Accounting is the process of identifying, measuring, recording and communicating economic information to assist users to make decisions.
“Accounting is the language of business” – Warren Buffett
Users are able to make better, well-informed decisions with the correct and sufficient information provided
* The CEO salary is regarded as an expense on the financial statement as it is a deduction and it reduces the company’s overall profit. (Salary is >$5 million)
To find information about a company, we rely on:
1. Information asymmetry, voluntary disclosures
2. Annual reports - contains information about company and general purpose financial statements
*Information asymmetry: a situation in which one party in a transaction has more or superior information compared to another (such as the seller knowing more than buyer)
Most of this information in annual reports is based on accounting.
Financial Accounting System and Managerial Accounting System
The managers of a company would be considered in the managerial accounting system. They have the most information about the company.
The insiders of companies can manipulate the financial information to lure in investors. Thus, independent auditors are used to enhance credibility.
Auditing: checking that procedures are in place to prepare financial statements that are true and are a fair reflection of the company position and performance
*Independent Auditor’s Report
Financial accounting: provision of information to users external to the enterprise.
Reports on financial position and financial performance
Providing information to stockholders, creditors and others outside an organisation (such as banks, lenders, financial analysts)
Helps in making investment decisions and credit rating
Discloses end result of business
Financial condition of business on particular date to external stakeholders (board of directors, stockholders, financial institutions and other investors, tax authorises and regulators)
Important for current and potential investors
It involves judging a company’s past performance - history
Management accounting: provision of information to users within the enterprise (aids in operational planning and control decisions)
Managers need to assess each division and the budgeting within each division to ensure the company’s maximum performance.
Analyses and provides cost information (with which organisations are run) to internal management (used by managers and employees)
Its purposes are to plan, control, decision-making
CIMA (Chartered Institute of Management Accountants): “used by management to plan, evaluate and control within an entity and to assure appropriate use of accountability for its resources”
It focuses on the current and future trends – forecasting of markets and trends
Economic consequences are related to financial reporting
It is important to convey economic information to decision makers
This includes the introduction of the IFRS (International Financial Reporting Standards) and New Corporate Governance Laws
The IFRS was adopted by Australia in 2005. It is based on same accounting rules as other countries that are in agreement with the IFRS, so one can use the acquired accounting in different countries.
The International Financial Reporting Standards is a set of accounting standards developed by the International Accounting Standards Board (IASB) – independent, non-profit
It is the framework for how public companies prepare and disclose financial statements globally. (guidance is given)
It is important for large companies with subsidiaries in different countries – one ‘language’
Over 100 countries have IFRS for public companies – replaced the IAS (International Accounting Standards from 1973-2000)
Uses of Accounting:
1. Management in making business decisions
2. Shareholders for decision making
3. Board of directors in takeover battles