Accounting, 8th Edition
Chapter 1 – Decision Making and the Role of Accounting

1. Economic Decisions
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Many of the decisions that we make involve the use of economic resources for consumption or investment purposes.
Other factors that need to be considered when making decisions are:
1. Personal taste.
2. Social factors.
3. Environmental factors.
4. Religious and/or moral factors.
5. Government policy.
Steps in the decision making process:
1. Establish goals.
2. Gather available information on alternatives.
3. Determine consequences of alternatives.
4. Choose a course of action.
In a complex society decision makers have to rely on data supplied by specialists.
The accountant (as a specialist): o Is involved in steps 2 and 3 of the decision making process; o To offer advice regarding step 4; and o To measure the outcomes or consequences of the decision-making process.

2. Accounting Defined
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“The process of o Identifying - observing economic events and determining which of those events represents economic activities relevant to a particular business; o Measuring; o Recording – classification and summarisation; and o Communicating – preparing and distributing accounting reports economic information to permit informed judgements and economic decisions by users of the information”.

3. Users of Accounting Information
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The first objective of accounting is to provide information in reports which can be used by internal and external decision makers.
Internal decision makers (Management Accounting): o Information is presented to management in the form of special-purpose financial reports. o Special-purpose financial reports are prepared for users who have specialised needs and who possess authority to obtain information to meet those needs.
External decision makers (Financial Accounting): o Financial statements (general purpose financial reports) are prepared for external users and are designed to meet the information needs of a wide range of users who are unable to command the preparation of reports tailored to satisfy their individual specific needs for information.
Curtin College – Acc 1100 Chapter Review Study Notes

Accounting, 8th Edition
Chapter 1 – Decision Making and the Role of Accounting o General purpose financial reports generally comprise:
 Income Statement;
 Balance Sheet;
 Statement of Changes in Equity; and
 Statement of Cash Flows.

4. Public Accounting v Commercial Accounting
4.1
Public Accounting
 Public accountants run businesses which offer their professional services to the public for a fee.
 Most public accounting businesses specialise in one of four general services: o Auditing and assurance services; o Taxation services; o Advisory services; or o Insolvency and administration.
4.2
Accountants in Commerce and Industry
 The Chief Financial Officer (CFO) will usually have staff accountants that work for them, called management accountants.
 Activities undertaken by the accounting staff in commerce and industry include: o General accounting (oversee the recording of transactions and prepare reports); o Cost accounting (collection, allocation and control of production costs); o Accounting information systems (designing accounting systems); o Budgeting; o Taxation accounting (preparation of taxation returns and reports, consulting); o Internal auditing and audit committees (conduct ongoing reviews to make certain that established procedures and policies are being followed).

5. Types of Business Entities
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Single Proprietor or Sole Trader
 A business entity owned by one person.
 A sole trader is not a separate legal entity.
Partnership
 A business entity owned by two or more people acting as partners.
 Partnerships are not separate legal entities, so individual partners are personally liable for the debts of the partnership.
Company or Corporation
 A separate legal entity formed under the Corporations Act 2001.
 Owners are called shareholders and own shares in the company.
 Due to a company being a separate legal entity, shareholders in a limited company enjoy “limited liability”. o Limited liability means that shareholders are not personally liable for the debts of the company once their shares have been paid in full.

Curtin College – Acc 1100 Chapter Review Study Notes

Accounting, 8th Edition
Chapter 1 – Decision Making and the Role of Accounting

6. Management Functions
1. An organisation is defined as a group of people who share common goals with a welldefined division of labour.
2. Managers of a business are accountable to owners for adequate profits, so management must be: o Efficient – maintaining a satisfactory relationship between an entity’s resource inputs and its outputs. o Effective – how well an entity attains its goals.
3. Management Functions: o Planning; o Organising; o Directing; and o Controlling.

7. Ethics
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In order for a business entity to function effectively, all people working in the entity have to be honest, abide by the rules and ‘do the right thing’.
There are no widely held, generally accepted codes of ethics or rules of ethical behaviour. In 2006 CPA Australia and the Institute of Chartered Accountants (ICAA) in Australia established the Accounting Professional & Ethical Standards Board (APESB) to maintain a compulsory code of ethics for their members.

Curtin College – Acc 1100 Chapter Review Study Notes