CHAPTER 1

Introduction to accounting
 LEARNING OBJECTIVES

By the end of this section of the course, you should be able to:
1. explain what is meant by the term ‘accounting’
2. explain the difference between management accounting, financial
accounting and tax accounting
3. identify the main users of accounting information, and the main purposes for
which the information is used
4. identify the limitations of accounting information
5. discuss the factors that influence the choice of accounting systems for
different types of organisations
6. demonstrate an understanding of the regulatory and environmental
considerations that can influence accounting decisions
7. explain what is meant by the term ‘economic consequences’ and relate this
to the choice of accounting policies
8. identify career opportunities for accountants.
 WHAT IS ACCOUNTING? (LO 1)
‘The process of identifying, measuring and communicating economic
information to permit informed judgement and decisions by users of the
information’.
American Accounting Association: ASOBAT, 1966: 1

Identifying Measuring Communicating Decision making

Accounting process involving

economic information
 OBJECTIVES OF ACCOUNTING
• To provide information through financial statements
• To provide information about management’s use of scarce resources
• To provide information to predict and assess the going concern of an
entity
• To provide information on earnings, cash flows, profitability and the
financial position of an entity.

Entity’s going concern:

Business • earnings
Scarce operations Financial • cash flows
resources statements • profitability
Accounting • financial position
process

Decision making
 FOR WHAT PURPOSE IS ACCOUNTING
INFORMATION USED? (LO 2)

Financial accounting
• The provision of accounting information to parties
outside of the organisation:
– for example, investors, customers and employees
– financial statements to be prepared in accordance with
Generally Accepted Accounting Principles (GAAP).
Management accounting
• The provision of accounting information to parties within
the organisation – usually, managers.
 WHO USES ACCOUNTING
INFORMATION? (LO 3)
Internal users
• Management
• Owner (in a small business).

External users
• Resource providers
• Recipients of goods and services
• Parties performing a review function.
 WHO ARE THE USERS?
Managers need financial information
to fulfil their duties:
• stewardship Decision: How much
finance to be raised? To
• planning borrow?
• control Planning: Sales
targets?
• decision making.
Planning/decision:
What price to
maximise income?
Stewardship/control: Are Advertising strategy?
there sufficient raw
Planning: Which materials to meet the Planning: How much will it cost to
department/product is demands of production produce a particular item?
most profitable? and sufficient goods in
stock?
 WHO ARE THE USERS? (CONT.)
Is the business profitable for investment?
Should we buy/sell shares?
External users:
• Should we lend money?
owners and shareholders Will the business have enough money to
• lenders pay due debts?

• suppliers of goods Should we supply goods on

• customers
• employees
• the government
• the general public.
credit? Will the business be able to pay
the goods on time?
Can customers rely on consistent
availability of the business’ goods? Should
we purchase products
or services?

What fees and taxes must be paid?

Is the organisation being

environmentally responsible?
LIMITATIONS OF ACCOUNTING (LO 4)
• Only one source of information
• Mainly quantitative financial information
• Historical view
• Subjective amounts
• Little information about external factors
• Effect of a non-stable monetary unit.
 CHOICE OF ACCOUNTING
SYSTEMS (LO 5)
Accounting systems provide information to
enable managers to make decisions.
To serve this purpose, design of accounting systems
must consider:
• organisational goals
• the structure of the organisation
• the size of the organisation.
REGULATORY AND ENVIRONMENTAL
CONSIDERATIONS (LO 6)
Regulatory
• Corporations Act 2001
• Australian (AASB) Accounting Standards.

Economic condition
• For example, inflation and economic development.

Environmental aspects
• For example, the state, technology and labour.
ECONOMIC CONSEQUENCES (LO 7)
• Management can choose accounting policies as long as
these comply with the AASB Accounting Standards.
• The selection of policies is based on:
– the need to provide useful information to users
– economic consequences for managers and organisations.

Examples:
• Compensation plans and debt contracts tend to lead to
profit-increasing accounting policies.
• Political costs tend to lead to profit-decreasing
accounting policies.
 CAREERS IN ACCOUNTING (LO 8)
• Accounting firms:
– for example, PricewaterhouseCoopers, Ernst & Young, KPMG
and Deloitte.

• Industry and commerce:

– for example, internal auditor, tax accountants, costs accountants.

• Not-for-profit entities:
– for example, government, charities, business and professional
associations, and others such as religious groups.
 PROFESSIONAL MEMBERSHIP

• Chartered Accountants Australia and

New Zealand (CAANZ)
• Certified Practicing Accountants Australia
(CPAA)
• The Institute of Public Accountants (IPA).
 SUMMARY
• The nature and role of accounting pervades organisations and
commercial environments.
• Management accounting is prepared for internal users, while
financial accounting is prepared for external users.
• There is no perfect accounting report to meet users’ needs.
• Accounting is useful only when it is used correctly and its
limitations are understood.
• The economic consequences of accounting numbers can
influence accounting policy choices.
• Careers in accounting involve public accounting firms, business,
government and not-for-profit entities.