Learn the foundational accounting knowledge required for all areas of study in just 5 minutes! Understand the process of accounting and how accountants give advice to owners.
What is Accounting?
Accounting is the process of recording, reporting, and analysing financial information.
Financial information: Facts or material that relate to money. E.g. Amount of Sales Revenue
The purpose of accountants is to help managers/owners to make well informed decisions about the future of the business which will help it run successfully.
Factors To Consider When Giving Advice:
1. Financial information
First use the information from the accounting reports and data from key financial indicators to determine the firm’s financial performance.
Determine how a strategy could improve these figures as well as benefit the business financially
2. Non-Financial Information
This includes all things which are not of a monetary (money) nature, such as the number of customer complaints or staff turnover.
Determine how changing certain aspects of the business to improve it financially could affect other non-financial aspects
3. Ethical Considerations
Corporate social responsibility (CSR) is the ongoing commitment of a business to go beyond legal obligations and to take responsibility for the economic, social, and environmental consequences of their activities and to be accountable to a wide range of stakeholders.
Determine how any actions to improve the performance of the business could impact on its stakeholders (employees, general public, customers). Generally, if a strategy seems unethical, it will harm the business in the long-run and negatively affect its future performance.
When answering questions that require you to give advice, it is often best to look at the advantages and disadvantages of an option.
For example, one option may greatly increase sales but it may not be ethical and it is up to you to advise the owner if you think they should go through with the strategy, highlighting its benefits and negatives.
The Accounting Process:
When completing a question, it is often best to also understand what part of the accounting process it is asking you to analyse:
Step 1: Collecting Source Documents (Provided in questions)
Source documents are used to depict the transactions the business has been involved in and provide evidence of the transactions to ensure verifiability.
Step 2: Recording Financial information
It is the job of accountants to be able to record any source document in an organised way that makes it more useable. Often recorded in a type of journal.
Step 3: Reporting Financial Information
Converting financial records into a report which is understandable to the owner and summarises key information.
3 main financial reports. The cash flow statement, income statement and balance sheet.
Step 4: Advice
This involves the use of both financial (reports listed above) and non-financial information, as well as any relevant ethical considerations to provide options to the owner and suggest the best course of action.
Conclusion:
Accounting is simply the process of collecting, recording and reporting financial information (data relating to money). As an accountant (or student answering a question) it is your job to recognise trends in financial reports and provide advice to the owner. The advice must include financial and non-financial information as well as any ethical concerns.
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