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CHAPTER 1 INTRODUCTION TO ACCOUNTING

Accounting definition
The process of identifying, measuring and communicating economic information to permit informed
judgement and decisions by users of the information.
For what purpose is accounting information used?
Accounting information can be used on at least two levels: that of the individual and that of the
organization (or entity). At the individual level, people can use accounting information to help them
control the level of their expenditure, to assist in planning future levels of expenditure, to help them raise
additional finance (through, for example, mortgages or hire-purchase) and decide the best way to spend
their money. So we can see that for the individual, accounting can have three functions: planning,
controlling and decision support.
At the level of the entity, accounting is used to control the activities of the organization, to plan future
activities, to assist in raising finance, and to report the activities and success of the entity to interested
parties and to the government to determine taxes payable.
Management accounting, financial accounting and tax accounting
Management accounting is prepared for internal users and is largely unregulated. Financial accounting
results in financial statements prepared for external users in accordance with GAAP. Tax accounting
involves the preparation of tax returns where the objective is to report the activities of the organization
in compliance with the tax rules so that the organization pays the minimum amount of tax to the
government.
Identify the main users of accounting information, and the main purposes for which the information is
used
There are many users of accounting information and they include internal users (managers) and external
users (shareholders, lenders, suppliers, customers, employees, government and the general public). There
is no perfect accounting report that will meet the needs of all users, and that the needs of users vary. For
example, in the case of a small business the owner may wish to show a low profit to reduce the potential
tax bill, but may need to show a high profit in order to persuade a banker to lend his or her business
money.
Integrated reporting
An integrated report provides information on how an entity creates value through all of its activities and
details its strategy and governance and includes information about environmental and social impacts.
Global reporting initiative (GRI) and the GRI approach to sustainability reports
The global reporting Initiative (GRI) is based in the Netherlands and was established through the United
Nations Environment Program with the objective of enhancing the quality, rigor and utility of sustainability
reporting. In 2013, the GRI released the G4 Sustainability Reporting Guidelines.

The GRI guidelines allow organizations to choose a core or comprehensive option. Both options require
the disclosure of a number of indicators across environmental, social and financial (economic) areas. The
core option has some information about governance and ethics while the comprehensive option requires
significantly more disclosures in these two areas.
Limitations of accounting information
Accounting is only useful if it is used correctly and if its limitations are understood. Financial accounting
is based on past information and only includes those elements that meet the definition and recognition
criteria for assets, liabilities, income, expenses and equity.
Factors that influence the choice of accounting systems for different types of organizations
The factors that influence the choice of an accounting system include the size of the organization, the type
of business activity being undertaken and whether it is simple or complex, the structure of the
organization and whether the organization is for-profit or not-for-profit.
Economic consequences and its relation to the choice of accounting policies
The economic consequences of accounting policies can influence a managers choice of accounting
policies. Accounting numbers are used in various contracts and this, it is argued, creates incentives for
managers to choose accounting policies based on their impact on the numbers in the contracts.
Managerial compensation and debt contracts create incentives for managers to favor profit-increasing
accounting policies. Political costs create incentives for managers of large organizations to favor profitdecreasing accounting policies.
CHAPTER 1 MORE DEFINITIONS BY CENGAGE.COM

AASB Accounting Standard The standards issued by the Australian Accounting Standards Board
Accounting System A collection of source documents, records, procedures, management policies and
data-processing methods used to convert economic data into useful information.
Agency Relationship A contract under which one or more principals engage another person (the
agent) to perform some service on their behalf which involves delegating some decision-making
authority to the agent.
Assets Resources controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
Auditing The examination of a companys general-purpose financial statements by an independent
external observer (the auditor) to ensure that they present a true and fair representation of the
companys financial status. The auditors findings are presented in the auditors report.
Balance Sheet A statement that shows all the resources controlled by an entity and all the obligations
due by the entity at one point in time.

Budget A short-term and long-term plan of action for the future operating activities of a business,
expressed in monetary terms.
Cash Cash on hand and cash equivalents.
Comprehensive Income The sum of profit for the year and other comprehensive income.
Corporate Social Responsibility The mechanisms by which a firm manages those business activities
that impact on society (e.g. employment of minorities or the disadvantag
Creditor A person or entity to who, a debt is owed.
Double-Entry Bookkeeping The system developed for recording accounting information based on the
concept that every transaction affects two or more components of the balance sheet (accounting)
equation.
Economic Consequences The impact of accounting policy changes on the economic position of various
parties affected by the change.
Entity A fictional or notional being, such as a business, club, company or partnership, in respect of
which financial transactions occur and accounts are kept.
Financial Statements The means of conveying a concise picture of the profitability and financial
position of the business to management and interested outside parties. The most widely used financial
statements are the balance sheet, the income statement, the statement of changes in equity and the
cash flow statement (plus the notes attached to the statements).
Going Concern The assumption that a business will continue to operate in the future without any
intention to liquidate or to significantly reduce its scale of operations.
Income Statement A financial report listing the income, expenses and net profit or net loss of a
business (entity) for a time period.
Interest A charge made for the use of money.
Internal Control The procedures and processes in place within a business to safeguard all assets
including cash.
Just-In-Time Management A management technique designed to lower the costs of holding high
levels of stock.
Lenders Persons or organisations which permit the temporary use of money; for example, in return for
payment.
Liquidity The ability of a business to satisfy its short-term obligations. Liquidity refers to the ease with
which assets can be converted to cash in the normal course of business.

Qualitative The nature or characteristics of information.


Quantitative The amount or size of information.
Stewardship The need to protect a firm's economic resources (normally referred to as assets) from
theft, fraud, wastage, and so on.
Stock Exchange A market for the buying and selling of stocks and shares in which supply and demand
governs price.
Taxable Income The amount of profit, as determined by the Tax Commissioner, on which the current
income tax liability is calculated.
Triple Bottom Line (TBL) Accounting A framework for reporting an organisation's economic,
environmental and social performance.
Value An items equivalence in money.