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Accounting/Finance function within a business is

a central part of its management information
systems (MIS).
The main purpose of accounting/finance
information is to help managers make decisions
with respect to:

Allocation of resources;
Performance evaluation and control;
Continue with certain business operations;
Invest in particular projects or new ventures;
Sell particular products

References:

Atrill, P., E. Mclaney, D. Harvey, and M. Jenner, Accounting: An

Introduction, 4edn. 2009, Prentice Hall.

Atrill, P., and E. Mclaney, Accounting and Finance: For NonSpecialists, 8edn. 2013, Prentice Hall.
Atrill, P., and E. Mclaney, Management Accounting: For Decision
Makers, 4edn. 2005, Prentice Hall.
Atrill, P., Financial Management: For Decision Makers, 5edn.
2009, Prentice Hall

Finance is concerned with the ways in which funds for a

business are raised and invested.
Financial information is to understand main forms of
finance available; risks associated with each form of
finance; the returns from available investments; and risks
associated with that investment.

1. People make decisions.

2. Business transactions occur.

Accounting is concerned with the collection, analysis and

communication of financial information.
Accounting information is a tool for decision-making,
planning and control of business.

3. Businesses prepare reports to show

the results of their operations.

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Planning is essential for business success

Prudent decision-making is closely linked to

Planning is usually broken down into three stages:

1.

Setting the objectives or mission of the business

(Detailing what the business is basically trying to achieve)

2.

Setting long-term plans

(Describing how the business will set out to achieve its longterm objectives)

3.

Setting detailed short-term plans or budgets

(Typically financial plans for one year ahead)

effective planning

Planning covers both long-term and short-term

scenarios

Over time, plans are normally adapted to changing

circumstances

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Step 1

Identify business objectives

Step 2

Consider options

Accounting is useful in control to compare

planned outcomes with actual outcomes in
commonly specified terms

Step 3

Prepare a long-term plan based on the

most appropriate option(s)

Step 4

Prepare short-term plans (budgets)

Managers can take steps to get the business back

on track if variances are highlighted between
planned and actual outcomes

Step 5

Perform and collect information on actual performance

Step 6

Respond to divergences between plans and actuals,

and exercise control

Step 7

Revise plans and budgets if necessary

Control is the process of making planned events

actually occur

The popular suggested business objectives include:

Maximisation of sales revenue (this does not consider the

need to cover business costs)

Maximisation of profit (this takes in to account sales

revenues as well as expenses, but is limited as it does not
include other factors such as risk.

Maximisation of return on capital employed (accounts for

level of profit as well as the level of investment)

Survival (This is the aim of most businesses, however it is rarely

a primary objective)
Long-term stability (Like survival, most businesses aim for it,
but it is rarely a primary objective)

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Growth (Encompasses survival and long-term stability and

aims to strike a balance between short and long-term
benefits, however it is probably not a specific enough target)
Satisficing (Attempting to grant a satisfactory return to all
stakeholders - not just the owners. Difficult to define as a
practical benchmark for business decisions.)
Achieving sustainable development (Achieving economic
growth while minimising or eliminating environmental impact
and meeting societys expectations of good corporate
citizenship.)

Enhancement / maximisation of business wealth

Means the business takes decisions intended to make it

worth more.

Encompasses all the valuable features of the previous

suggested objectives.

Likely to be the main financial objective for many

businesses )

Management accounting is concerned with

providing managers with information required for
day-to-day running of the business

Financial accounting is concerned with providing

the other users with useful information

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Financial Accounting

Management Accounting

Focus

Mainly external

Internal only

Nature of reports

General purpose

Specific purpose

Level of detail

Broad overview

Quite detailed

Restrictions

Accounting standards and

other regulations

No restrictions

Reporting interval

Mainly annual, sometimes

semi-annual or quarterly

Whenever required weekly,

monthly

Time horizon

Mainly historical

Both past and future

Range of information

Quantifiable in money
terms; focus on objective
and verifiable data

Can contain non-financial

information; less focus on
objectivity and verifiability

Paul starts a wrapping paper sales business with $100

On the first day, he uses the $100 to purchase wrapping

paper (inventory)

The Cash Flow Statement (shows the sources and uses of cash
for a period i.e. cash movements cash in & cash out)
The Income Statement - statement of financial performance
(traditionally known as Profit and Loss; measures and reports
how much profit has been generated in a period )
The Balance Sheet - statement of financial position (shows
overall net financial position at the end of a particular period)

How much did wealth increase (financial performance) as a

result of the first days trading?

On the same day he sells 75% of that inventory for $110 in

total

What cash movements took place in the first day of trading?

There are three main financial reports:

Closing cash balance for the day is $110 (opening balance

$100 - $100 stock purchase + $110 sales = $110)

The increase or decrease in wealth is measured as the

difference between sales made and the cost of goods sold
sales were $110 less cost of goods sold $75 = profit of $35

Note that only the cost of the paper sold is measured against the
sales to find profit, not the total cost of the wrapping paper
purchased.

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What is the accumulated wealth (financial position) at the end of

the first day?
At the end of the first day, a balance sheet is drawn up, showing
the resources held by the business:

Cash (closing balance) = $110

Inventory (stock available for resale) = $25
Total business wealth at end of day = $135

Note that the profit of $35 has led to an increase in wealth of $35
Note also that the increase in cash of $10 is not the same as the increase
in wealth because wealth does not exist only in the form of cash (see
inventory)

Balance sheet at the

beginning of Period 1

Balance sheet at the

end of Period 1

Balance sheet at the

end of Period 2

Income statement

Income statement

Cash flow statement

Cash flow statement

Period 1

Period 2

Time

Note: Balance sheet measures stock of wealth at a particular moment in

time (static) Other three statements measure flows of wealth over time

Those who intend to work as a manager in a

business or a company should have a fairly clear
idea of certain important aspects of accounting
and finance:
How accounting reports should be read and
interpreted;
How financial plans are made;
How investment decisions are made; and
How business are financed.

Its all about street wisdom to make you a bit streetwise

in accounting and finance

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Sole Proprietorship (single owner called the

proprietor)
Partnership (two or more owners established by a
formal partnership agreement or informal
arrangement)
Company (owned by many people who have
invested in the business)

Public Limited Company / Berhad

Private Limited Company / Sendirian Berhad

Some advantages of sole proprietorships include:

No separate legal entity (no distinction between the owner

and the business, but distinct as an accounting entity)
Limited life (restricted to the period the owner continues to
operate the business)
Unlimited liability (the owner is fully responsible for the debts
and obligations of the business)
Minimum reporting regulations (minimal compared with other
entity structures)
Limited access to funds (restricted to the personal resources
of a single owner)
Low establishment costs (comparatively much lower
compared to other entity structures)

Some disadvantages of sole proprietorships include:

Simple and inexpensive to establish and operate

Unlimited liability of the owner

Minimal financial reporting regulations

Restricted access to ownership funds

Ownership and management are normally combined

Limited access to non-ownership funding

Financial rewards flow directly to the owner

inflexibility in management - sole owner is the sole

Timely decision-making is possible

manager

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A partnership may be described as: The relationship

that exists between two or more persons carrying on a
business with a view to profit.

The relationship may be established by a formal partnership

agreement or an informal arrangement between the parties,
or it may be inferred by the actions of two or more
individuals.
The partnership maintains individual records of each
partners transactions according to:

Resource contributions (capital)

Resource withdrawals (drawings)
Share of undistributed profits (either current or retained
earnings)

Advantages of partnership as against sole

proprietorships:

No separate legal entity (no distinction between the partners

and the business, but distinct as an accounting entity)

Limited life (as long as the partnership exists)

Unlimited liability (jointly and separately for debts of business)

Mutual agency (each partner is responsible for the actions of
the other partners)
Co-ownership of assets (the partnership assets are owned by
the partners in aggregate, not individually)

Co-ownership of profits (equally or in agreed proportions)

Limited membership (a restriction on the number of partners
allowed. Normally twenty is the limit. Some exemptions exist
e.g. accounting practices)
Increased regulation (most states have Partnership Acts for
direction of activities and rights and responsibilities of
partners)

Disadvantages of partnership as against sole

proprietorships:

Greater access to capital (two or more owners)

higher level of regulation (partnership acts)

Different skills are brought together (partners)

profit sharing with other owners (co-ownership)

Greater management flexibility (more than one

asset sharing with other owners (co-ownership)

owner)

reduced decision-making authority (shared management)

Taxation advantages (income sharing)

responsibility for the business actions of other partners

(mutual agency)

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Disadvantages of partnership as against a company

entity:

limited life affects long-term planning

unlimited liability creates greater risk for ownership

investment

absence of specialist management team

mutual agency imposes extra responsibility for the

Important to have a detailed and formal agreement

so that most potential problems can be avoided
Issues not covered by the partnership agreement
will be governed by Partnership Act
On distribution of partnership profit, most
Partnership Acts indicate:

Partners not entitled to a salary or wage

Partners not entitled to interest on capital contributed
Equal shares of profits and losses

business actions of other partners

limited access to both ownership funds and debt funds

These rules apply only in the absence of an agreement, partners may

agree to share profits in any way they choose

There are a number of company types, the most common being

the company limited by shares, or limited company
A limited company may be defined as: An artificial legal
person which has an identity separate from that of those who
own and manage it.

Ownership interest is broken down into shares hence the

term shareholders to describe the owners, who have invested
in the business.

Separate legal entity (a limited company has the legal capacity of a

person and is separate from those who own the entity i.e. can sue
and be sued, buy, borrow, lend and employ in its own right as a legal
person)
Unlimited (perpetual) life (the life of the company is indefinite and
not related to the life of the owners)
Limited liability (the entity is responsible for its own debts and
obligations because it is a legal person. Shareholders obligations
cease upon full payment of the agreed price of their shares.)
Company ownership of assets (assets owned by the company in its
own right as a legal person)
Company profits belong to the shareholders (profits are either
distributed or retained for the benefit of shareholders)

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Extensive membership (some forms of companies may be limited,

but public companies e.g. Westpac, Telstra often exceed 250,000
initial shareholders)
Separation of ownership and management (usually a separate
specialist management team exists outside the ownership interest,
although increasingly managers are also shareholders)
Extensive regulation (much stricter regulations due to limited
liability benefit granted to owners i.e. registration requirements,
securities requirements, auditing requirements, conformity to
accounting standards, etc)

Separation of ownership and management

Perpetual existence
Separate legal entity
Owners have limited liability
Greater access to ownership funding
Potentially greater access to debt funding
Potential taxation advantages
Potential increases in share values when listed on
the stock exchange

Public Berhad

Proprietary Sendirian Berhad

Company name includes

Ltd / Bhd

Pty Ltd / Sdn

Bhd

Pressure for short-term performance

Public sale of shares

Yes

No

Less management flexibility

Typical size

Large

Smaller

Greater scrutiny by analysts and investors

Extent of regulation

Extensive

Moderate

Taxation disadvantages (no tax-free threshold)

Raise monies from public Yes

Some restrictions

Subject to reporting
requirements

Depends on size

Extensive regulation

Higher establishment costs

Control by original owners may be lost

Yes

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Public companies and large proprietary companies

must prepare annual financial reports - including
financial statements and directors reports

Owners' Claim
(Shareholders' Equity)

Small proprietary companies do not have these

requirements unless requested by appropriate
regulatory body or by at least 5% of members

Shares
(investment by owners)

etc

etc

etc

etc

etc

To be small, they must satisfy at least 2 of:

etc

Reserves
(Profits and gains subsequently made)

Consolidated gross operating revenue < $10 million

Consolidated gross assets at end of year < $5 million
Must employ < 50 employees at end of year

Different types of shares

The basic division - an example (refer example

2.1 on page 45):

Several people decide to start a new company

They estimate they will need $50,000 to obtain assets to run
the business
Between them, they raise the cash to buy shares in the
company, which issues 50,000 shares at $1 each

The balance sheet at this point would be:

Net Assets (all in cash)
Shareholders equity
Share capital - 50,000 shares

$50,000
$50,000

Different types of Reserves

The company buys the necessary assets and

inventory and starts to trade
During the first year it makes a profit of $10,000
and the shareholders (owners) make no drawings
At the end of the first year the summarised balance
sheet is:
Net assets (various assets less liabilities)

$60,000

Shareholders equity
Share capital - 50,000 shares
Reserves (retained profits)

$50,000
$10,000
$60,000

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The profit is shown in a reserve known as retained

profits and is kept separate from share capital
Retained profits are not added to share capital due
to Corporations Act restrictions on the maximum
drawings of capital (or dividends) the owners can
make

The Corporations Act / Company Law provides the basic

framework of company accounting regulation. This is augmented
by international accounting standards and stock exchange rules

Reserves - profits and gains made by the company

that have not been distributed to shareholders

The most common type of reserve is retained

profits - profits earned by the company that are
held back for use within the company

Other reserves may be created in certain

circumstances - a reserve is created (asset
revaluation reserve) when assets are re-valued at
greater than their book value

The Directors are appointed by shareholders and are required to

report annually by means of financial statements
The auditors are appointed by the shareholders to give their
opinion on the credibility of financial statements

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