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Chapter 1

ACTG 2010 Chapter Notes - Chapter 1: International Financial Reporting Standards, Financial Audit, Independent People

Course Code
ACTG 2010
Douglas Kong

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Chapter 1 Accounting Notes
Making good business decisions is almost impossible without relevant accounting info
Accounting can also be relevant for personal decisions
Business and Personal decisions that rely on Accounting:
- Determining whether or not to buy a business and how much to pay
- Calculating the amount of tax to pay
- Evaluating whether to lend to a prospective borrower, and at what interest rate
- Assess whether or not you can afford to borrow money
- Decide if you can afford to go on vacation
- Determine how to divide family assets in a divorce
- Find out how much money you have in the bank
- Determine how to invest money in a retirement savings or tax free savings account
- Determine bonuses earned by management
- Evaluate whether to expand your business
- Assess whether to make a product or to purchase it from an outside supplier
- Evaluate how well managers have managed a business
- Assess how well a business has performed
- Determine whether to donate money to a charity (management/effective money use)
- Determine the worth of a business
- Evaluate how much regulated businesses should be allowed to charge for their goods
and services
- Evaluate if the government has provided effective and efficient financial management
- Decide whether to make a major purchase such as a computer or car
Some points to consider about accounting:
- Accounting is not a science, indeed it’s probably more of an art
- Accounting isn’t precise or exact, many estimates have to be made and there is
uncertainty around most accounting numbers
- Accounting doesn’t provide the right answer, there can be multiple correct answers for
an accounting situation
- Accounting is flexible and requires judgement

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What is Accounting?
Accounting: is a system for gathering data about an entity’s economic activity, processing and
organizing that data to produce useful information about the entity, and communicating that info
to people who want to use it to make decisions
Entity: is an economic unit of some kind, such as a business, university, government, or even a
It is always important to note the difference between data and information; data is comprised of
raw, unprocessed facts about an entity’s economic activity that are entered into an accounting
system, whereas information is the result of organizing and presenting the data in ways that
make it useful for decision making by stakeholders
Most simply the process of accounting involves:
1. Gathering data
2. Processing and organizing data
3. Communicating information
When designating an accounting system, accountants and managers have to make many
decisions about what data should be gathered and how it should be organized
Communicating using accounting info presents the same complexities people face with any
form of communication, just as writers choose words to influence readers, accountants can use
legitimate, alternative ways of reporting the economic activity of an entity to influence how
people perceive financial info.
Don’t confuse accounting and bookkeeping, bookkeeping is the process of recording financial
transactions and maintaining financial records, and thus only represents one part of accounting.
Accounting involves the design and management of information systems, how to account for
and report an entity’s economic activity, and the analysis/interpretation of financial info
Why Does Accounting Matter?
Accounting matters because it has economic consequences- it affects people’s wealth- and it
can have an impact on the decisions they make
Economic Consequences: the effect of actions on people’s wealth and decisions
Example: suppose you can account for a transaction in two legitimate/legal ways and one
results in you paying less in taxes, you probably choose that one and the economic
consequence is that you keep more money and the government gets less money or vice versa
for the opposite decision
Why Do People Need and Want Accounting Information
More and better information allows for more informed decisions and without it a decision is a
Not all information is equal; in making a decision, you would generally give more weight to the
information that is most reliable and most relevant to your needs

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Cost-Benefit trade-off: the concept of comparing the benefits of an action with its costs, and of
taking the action only if the benefits are greater
While more info leads to better decisions, there are limits, it’s usually not possible or worthwhile
to collect all the info on a subject, because first, gathering and analysing info is costly and takes
time, and simply the benefit won’t be worth the cost, and second, there are limits to the amount
of info people can effectively manage and process
Too much info (aka ‘information overload’) can impair a person’s ability to make decisions
The Accounting Environment
How an entity reports its economic activity in its financial statements or other type of accounting
report is influenced by the circumstances under which the activity is occurring
Accounting was created to provide a record of economic activity and information useful in
decision making, so it makes sense that accounting should be responsive to the environment
and the people using the information
The four key components of the accounting environment are:
-Overall Environment
The political, cultural, economic, competitive, regulatory, and legal differences between
countries help explain why accounting rules vary from country to country
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