Topic 1:

Introduction to Accounting,
BU1002/BU1902 – Accounting for Decision Making

Required Reading:
Chapter 1, Birt 7e
Learning Outcomes
 explain the process of accounting
 outline the role of accounting in decision making by various users
 explain the differences between financial and management
accounting
 explain the role of accounting in the business planning process
 discuss the globalisation of financial reporting
 identify the sources of company regulation in Australia
 explain the current standard setting framework and the role of the
professional accounting associations in the standard-setting
process
 evaluate the role of the Conceptual Framework and illustrate the
qualitative characteristics of financial statements
 provide examples of the limitations of accounting information
Overview of Lecture Recordings
Video 1 – Role of accounting, management vs financial accounting
Video 2 – Sources of regulation
Video 3 – Conceptual framework
Video 4 – Limitations of accounting

• This topic relates to the subject and course

learning objectives as stated in the Subject
Outline
• Required reading: Ch 1 and 2,
• Readings List - Conceptual Framework
• Complete - tutorial questions
• Complete - topic 1 online quiz
Video 1
The role of accounting

The difference between financial

& management accounting
Accounting is a process

• Accounting is the process of identifying, measuring &

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

Identifying Measuring Communicating Decision making

Transactions that Analysis, Via income Used for a range
must be able to recording & statements, balance of decisions by
be reliably classifying sheets & external & internal
measured & transactions statements of cash users
recorded flows
Identifying Transactions:

 Business transactions:
 External exchange of something of value between 2 or
more entities
 Affect assets, liabilities & equity
 Can be reliably measured & recorded

 Relevant information
 Information that makes a difference in decision making
Accounting role in decision-making

 Accounting information is designed to meet the needs of both:

 internal users (management)
 external users (stakeholders)

 External users include:

 Investors – both current and prospective

 Suppliers and banks

 Employees
 Government authorities (e.g., ATO, ASIC)
Financial vs Management Accounting

 Financial accounting is the preparation & presentation of

financial statements to allow users (external in particular) to
make economic decisions about the entity
 Financial statements consist of
 Statement of Cash Flows

 Balance Sheet
 Income Statement
 Statement of Changes in Equity
Financial vs Management Accounting cont.

 Management accounting provides economic information for

internal users that is then reflected in financial accounting
statements for external users
 Core activities include:
 Formulating plans & budgets

 Providing information to be used in monitoring & control

within the entity
Financial vs Management Accounting cont.
The role of accounting information in
business planning
 Accounting plays a crucial role in the business planning process.
 There are many questions that need to be answered, e.g. Is it a new
business or an existing business? Single owner or several investors?
Service or retail firm? Profit-orientated or not-for-profit business?
 A business plan - used to provide a clear formal statement of goals,
direction and procedures to achieve outcomes.
 Accounting information provides tools to assist decision making in
the daily operation of the business and identifying whether the
planned goals are met. We will learn aspects of both financial and
management accounting in this subject that will assist in decision
making.
 All aspects of business operations should be reviewed. Evaluation of
performance and variances in comparison to planned goals may
identify the need to amend assumptions used in the planning process
Video 2

Sources of regulation
Globalisation of Accounting
 Entities have become larger, more
diversified & multinational.
 This has led to a need for globalised
accounting standards.
 Australia adopted International Financial
Reporting Standards (IFRS) from January
1, 2005.
 This ensures corporations that operate in
Australia & internationally, comply with
internationally agreed principles,
standards & codes of best practice.
Digital disruption and impact on accounting
 Digital disruption - “new technologies and business models that
impact, transform or re-invent existing goods/services/industries and
business activities”.
 Development in technology has led to cloud based accounting, big
data and data analytics, mobile phone technology, AI and social
media which impact on the way businesses and accountants do
business,
 It is necessary to have skills to understand data analytics by using
analytical tools to draw insight from data and be able to
communicate to appropriate parties.
 Technology is also impacting AI with robotic technology used in
healthcare, agriculture and food preparation industries.
 Drone technology used to assist audits in remote areas that would be
difficult to access.
Sources of Regulation

Corporations Act (2001)

 Based on legislative powers under s.51 of the Australian
Constitution
 Contains sections that provide guidance for corporations in
Australia
 enforced by Australian Security & Investments Commission (ASIC)
who act as the company watchdog by enforcing company &
financial services laws to protect consumers, investors & creditors
 ASIC’s role is to:
 Uphold the law & promote informed participation

 Ensure company info is publicly available

 Improve performance of financial system
Sources of Regulation cont.
Australian Securities Exchange (ASX)
 is the main Australian market place for trading equities,
government bonds & other fixed interest securities
 ASX Market Rules regulate how trading takes place on ASX
 ASX Listing Rules help ensure that companies are
 providing adequate disclosures to various shareholders

 behaving appropriately

Australian Competition & Consumer Commission (ACCC)

 administers the Trade Practices Act & Prices Surveillance Act

 ACCC’s primary role is consumer protection

Reserve Bank of Australia (RBA)

 the stability of the Australian financial system
 setting monetary policy
Sources of Regulation cont.

Australian Taxation Office

 ATO collects taxes & oversees all self-managed superannuation
funds
Other government agencies
 Targeted to particular areas of commercial operations

e.g. privacy, consumer advocacy, human rights

Accounting standards
 Since 1 Jan 2005, Australian entities -have complied with
International Financial Reporting Standards (IFRSs)
 Australian Accounting Standards Board (AASB) is responsible for:
 Issuing Australian versions of International Accounting
Standards
 Significantly influencing development of IFRSs
 The Corporations Act stipulates that all disclosing entities must
apply AASBs in preparing their financial reports
 The development of an accounting standard is a lengthy &
rigorous process that must follow due process
Accounting standards cont.
 3 professional bodies for accountants in Australia
 CPA Australia
 The Institute of Chartered Accountants in Australia (ICAA)

 Institute of Public Accountants (IPA)

 Play an important role in regulating Australian companies through
 stringent regulation of their members

 their input into the standard setting process

Video 3

Conceptual framework
The Conceptual Framework
 There is a need for guidance
 Must be consistent & meet needs of users
& preparers
 Conceptual framework intended to:
 Develop logical, consistent standards

 Provide guidance where no standard

exists
 Enhance understanding of users
 Objective of financial reporting:
 Provide financial information about an
entity to assist users in making decisions
about providing resources to the entity
The Conceptual Framework cont.
 The Framework - Qualitative characteristics of financial
information.
 Fundamental characteristics:
 Relevance – info must have a quality to enable users to form
future predictions or confirm / correct past evaluations.
 Materiality – material if omission / misstatement can adversely
affect user’s decisions.
 Faithful representation – information must be complete,
neutral & free from material error.
The Conceptual Framework cont.
 Enhancing qualitative characteristics:
 Comparability – ability to compare info over time within an
entity & with other entities.
 Consistency – use of the same methods to account for the
same items from one period to the next.
 Verifiability – different knowledgeable & independent
observers could reach consensus that a piece of information is
a faithful representation of the economic phenomena.
 Understandability – users can understand reports given
reasonable knowledge of accounting
 Cost constraint on financial information:
 Benefits of providing information should not be outweighed by
the costs of providing it.
Definition of the elements: Assets
 Definitions of the elements - 5 Elements used in the preparation of
financial statements:
 Assets, Liabilities, Equity, Income & Expenses
 Definition of Asset:
 “a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to
flow to the entity”.
 Key pts – control, future economic benefits & past event
 i.e bank, accounts receivable, inventory, vehicle

 Tangible or intangible
 Ranked in order of liquidity on balance sheet
Definition of the elements: Liabilities
 Definition of Liability:
 “a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits”.
 Key pts – present obligation, future sacrifice & past event

 i.e. bank overdraft, creditors, loans, mortgage

 Involves an external party
 Require payment, cash, transfer of assets or performance of
services to cancel the debt.
Definition of the elements: Equity
 Definition of Equity:
 “residual interest in the assets of the entity after deducting all
its liabilities”.
 Key pts – depends on definitions of assets & liabilities

 i.e. capital, drawings, retained profits

 Creditors have legal precedence in debt repayment over
owners!!
 Other terms – proprietorship, capital

 Manipulation of accounting equation:

O.E = A - L
Definition of the elements: Income
 Definition of Income:
 “increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases
of liabilities that result in increases in equity, other than those
relating to contributions from equity”.
 Key pts –  assets or  liabilities, no capital contribution ‘cos
entity can’t earn wealth thru’ contributions with its owners!!
 Note: is broad to encompass both revenue & gains!!
 i.e. revenue, sales, interest received, commission revenue
Definition of the elements: Expenses

 Definition of Expenses:
 “decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those
relating to distributions to equity”.
 Key pts – assets, or  liabilities, no drawings
 i.e. wages, rent, cost of goods sold, rates, insurance, interest
Recognition criteria for all elements

 If an item meets the definition characteristics,

the next step is to recognise how it will be
recorded in the accounting s
 “it is probable that any future economic benefit
associated with the item will flow to or from the
entity; and
 the item has a cost or value that can be
measured with reliability”.
Video 4

Limitations of accounting

Summary
Limitations of Accounting Information

 Time lag in the distribution of information to users, therefore

affecting its accuracy
 Historical information based on past data & is often outdated
 Subjectivity of information refers to choice involved in inclusion of
items to be reported & choice of accounting policies to adopt
 Costs of providing information
 Costs involved in gathering, summarising & producing info
contained in financial reports
 Release of competitive information
 Info in financial report may contain proprietary information
that could be used by competitors to strengthen their market
position
Topic Summary:
 Process of accounting - identifying, measuring
and communicating economic information for
decision making.
 Users of accounting information, internal or
external.
 Financial Accounting vs Management
accounting.
 Globalisation - entities have become larger,
more diversified and multinational.
 Sources of regulation within Australia
 Conceptual framework – GAAPS and definitions
of elements
 Limitations of accounting