Introduction to accounting and

business decision making

Module 1
 What is accounting?

‘the process of identifying, measuring, and communicating

economic information to permit informed judgments and
decisions by users of the information.’
 Key aspects of definition:

• Identifying: Transaction or Event?

• Measuring
• Communicating
• Economic information
• Informed judgements and decisions
• Users of Information: External/Internal
 The significance of accounting

• Accounting does not just describe economic events and

circumstances, it changes them.
Examples:
• Investors allocating their funds on the basis of financial reports.
• Executive remuneration (bonuses) linked to reported profits.
• A local government rate rise justified by budget projections.
• Accounting plays a key role in determining the distribution of resources
in society.
 Different areas of accounting

Financial accounting:
• Accounting information (‘general purpose financial reports’)
prepared for distribution to parties external to an organisation.
• Used by shareholders, creditors, prospective investors, regulatory
agencies, constituents, social groups (i.e. parties that do not have
authority to ‘command’ information).
 Different areas of accounting

Financial Reports (THE GPFR) include:

• Cash Flow Statement (reports on an entity’s cash inflows and cash
outflows)
• Income Statement (reflects the profit for the entity over a specified
period of time)
• Balance Sheet (reflects an entity’s assets and claims against these
assets at a point in time)
 Different areas of accounting

Management accounting:
•Accounting information prepared for internal use within an organisation.
•Used by, managers to plan and control activities and make decisions on
resource allocation.
•Reports/information include:
•Budgets; Variance reports; CVP Analysis; Tactical decision analysis;
Performance reports
•Question:
•‘Distinguish financial accounting information from Management
Accounting information’.
 Different areas of accounting

Auditing:
• The independent testing of a general purpose financial report and
expressing an opinion based on specified criteria.
• Intended to provide assurance to the users of financial reports regarding the
reliability of such reports.
• Question:
• ‘Discuss the relative roles of the External Auditor and the Internal
Auditor in the provision of Accounting information’
Factors influencing accounting practice

• Legislation (e.g. Corporations Act).

• Court decisions.
• Regulatory agencies (AASB, ASIC, ASX).
• Accounting profession.
• Convention.