Chapter 1:
A view of viewing business
As my understanding of this
chapter, accounting is not just numbers anymore; it is a process for us to see
what is going on with the business. It is a look of how business process and
what is going on with business. Accounting is a way to understand how to use
the information so we could communicate and connect to the economic and
business realities of each firm easier. To my understanding, business is
creating value substantially, real and actual value. In accounting, the word
value is what the actual word that I should be looking for more. It is important
as it describes the firm’s business activity and it would make a big difference
if the value changes anytime.
I also see that in mainly
Australia, New Zealand and UK (but a lot of other country as well) a lot of
economic and business activity is conducted by people operating in firms. Firms
are creating and exchanging value with other firms in markets and also in all
different markets. I also understand that there are different types of markets
in the business world. Which is input markets, products markets and capital
markets. Input markets are the ones, exchanging value with suppliers and
employees. Products markets are mainly exchanging value market with customers
and capital markets are exchanging with equity owners and debt investor. I then
see that a firm also communicated with government through the taxation and
government regulations and services issues.
As mentioned before, value is a
important words in aspect of accounting. Firm can destroy or create value
through their activities. Business need to understand how to operate business
so it creates value rather than destroy value. We need to understand that
accounting isn’t just numbers; we used the information to understand what is
going on with the business.
Firms are allowed to do many
different things and in different sizes. I understand that businesses not just
provide services to consumers, they could retail products or they could manufacture
products. Also they could mix them up to achieve business need. Businesses are
everywhere. I see that not every business are private owned. It could be run by
government as well. Business (private business) can also run by one owner, more
than one owner and a few staff and also by thousand of shareholders with large
number of staff. But it does not affect how we see the business. No matter how
small or big is the business; they all do bookkeeping to record transactions.
Now we are going to look more
into types of businesses. A small business can run by one owner. This is call
sole trader. To remember this name, I told myself the definition of sole is
single while trader which is the person trading the services or products (which
business does). Which than makes me remember easier that when I see sole, it is
meaning of one. Sole trader has no separate legal status apart from its owner. The
owner is in the business for themselves. The owner needs to be responsible to themselves
regards to decisions or actions made.
Partnerships. Remember the word,
partners. This is more than one. Partnerships are run by more than one owner.
In this group, the owners pool their resources and share in the firm’s profit
and loss together. Every partner in the business are set with partnership
agreements, this is to make the relationship between the partners clear. This
agreement is to help partners to sort out disputes they might occur over time.
Business can also run as a company.
Companies than have their own separate legal entity separated to the owners.
Another type of organization is as a trust. It is a relationship where trustee
carry on a business for the benefit of certain beneficiaries. Trusts have a
trust deed to sets out the relationship between beneficiaries and trustee.
Now we will look at keeping
records of business. We have seen that records are to give us guidance and
understanding the economic and business realities easier. But there is
circumference that it failed to do this which is when things of the firm are
first recorded. There is a big range of different people who is genuine
interests in the firm’s operations. Firms can be commercial enterprises, not
for profit entities or public sector entities.
Double-entry bookkeeping or known
as double-entry accounting, is a way to record transactions that have been
developed long time ago. Our cultural now is that, he way we do things are the
ways have been developed over many generation. But why? Isn’t it would be
easier for us to do it in a short form or something? The reason why we still
use the previous developed ways is because it would be so much easier to let
the people who do not know the ways to learn everything than to retrain everyone
who can already deal with the way it works. Yet we still have to remember,
ideas are powerful. Also to be accurate in records, it is good to maintain
double-entry format as it helps us to fix up any errors that we could spot
while doing double entry.
Double-entry accounting is a
system of recording transactions of firm to ensure the relationship between the
different elements of the business model that underpins accounting is kept
intact. We have now move bookkeeping into digital form instead of using books
like older days. It is because the world now runs better with computer system
and it is easier for us to keep them and review them. There is now a lot of
accounting packages that has been developed to make our transaction entry
easier. Moreover, Excel spreadsheet can be easily used to record and manipulate
and manage data as well. Small business may do their own bookkeeping or they
may be like slightly larger business would employ someone to do bookkeeping on
a weekly or monthly basis depending on how much transactions a business have
each day. (That is a part-time basis) While, the larger business would employ a
full-time staff to enter data and to ensure the bookkeeping are up-to-date.
To achieve knowledge of
accounting system, I understand that it is important for me to understand the
idea and concepts. It has to make sense to myself and all I need to be involved
and connected to the ideas of business by myself. No one else could do the work
for me. To be able to transform the way I look at business or improving more
ideas and concepts, it is important that myself to support accounting prior to
my knowledge and previous experiences.
In building-blocks of accounting,
there are a part call journals and ledgers. It was break into two books in the
older days. Since we have now records everything into digital format I would
actually know this as two different folders. Journal is a file that contains
daily transactions and economic events of the firm. It is recorded each day,
which than you can understand as it is a list of transactions recorded for the
firm. While ledger, it contains the same transaction but arrange not in order
of each day. It is arranged as an individual accounts form. The different
accounts are assets, liability, equity, revenue and expenses. Which also known
as the five elements of accounting.
Liabilities are aspects use up in
future economic benefits. Equity is the left over concept. Which is what we
have left after liabilities are deduct from assets. Assets and liabilities
represent value of firm while equity represents the interest of its owners.
After understanding of the elements I also know that equity will always be
equal to assets less liability. These three elements provide measure of the
value of firm. This is the central concept of business.
Also, to my understanding, value
would be different as business is always on the move as they change in markets
or due to business activities. Now we will make a step forward to revenue and
expenses. It is addition or deductions in equity. I see that the reason of
business makes profit is because profit gives an addition (increase) in value
which is important for the business. Which the less expenses the better it is
as it considered being a loss which will be decrease in value.
Question 1:
Why do we have double-entry accounting? Why do we put in
everything twice? Why not just one?
The double-entry accounting has been developed awhile ago,
the reason why do we still follow it is because it is a good data records as it
provides all the information about the firm that is needed as well as it is
accurate. Using the double-entry accounting system also helps us to identify
any error and giving us an opportunity to correct the error so that all the
values are accurate and up-to-date.
Question 2:
For your firm, identify three assets, three liabilities and
three items of equity. Describe what each item means to you.
-After my understand of this chapter as I mentioned above,
these are the three assets of my allocated company (Webster Limited);
*Trade and other receivable, in both current and non-current
assets as amounts billed by Webster to its customers when it delivers goods or
services to them in the ordinary course of business and some to be pay now
while some to be pay in future
*Property, plant and equipment, non-current assets, vital to
Webster operations but cannot be easily liquidated. Not planning to sell them
yet which than each year after revaluation, the property, plant and equipment
and increase in value which than turns to be future assets.
*Investment property, non-current assets, property that has
been purchased with the intention of earning a return on the investment current
or in future. As property not sold yet so it would remain as future assets till
sold.
-Three liabilities of Webster Limited;
*Borrowings, current liability as a certain minimum amount
is needed to be pay each year
*Deferred tax liability, non-current liability, as it has
been deferred and to be pay in future
*Provisions, current-liability. Payment of services (transportation
and more) or equipment currently
-Three items of equity
*Issued capital, issued share to shareholders. This is part
of a Webster’s authorised capital
*Reserves, shareholders’ equity
*Retained earnings, retain their earnings in order to invest
them into areas where the company can create growth opportunities, such as
buying new machinery as is part of future plan.
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