WEEK 1
CHAPTER 1 - ACCOUNTING IN ACTION
1
1.1 - Accounting Activities and Users
Accounting consists of three activities: it identifies, records and
communicates the economic events of an organisation to interested users
. Starting point of accounting process - a company identifies the economic
events relevant to its business
. Then it records those events in order to provide a history of its financial
activities - consists of keeping a systematic, chronological diary of
events measured in monetary units
. Finally the business communicates the collected information to
interested users by accounting reports (e.g. financial statements)
Financial information is reported in a standardised way e.g. all sales
transactions are accumulated over time and data is reported as one amount
in the company’s financial statement
– Data is reported in the aggregate = the accounting process implies a
multitude of transaction and makes a series of activities understandable
and meaningful
Vital elements in communicating economic events is the accountant’s ability
to:
3 ● Analyse the reported info = involves use of ratios, percentages, graphs,
and charts to highlight significant financial trends and relationships
● Interpret the reported info = involves explaining the uses, meanings and
2 limitations of reported data
1 Bookkeeping = usually involves only the recording of economic events
– One part of the accounting process
Who uses accounting data:
. Internal users
– Managers who plan, organise and run the business (e.g. marketing
managers, production supervisors, finance directors and company
officers)
, – In running a business, internal users of accounting info must answer
many important questions such as
–
– To answer these and other questions, internal users need detailed
info on a timely basis
– Managerial accounting = provides internal reports to help users make
decisions about their companies (e.g. financial comparisons of
operating alternatives, projections of income from new sales
campaigns, forecasts of cash needs for the next year)
. External users
– Individuals and organisations outside a company who want financial
info about the company (e.g. investors and creditors)
– Investors (owners) - use accounting information to decide
whether to buy, hold or sell ownership shares of a company
– Creditors (e.g. suppliers and bankers) - use accounting information
to evaluate the risks of granting credit or lending money
–
– The information needs of external users vary:
– Taxing authorities want to know whether the company complies
with tax laws
– Regulatory agencies want to know whether the company is
operating within prescribed rules
– Customers are interested in whether a company will continue to
honour product warranties and support its product lines
– Labor unions want to know whether companies have the ability
to pay increased wages and benefits to its union members
Accounting software systems collect vast amounts of data about a
, company’s economic events as well as its suppliers and customers
Business decision-makers use this wealth of data by using data analytics to
gain insights and make more informed business decisions
● Data analytics = involves analysing data, often employing software and
statistics to draw inferences
○ Becoming increasingly common as data access and analytical
software improve
1.2 - The Building Blocks of Accounting
. Ethics in financial reporting
Ethics = the standards of conduct by which actions are judged right or
wrong, honest or dishonest, fair or unfair
CHAPTER 1 - ACCOUNTING IN ACTION
1
1.1 - Accounting Activities and Users
Accounting consists of three activities: it identifies, records and
communicates the economic events of an organisation to interested users
. Starting point of accounting process - a company identifies the economic
events relevant to its business
. Then it records those events in order to provide a history of its financial
activities - consists of keeping a systematic, chronological diary of
events measured in monetary units
. Finally the business communicates the collected information to
interested users by accounting reports (e.g. financial statements)
Financial information is reported in a standardised way e.g. all sales
transactions are accumulated over time and data is reported as one amount
in the company’s financial statement
– Data is reported in the aggregate = the accounting process implies a
multitude of transaction and makes a series of activities understandable
and meaningful
Vital elements in communicating economic events is the accountant’s ability
to:
3 ● Analyse the reported info = involves use of ratios, percentages, graphs,
and charts to highlight significant financial trends and relationships
● Interpret the reported info = involves explaining the uses, meanings and
2 limitations of reported data
1 Bookkeeping = usually involves only the recording of economic events
– One part of the accounting process
Who uses accounting data:
. Internal users
– Managers who plan, organise and run the business (e.g. marketing
managers, production supervisors, finance directors and company
officers)
, – In running a business, internal users of accounting info must answer
many important questions such as
–
– To answer these and other questions, internal users need detailed
info on a timely basis
– Managerial accounting = provides internal reports to help users make
decisions about their companies (e.g. financial comparisons of
operating alternatives, projections of income from new sales
campaigns, forecasts of cash needs for the next year)
. External users
– Individuals and organisations outside a company who want financial
info about the company (e.g. investors and creditors)
– Investors (owners) - use accounting information to decide
whether to buy, hold or sell ownership shares of a company
– Creditors (e.g. suppliers and bankers) - use accounting information
to evaluate the risks of granting credit or lending money
–
– The information needs of external users vary:
– Taxing authorities want to know whether the company complies
with tax laws
– Regulatory agencies want to know whether the company is
operating within prescribed rules
– Customers are interested in whether a company will continue to
honour product warranties and support its product lines
– Labor unions want to know whether companies have the ability
to pay increased wages and benefits to its union members
Accounting software systems collect vast amounts of data about a
, company’s economic events as well as its suppliers and customers
Business decision-makers use this wealth of data by using data analytics to
gain insights and make more informed business decisions
● Data analytics = involves analysing data, often employing software and
statistics to draw inferences
○ Becoming increasingly common as data access and analytical
software improve
1.2 - The Building Blocks of Accounting
. Ethics in financial reporting
Ethics = the standards of conduct by which actions are judged right or
wrong, honest or dishonest, fair or unfair
