Chapter 1

Introduction to
accounting and business
decision making

©2020 John Wiley & Sons Australia Ltd

 Learning objectives

After studying this presentation you should be able to:

1.1explain the process of accounting
1.2outline the importance of accounting and its role in
decision making by various users
1.3explain the differences between financial accounting
and management accounting
1.4explain the role of accounting information in the
business planning process
1.5discuss the globalisation of financial reporting
 Learning objectives

1.6explain what is meant by digital disruption and how

new technology is influencing the accounting profession
1.7describe business sustainability, outline its key drivers
and principles, and compare key theories in the area
1.8describe sustainability reporting and disclosure
(including integrated reporting)
1.9provide examples of exciting opportunities for careers
in accounting.
 The accounting process

• Accounting is the process of identifying, measuring and

communicating economic information about an entity
to a variety of users for decision making purposes.
 Identifying transactions

• Business transactions:
– are the external exchange of something of value
between 2 or more entities
– affect assets, liabilities and equity
– can be reliably measured and recorded.
 Accounting information and its role in
decision making
• Accounting information is designed to meet the needs
of both internal and external users.
• Accounting information is extremely valuable to an
entity’s owner or management (internal users).
 Accounting information and its role in
decision making
• External users (stakeholders) are parties outside the
entity who use information to make decisions about the
entity. Stakeholders can include:
– shareholders (both current and prospective)
– customers
– suppliers and banks
– employees
– government authorities (e.g. ATO and ASIC).
Accounting information and its role in
decision making
 Financial accounting and management
accounting
• Financial accounting:
– preparation and presentation of financial statements
– allow users to make economic decisions about the
entity.
• Financial statements:
– a set of statements
– directed towards the common information needs of a
wide range of users (both internal and external).
 Financial accounting and management
accounting
• Financial statements consist of:
– statement of cash flows
– statement of financial position
– statement of profit or loss.
• For companies:
– the statement of profit or loss and other
comprehensive income
– the statement of changes in equity.
 Financial accounting and management
accounting
• Management accounting:
– Economic information for internal users.
– Reflected in financial accounting statements for
external users.
– Predominately about planning and decision making
for future events.
– Core activities include:
• formulating plans and budgets
• providing information to be used in monitoring
and control within the entity.
Financial accounting and management
accounting
 Role of accounting information in
business planning
• Benefits of a business plan:
– The business plan provides a clear, formal statement
of direction and purpose.
– Allows management and employees to work towards
defined goals in the daily operations of the business.
– The business entity in evaluating the business.
 Role of accounting information in
business planning
• Operation of the business:
‒ Accounting information provides managers and
owners with the tools they require to:
‒ make decisions regarding the daily running of the
business entity
‒ evaluate whether the goals set by the business
entity in the planning process are being achieved.
‒ Cost–volume–profit analysis: understanding how
profits will change in response to changes in sales
volumes, costs and prices.
 Role of accounting information in
business planning
• Evaluation of the business plan:
– Accounting information provides management with
the tools necessary to:
• evaluate the business plan
• encourage the management and owners to review
all aspects of the operations.
– Management can make changes to the entity’s
operating activities to ensure that they keep on track
with the original business plan.
 Globalisation of accounting

• Entities are becoming larger, more diversified and

multinational.
• Therefore, more complicated accounting and auditing
services are required.
– For example, The National Australia Bank (NAB):

Year Reported profit Total assets

1996 $2.1 billion $174 billion
2018 $5.6 billion $806.5 billion
 Digital disruption and the impact on
accounting
• Digital disruption has been defined as ‘New
technologies and business models that impact,
transform or re-invent existing goods and services,
industries and business activities. It’s a change that can
be positive or negative, and can drive substantial
changes across the economy’ (Queensland Government
Chief Information Office 2018).
 Digital disruption and the impact on
accounting
• In recent years we have seen the emergence of:
– fintech industry
– Big Data and data analytics
– cloud computing
– mobile phone technology
– AI
– social media.
• All of these have consequences for the accounting
profession.
 Blockchain technology

• Blockchain technology supports cryptocurrencies such

as Bitcoin.
• Bitcoin is a digital currency that allows for online
payments to be made without going through a financial
institution (Raymaekers 2014).
• A blockchain is a structure of data that represents a
financial ledger entry (Hassell 2016). The blockchain’s
data is partitioned into blocks and these blocks are
linked together using cryptographic signatures. 
 Blockchain technology

• The blockchain creates both opportunities and

challenges for the accounting profession:
– some current accounting and audit roles will
diminish, as there will be less need for accountants
and auditors to perform the transaction processing,
reconciliation and control type tasks
– there will be new opportunities for auditors in
overseeing and auditing the blockchain.
 Artificial intelligence (AI)

• AI is having an impact on many industries.

• Traditionally robots have been used in the
manufacturing industry.
• In recent years there has been adoption of robotic
technology in the healthcare, agriculture and food-
preparation industries.
• In auditing, drones are performing audits in remote
areas that are difficult to access and would otherwise
be too expensive or unsafe to send a human to.
 Business sustainability, drivers, principles
and theories
• A growing environmental and societal awareness has put
pressure on entities to consider their non-financial
impacts. Business sustainability refers to use of the
world’s resources in a way that does not compromise
the ability of future generations to meet their needs.
• Entities need to account for:
– all resources used (labour, material, energy, forests,
water, air etc.)
– all outputs produced (products/services, carbon
emissions, waste etc.).
Business sustainability, drivers, principles
and theories
Business sustainability, drivers, principles
and theories
• Key drivers of sustainability:
– Competition for resources:
• The world’s population is continuously growing.
– Climate change:
• We have a fossil-fuel based economy.
– Economic globalisation:
• The integration of national economies into the
global economy.
Business sustainability, drivers, principles
and theories
• Key drivers of sustainability:
– Connectivity and communication:
• Increases in connectivity has led to less time to
both build reputations and/or destroy
reputations.
 Business sustainability, drivers, principles
and theories

• Theories of business sustainability:

– Corporate social responsibility (CSR):
• A corporation has many stakeholders (individual
and groups).
– For example shareholders (owners), employees,
creditors, suppliers and governments.
• Does the entity have a responsibility to consider
them all equally (in regard to CSR)?
 Theories of business sustainability

• Theories of business sustainability:

– Shareholder value:
• Shareholder (owner) returns are the primary focus
of an organisation.
• Agency theory:
– Managers act on behalf of shareholders.
 Theories of business sustainability

• Theories of business sustainability:

– Stakeholder theory:
• Holds that the purpose of the entity is to work for
the good of all stakeholder groups, not just to
maximise shareholder wealth.
 Theories of business sustainability

• Theories of business sustainability:

– Stewardship theory:
• Directors act in the interest of a group(s) of
stakeholders and not shareholder value.
• Contributes to the rise of independent non-
executive directors.
 Theories of business sustainability

• Theories of business sustainability:

– Legitimacy theory:
• Theory that entities must conduct operations in
accordance with societal expectations.
• Society allows the entity to operate (pursue its
objectives and rewards) so long as the entity
agrees to act in a socially acceptable manner.
 Benefits of environmental reporting

• Improving stakeholder relations

• Creating market opportunities
• Increasing control over environmental disclosure
• Satisfying a mandatory or signatory reporting need
• Gaining the confidence of investors, insurers and
financial institutions
• Triggering internal improvement in environmental
performance
• Gaining external recognition/awards.
 Benefits of sustainability reporting

• Reputation and brand benefits

• Securing a ‘social licence to operate’
• Attraction and retention of high-calibre employees
• Improved access to the investor market
• Establishing position as a preferred supplier
• Reducing risk profile; cost savings
• Innovation aligning stakeholder needs with
management focus
• Creating a sound basis for stakeholder dialogue.
 GRI standards

• The GRI standards encourage the reporting of

sustainability practices. Sustainability reporting
promotes the transparency and accountability of an
entity’s operations. GRI standards contain four parts:
1. Universal Standards
2. Economic Standards
3. Environmental Standards
4. Social Standards.
Triple bottom line
 Role of accountants in sustainability

• The role of accountants in promoting and reporting

sustainability is very broad and includes:
– reporting
– cost analysis
– auditing and assurance services.
 Integrated reporting

• Integrated reporting (IR) refers to the integration of

social, environmental, financial and governance
information. In 2010 the International Integrated
Reporting Council (IIRC) was formed, which has
accelerated the implementation of IR.
• An integrated report is based on the six capitals:
financial capital, manufactured capital, human
capital, intellectual capital, natural capital, and social
and relationship capital.
 Careers in accounting

• Three main areas of employment (traditionally):

– public accounting
– private sector
– government and not-for-profit.
 Careers in accounting

• Exciting new opportunities for today’s accounting

graduates.
• New areas for an accounting profession include:
– forensic accounting (e.g. computer hacking)
– internal controls for e-commerce (e.g. BPAY)
– administration of insolvency (e.g. failing companies)
– sustainability/carbon accounting (e.g. business risk,
greenhouse gas emissions and carbon reporting).
Accounting opportunities in Australia
 Appendix 1A

• The business planning process:

– Please refer to chapter 1, pages 26–44, which covers:
• What is a business plan?
• Advantages of a business plan
• Disadvantages of a business plan
• Components of a business plan
• Preparing the document
• Sample business plan.
 Summary

• Process of accounting concerns identifying, measuring

and communicating economic information for decision
making.
• Users of accounting information may be external or
internal.
• Management accounting concerns needs of internal
users, while financial accounting focuses on reports for
external users.
• Accounting plays a major role in the business planning
process.
 Summary

• Entities have become larger, more diversified and

multinational.
• Digital disruption is influencing many aspects of
business and will provide opportunities and challenges
for the accounting and auditing professions.
• Business sustainability considers the use of the world’s
resources in a way that does not compromise the ability
of future generations to meet their needs.
 Summary

• The triple bottom line approach and the GRI Standards

are two common methods used for reporting corporate
social responsibility (CSR).
• Accountants are employed in public accounting roles,
private and public sector accounting roles, and
government and not-for-profit sector accounting roles.
New opportunities for accountants exist in forensic
accounting, environmental accounting, e-data analytics,
blockchain, commerce, insolvency and international
accounting.