Hi welcome to this tutorial on accounting basics. Specifically we're
going to talk about the theoretical functions of accounting and, ah, the
functions of accountants, and why they both exist. So first of all, I want to say
this is the first recording I've done in a few years, so I'm sorry if I'm a bit
rusty, and secondly I'm in a new location ah compared to previous recordings and
nearby they're constructing a block of units so if you can hear a little bit of
construction noise in the background, um, then I do apologise. Anyway here we go!
All right, so what are we going to cover in this tutorial? First of all there's
this introduction, then we want to talk about what is accounting, then we're
going to talk about what do accountants do, and finally we will talk about the three
functions of accounting. and then we'll have a conclusion. All right, so let's
get into it. All right, so what is accounting? Essentially, accounting is an
information system. Now whether an information system is software or
specifically IT related, or simply some sort of manual or paper information
system, it doesn't really matter, um, in this case. Accounting is an information
system. Now this information system primarily uses financial data so things
that involve money and finances such as transactions that have occurred in a
business or an organization, financial statements that are denominated by
dollars or euros, or so forth. And also, this information can also include
non-financial data. Now that's kind of important. Many people think I'm
accounting only involves money, but you'll find that many accounting reports,
specifically in management accounting, do involve non-financial data. So you may
have a management accounting report, like a materials variance report, and they
might have raw material inputs, in those management accounting reports. And that
involves some specific non-financial data, such as raw material. Ok, so when we
say it's an information system, ah, this accounting
information system has to be able to: Collect the inputs, so it has to be able
to collect transactions or collect events, and also then has to be able
to process, store, retrieve and analyze those events, and transactions, and then
generate reports, and essentially produce the outputs. And this is very similar to
other types of information systems. Ok, accounting is used in almost every type
of organization whether they're private organizations, public sector entities or
nonprofit organizations. (It's) We'll talk about why accounting information and
accounting information systems are so prevalent when we talk about the
functions of accounting towards the end. Ok so next up, what do accountants do? So
accountants, ah, interact with this particular information system and they
communicate the results they get from that system. So whether the information
system is a manual, perhaps in a paper ledger like in those old ledger
notebooks you may see from very outdated newsagencies, or in a software system
where I could see today, or even millennia ago they would carve
accounting information to pieces of stone! And accountant needs to be able to
record, classify, summarize, and communicate data into this information
system and, ah, analyze the results. So they have to record transactions, they have to
be able to collect the inputs that will go into the information system, they have
to classify the inputs. So they have to say, "Ok here's a receipt, ah, what part
of the information system does this involve?" Then they might have to
summarize the data. So they might have to say, "Okay well my CEO doesn't want to see
a hundred thousand receipts, all he wants to see is a summary of all those
receipts that I can give him in a five-page report." Um, he may have to, an
accountant, he or she may have to analyze what's in the information system so
accountants aren't simply robots! They often, ah, have to use their analytical
processes. They have to know not only what's going to be a information system
but also how to read the language underlying business. So they may have to
analyze the reports, and then they have to communicate it. You'll find
that most higher-level jobs in the accounting field aren't really about
number crunching, it's more about the communication side. So whether they're
communicating to clients, or to a manager or to, ah, investors, it's about turning
what's in the information system, in the accounting 'language', into something
that's actionable and useful for the people who aren't as skilled in
accounting as that particular accountant is. Okay? And there's a vast array of
accounting roles, specialties and levels of responsibility in general, so I can't
cover everything here, but um you can, if you had to classify them, which you
probably shouldn't, you could probably state (sic) accountants perform their tasks
focusing on either financial accounting, management accounting, taxation, audit,
insolvency, or corporate finance. So, again, it's wrong to put these in mutually
exclusive buckets, but you'll find most accounting specialists, if you go out and
do an accounting career, normally tend to gravitate towards one of those areas. Yes,
again there's overlap, depending on the size of the firm there may be maybe more
overlap or less overlap, but ah, generally you'll become a specialist in one of these
fields, before you want to move around; perhaps for career mobility! And in
general, when you're working as an accountant there are four main areas so
you can work in. You can work at a specialist accounting firm, and that's
known as practice. Like, public practice or private practice, and that's where you
get your KPMG's and you EY's, everything down to your local CA or CPA
at a smaller office. That's where you work with clients, you may give business
advice, and ah, you might help them out with their tax, you might help them out with
restructuring things in their small business. It's a, it's a, whole basket of
choices, but essentially, you work as a specialist accountant and you provide
advice to your clients. Now you may work in a finance team
within a business, that's known as Commerce. That's where you work perhaps
in a large organization, like a large, perhaps in a large retail organization,
or a large manufacturing organization, and they had their finance team in-house.
That's probably led by the CFO, the chief financial officer, and there are
specific managers underneath them, and they handle all of the accounting
functions within that particular business, and only that particular
business. Now there's a similar sort of role within a government department, it's
a very similar role to the previous one, except you're in a public sector
organization. And also some people choose to be a teacher. And they teach
accounting in an institution, and they become academic accountants. And they
may be working at universities, or technical colleges or, um, other tutors and
so forth. Okay so this is this is the heart of the lesson: These are the
theoretical functions for accounting. Why does it accounting exist? What led to the
development of accounting in the first place? And, when you study accounting
you'll be generally told that there are three specific functions to accounting.
We have to remember that, all these involve the idea that resources are
scarce and need to be allocated well, or efficiently or optimally. Okay? So if we
all had as much money as we want and there was infinite resources on the
planet, then accountants probably wouldn't exist!
So let's embed these three functions, based on the idea that we have have to
make choices between: Where we spend our money. (And) have to make choices where we
spend our time. And we have to make sure whatever we spend our time and money on,
that we do it well. Okay, so taking that on board, now the three functions of
accounting are. the decision-making function, the contracting function and
the stewardship function. And we're going to go over them each, one by one.
Okay, the decision-making function. All right. So people in organizations need to
optimize decision making when deciding where to allocate their resources and
how to control the performance of these resource allocations. And accounting
information can greatly help this! Okay so that the general preamble. So we have
to decide where we spend our money, where we spend our time, between choices
and that's pre making the choice, and then post making the choice, we have to
make further decisions about controlling the management of those particular
allocations, so we have to make sure that, after we've made the choice then we have
to make further decisions that: whatever we hoped would happen, is actually
happening. And how do we get a hold all this? Accounting information,
whether they're management accounting reports or financial
accounting reports, greatly assist this decision making. And this function grew
out of the Industrial Revolution so pre-industrial revolution, ah, life is pretty
simple. You had a house, you had your family, you had your kids, you probably
had a small farm, that was right outside your house! So all you ever did was tend
to your farm. What you grew, you ate, and if there's any
leftover you might walk a hundred metres and sell it at the market, or something.
Not too complicated. But once the industrial revolution, um, the ownership and control
of assets and resource became separated. And the scale of projects became more
difficult to manage and control. So there we were in our farm, suddenly Industrial
Revolution occurs, or not so suddenly but um it occurs, and now we don't just own a
farm we may own a factory, ten farms, our employees might not be our children who
are sleeping in the same house as us, but we may have 50 employees in
another part of the country! And we not might not be selling, you know, 40
potatoes at a market, we might be selling millions of dollars of potatoes, in a
foreign country. So all those easy things we could do in
the past, by looking out the window and telling our kids what to do, or doing it
ourselves and watching over it, it was impossible once the Industrial
Revolution. So we needed this form of standardized communication. We needed to
know: What was my factory doing in the south of the country, ah, last month?
What about the north of the country? How did the factory in the north of
the country compare to that in the south of the country? So the accounting
information became the standardized communication
methods, both to make decisions and control our decisions. Alright, secondly
the contracting function. Alright so remember the idea that
now we have, ah, not just our children working for us, or ourselves working for
us, on the farm, but now we have a large enterprise and we may have 50 or 500 or
5,000 employees working for us. So how do we manage and influence, to control these
large numbers of people, that are spread over large distances, where even larger
sums of resources are at stake? You know, I imagine if you're growing up in you
know 15th century farming community and your parents told you to chop the wood,
there wasn't much of a choice. But if you if you're living post Industrial Revolution
and you've got a CEO on the other side of the world, what's making you do the
right thing, when you're being employed by them? What's actually controlling you
and influencing you? And this is where accounting info can again help, because
you can embed accounting info into these employment contracts. And the accounting
info, within the contracts, can overcome the agency problems. And now the agency
problems, are/is a technical term or an academic term, for the situation I
just described earlier, in that ownership of the resources, (and) the control the
resources, like the managers and the employees, they're separated! So they
often have different motives. The managers and the employees probably want
to do as little work and get paid as much as possible. While the owners of the
resources probably want the agents to do as much work as possible, for as little
money as possible! So they have they have different incentives. So by introducing
accounting information into our contracts we can perform: bonding
mechanisms, and monitoring mechanisms. And these are the two techniques to overcome
agency problems. Now an example of (a) bonding mechanism, let's go back to,
we'll forget farming, let's go to mining. Okay? So I'm in Sydney at the moment, and
this is post-industrial revolution, and I want to start a mine. I've analyzed the
accounting data, and I've made the decision that I don't want to start a
mine in Sydney, ah, in Australia, I want to start a mine in South Africa. So I employ
a mine manager in South Africa to open my mine, and operate my mine. Now an
example of a bonding mechanism, we can embed into his contract, is we can say,
"Okay Mine Manager, if our mine generates, you know, X amount of profit this year
then I will give you a bonus." So we're bonding the mine manager's and my
motivations. We're saying, "I want profit as the owner, now if you if you give me
profit, then you'll get a bonus." So essentially we're bonding our
motivations so we want the same thing. That's, ah, one example there. The other
example is the 'monitoring mechanisms'. So, even though I'm using the bonding
mechanism to get my mine manager to want the same thing as I do, that's not
the only way to influence and control his behavior, his or her behavior, I beg
your pardon. Now we can include our monitoring
mechanisms using accounting information into the contracts. I can say,
"Okay Mine Manager I'll only employ you if you send back
monthly mine operation reports back to me in Sydney. So each month he would get
the accounting information, he would do a quick management accounting
information report and he would email me, back to Sydney. And then I could get
the report and I could 'monitor', what his performance is like over the previous
month. And that's how I use that accounting information as a monitoring
mechanism. And that's the second way we can introduce the contracting function,
using accounting information. Okay, and the final function of accounting is the
stewardship function. Now this one pre-dates the previous two functions, although
it's kind of similar. So the previous two functions of decision-making and
contracting we're all post-industrial revolution and
kind of involve the employee-employer relationship, and the profit motive. The
stewardship function predates that, and goes all the way back to the times of
kings and queens and lords and ladies and, ah, so forth. It was when one
person or one organization would own ALL the resources, and not out of an
employee/employer relationship, someone will be given a certain piece of those
resources to manage. So there may be a king in London or a queen in London and
they would say, "Okay, ah, lord, Lord Jamie(!), you can look after this area of land and as
long as you take care of it well, and you're a good steward of that land, and you
know, ah, pledge allegiance to the king and queen, then you can
maintain that land and, get a nice life off it. Now go enjoy that Lord Jamie." So it
still involves similar ideas to the previous two, ah, we're trying to control the
behavior of Lord Jamie, who's looking after the land and we want him to take
care of that land. We don't want him to trash the land, we don't want him to let
it over grow, and, we want to take care of the land, and ah, we also want him to report
back how the land is going, back to the king and the queen, or the bishop in case
of the religious organization. So how can both parties assess if the steward is
doing a good job? How can the king or the queen or the bishop know that the
steward... how can each of them communicate saying, "Yes, are you doing a job?" and the
steward goes, "Yes, I am doing a good job! Like, here we go, here's some information."
So they use this accounting information, um... Okay my slide's a bit wrong there. So,
"Accounting information within contracts can provide the communication of control,
um, control mechanism." Just remove that: "within contracts" so just um, that slide
should read, "Accounting information can provide this communication and control
mechanism." So we may have our the accounting information such as tax receipts of the
land, agriculture output and distribution, you know,
if it's a particular area of the country or land there may be gold treasure stored there, so they
could report back how much gold is on that piece of land, ah, using
accounting information. And they may even report on soldiers and armory available
for wars. So the king, who's in his castle in the capital, would know um, perhaps
how much gold is located everywhere in his Kingdom.
All right. And so you see it pre-dated, and it's a bit of a different relationship,
but they're they're similar sorts of ideas. Yeah, feel free to comment, if um that,
'within contracts' section has thrown you off. I should have double checked that. You know
how you always, you make mistakes, um not when you do typos and they've got the
red line showing you the made a mistake, it's when you
include words that are spelled correctly and obviously grammatically
correct, and ah yeah, completely missed it! So I'm sorry about that. Okay so let's, ah,
have a quick review. What we covered today was: What is accounting? And that's
essentially an information system. What do accountants do? They interact
with the information system and communicate the results. And what are the
three functions of accounting? That is decision-making, contracting and
stewardship. Okay! All right that's it! I hope it helped. Best of success, in your exams, and
your studies and if you choose accounting as a major. If you enjoyed the
video please subscribe to the channel, button should appear soon you can click
on. Or you can watch another one of my tutorials now. Or even if you don't want
to do either of those, just give me a like and that would be really good as well!
And finally, feel free to comment below if anything needs clarification or if you
just want to say hello. So, um, it doesn't have to be a one-way conversation here.
If, ah, I can't answer like specific assignment questions, haha! You'd be surprised
how many people just send me their homework and assignment questions and, ah,
want me to give them the answers, but I can't do that. But if you
need any clarification, where you can help yourself, then feel free to
comment below. And, um yeah, I hope to hear from you. Alright thanks very much!
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