Accounting: Dynamic Environment & Economic Decisions

• Accounting's role involves decision making
• Accounting requires understanding financial statements

Dynamic Accounting Environment

• The accounting environment is constantly evolving
• Driven by developments in information and communication technologies like AI, automation, cloud accounting, and blockchain
• Increased societal demand for non-financial data, including social and equity diversity and environmental and sustainability considerations, is impacting the role of accounting
• Globalization of business and regulations, incorporating international financial reporting standards, is a factor
• Digital advancements, such as big data and data visualization, are transforming accounting practices

Economic Decisions

• Economic decisions typically involve money flow
• Understanding accounting concepts, standards, and reports helps decision-makers make informed choices

Nature of Accounting

• Accounting provides and interprets financial data for economic decision-making
• People need relevant information for sound decisions
• Accounting uses its own language to communicate financial information to various stakeholders
• Accounting is a business language that facilitates economic information between parties
• Accounting involves identifying, measuring, recording, and communicating economic information for informed judgments and decisions

Stages of the Accounting System

• Identification: Recognizing transactions
• Measurement: Quantifying transactions in monetary terms
• Recording: Classifying and summarizing financial data
• Communication: Analyzing and interpreting accounting reports

Uses of Accounting Information

• A key objective of accounting is providing information in reports for internal and external decision-makers
• Accounting aims to meet the needs of internal and external users

Users of Accounting Information

• Internal users include managers running the organization
• External users include owners, customers, competitors, employees, government, community representatives, and investors

Areas of Accounting

• Management accounting provides managers with information for daily business operations, using both financial and non-financial data for planning, controlling, and pricing
• Financial accounting provides other users like shareholders with useful information, which is called 'general purpose financial information'.
• Financial accounting mainly focuses externally, provides general-purpose reports, with a broad overview, restrictions based on accounting standards, semi-annual/annual reporting frequency, a mainly historical time horizon, and quantifiable, objective information
• Management accounting is internal-only, provides specific purpose reports with detailed information, has no restrictions, uses weekly or monthly reporting, considers both past and future, and can include subjective non-financial information

Accounting as a Profession

• Australia's accounting profession is self-regulated
• Three major professional associations are CPA Australia, CAANZ, and IPA
• These associations operate globally
• Public accountants offer professional services to the public for a fee
• They specialize in auditing, taxation, advisory, and insolvency services
• Accountants are employed in businesses, with CFOs directing accounting activities
• Accounting functions include general accounting, cost accounting, information systems, budgeting, taxation, and internal audit

Public Sector Accounting

• Public sector accounting and not-for-profit accounting involves city councils, governments, and charities
• They collect and spend large amounts of money

Ethics in Accounting

• Ethical conduct is critical in business
• Honesty and adherence to rules are necessary for effective operation
• Successful businesses maintain high ethical standards
• Financial statements are control mechanisms for accountability and protecting stakeholders' interests
• Reports enable management performance evaluation
• Audits and assurance services maintain ethical behavior

Ethical Conduct

• Integrity
• Objectivity
• Professional competence
• Due care
• Confidentiality
• Professional behavior
• CPA Australia and CAANZ established APESB to maintain a code of ethics for their members

Ethical Standards

• Code of ethics for professional accountants
• Professional statements and guidance notes

Ethical Risks

• Self-interest
• Failure to maintain objectivity
• Improper leadership
• Lack of ethical courage
• Lack of ethical sensitivity
• Failure to exercise proper judgment

Types of Business Entities

• Business type and ownership impact required accounting information

Sole Proprietorship

• An individual in business on their own account
• Not a separate legal entity
• Has a limited business life
• Bears unlimited liability
• Has limited access to funds
• Offers low establishment costs and low regulation
• Has no separation of ownership
• Allows for timely decision-making
• Provides direct financial rewards

Partnerships

• Two or more persons operating a business for profit
• Limited membership (typically up to 20 partners)
• The relationship may be formal or informal
• Financial contributions are recorded
• No separate legal entity
• Limited life
• Unlimited liability

Unique Characteristics of Partnerships

• Subject to increased regulation
• Involves mutual agency
• Partnership assets are collectively owned, not individually
• Profits are shared according to the partnership agreement

Companies

• Separate legal entities managed and owned by shareholders

Ownership by Shareholders in Companies

• Ownership is divided into shares
• Limited liability to the value of their shares
• Public companies can offer shares to the public using 'Ltd' in their name
• Proprietary companies are smaller, with fewer shareholders, using 'Pty Ltd' in their name

Legal Nature of Companies

• A limited company has legal capacity and separate legal status
• Companies own property and pay income tax on their profits

Features of Companies

• Typically granted perpetual existence
• Shares are transferable
• Shareholders have limited liability
• Shareholders elect directors to manage the company
• Directors may comprise only of shareholders in small companies
• Larger companies may have ten or more directors

Regulation of Companies

• Much stricter regulation than partnerships/sole proprietorships
• Includes registration, annual accounts, audits, Corporation Act 2001 compliance, and ASX listing rules

Main Financial Reports

• Financial reports answer questions about a business's financial position, wealth increase, and cash movements covering a period
• Statement of Financial Position (Balance Sheet) shows overall positions
• Statement of Financial Performance (Income Statement) measures profit
• Statement of Cash Flows (Cash Flow Statement) shows the flow of cash
• Together, these reports provide an overall picture of financial health

Reporting

• Statement of Changes in Equity shows equity movements
• Two main reports receive detailed consideration

Assumptions in Financial Statements Preparation

• Accounting is a activity that pinpoints, records and measures data for making economic decisions
• Followed underlying assumptions include event identification, measurement principles, and guidelines in preparing reports

Accounting Entity Assumption

• Each entity is separate
• Each entity controls its assets and liabilities
• The entity's records are separate from its owner's and other entities' records

Accrual Basis Assumption

• Transactions are recorded when they happen
• Statements report cash transactions, future obligations, and receivables
• Accrual accounting provides information for decision-making

Going Concern Assumption

• Assumes the entity will continue operating
• Liquidation values are not reported

Reporting Period

• Results reported for time period
• Statutory requirements determine periodic profit figures, like taxation
• Profit determination involves recognizing income and deducting expenses
• Assets, liabilities, and equity are reported at the end of the period

Qualitative Characteristics

• Fundamental qualitative accounting information characteristics are relevance and faithful representation
• Relevance influences user decisions involving the future and the past

Faithful Representation

• Information is complete, unbiased, and reliable
• Information is recorded at its original historical cost
• Comparability identifies similarities and differences between data sets
• Consistency uses the same accounting policies
• Verifiability ensures agreement among independent observers
• Timeliness ensures users have quick access to useful information
• Understandability requires users to have knowledge and diligence

Materiality

• Essential information is included and clearly understood
• Significant information is highlighted
• Information is not misleading

Cost Constraints

• Benefits must justify the costs
• Information is costly