SEAB GCE O-Level Principles of Accounts

What accounting does

Accounting is the process of recording, processing and communicating information about a business's transactions so that the people with an interest in the business can make decisions. The owner of a bakery deciding whether to hire another baker, a bank deciding whether to lend to the bakery and a supplier deciding how much credit to allow it are all making decisions, and each needs figures about what the business owns, what it owes and what it earns. Accounting is where those figures come from.

The information is produced by an accounting information system, which collects transactions from source documents, records them in journals and ledger accounts, and reports them in financial statements. Everything that follows in these notes is a part of that system or a use of what it produces.

Accounting is sometimes called the language of business because it gives every business the same categories (assets, liabilities, equity, income and expenses) and the same rules for grouping transactions into them. Two different owners reading the same statement of financial performance can therefore discuss the same business in the same terms.

What accountants do

An accountant sets up and runs the accounting information system and reports what it produces. Through this, accountants act as stewards of the business: the owner hands over resources, and the accountant reports how those resources were used and what the business earned from them. The report lets owners and other stakeholders decide how the resources should be managed from here.

An accountant's work includes

• setting up the system that collects, records, organises and reports accounting information;
• preparing financial statements that owners and other stakeholders can read and rely on;
• thinking critically and solving problems, because transactions do not always fit the standard treatment and judgement is needed;
• adapting as the business environment and technology change, for example as more of the recording is done by computerised systems, so that the information is still relevant, arrives in time to be used and is presented in a way that owners and other stakeholders can understand.

Information that is late, irrelevant or presented in a way the reader cannot follow does not support a decision, however accurate it is. The accountant therefore has to produce it in time, for the people who need it, and explain it by reference to accounting theories, which are the agreed rules on how items are recognised, measured and presented.

Trust, integrity and objectivity

Stakeholders cannot check the books themselves, so they place trust in the accountant. That trust depends on the accountant following professional ethics. Integrity and objectivity are the first two principles listed in the code of conduct of the Institute of Singapore Chartered Accountants.

Integrity means dealing honestly and openly with everyone the accountant works with, whether in a professional or a business setting. An accountant with integrity does not report a figure they know to be wrong, hide a liability, or present a result as better than it is.

Objectivity means that bias, a conflict of interest or pressure from other people is never allowed to outweigh the accountant's own professional judgement. An accountant who is also a close relative of a supplier, for instance, has a conflict of interest when judging whether that supplier's invoices should be paid in full; an accountant pressed by the owner to show a bigger profit has to keep to the evidence instead.

Why they matter for decisions

The effect of unethical behaviour is seen in the decisions stakeholders make on the strength of the information.

• If profit is overstated, a bank may lend to a business that cannot afford the repayments, and an investor may pay too much for a share in it.
• If expenses are hidden or pushed into a later period, the owner may take out more in drawings or dividends than the business has really earned, which leaves it short of cash.
• If a liability is left out, suppliers and lenders see a business that looks safer than it is.
• If profit is understated, the owner may sell too cheaply or the tax authority may be given a wrong figure.

In each case the decision made was sensible for the figures shown and harmful given the true position. A decision can only be as good as the information behind it, which is why the people preparing the information are held to honesty and independence.