Introduction to accounting

Accounting is the process of identifying, recording, classifying, summarising and reporting the financial activities of an entity so that people can make informed decisions. It is more than bookkeeping. Bookkeeping captures transactions; accounting goes further by organising that data into reports, analysing what the reports show and communicating the results to the people who need them. In this subject the main entity studied is the sole trader: a business owned and controlled by one person.

Accounting informs a business's financial management practices because a business cannot be run well on guesswork. The records show whether revenue is covering expenses, whether debts can be paid when they fall due, how much the owner has put in and how much the owner has taken out. A manager who knows these facts can set prices, control costs, plan inventory purchases, decide whether to borrow and judge whether the business is worth continuing.

Without accurate records, problems such as slow-paying customers or creeping costs often go unnoticed until cash runs out.

Stakeholders are people or groups with an interest in the business. Internal users are the owner and managers. External users include lenders such as banks, suppliers who sell on credit, employees, customers, government bodies such as the Australian Taxation Office (ATO) and potential investors. Each group reads the reports for a different purpose, so the information must be reliable, relevant and understandable.

Several roles make up the accounting profession. An accountant designs and maintains accounting systems, prepares financial reports and tax returns, and advises owners on matters such as cash management and business structure. An auditor is an independent accountant who examines an entity's records and reports and gives an opinion on whether they present a true and fair view.

The accounting profession, through professional bodies, sets entry standards, requires ongoing professional development and enforces codes of ethics, which helps users trust the reports accountants produce.