Accounting

What accounting is: Accounting is the process of recording, summarising and reporting financial transactions so people can understand financial performance and position. It applies to big companies, small businesses and personal finances.

Accounting vs bookkeeping: Bookkeeping records transactions such as sales, purchases and payments. Accounting goes further by classifying, analysing and presenting this information in reports used for decision-making.

Language of business: Accounting is called the language of business because it provides a standard way to communicate results to investors, managers and regulators through financial statements.

Everyday example: A freelancer who earns $2,000 and spends $600 on subscriptions and advertising has a true profit of $1,400. A basic household budget that tracks income, bills and savings is also a simple form of accounting.

Practice question: A student receives $1,000, spends $400 on rent, $200 on food and $100 on transport. Savings = $1,000 − ($400 + $200 + $100) = $300.

Double-entry principle: Every transaction affects at least two accounts: one debit and one credit. For example, buying equipment for $1,000 in cash increases equipment and decreases cash by the same amount, keeping the system balanced.

Accrual vs cash accounting: Cash accounting records income and expenses only when money is received or paid. Accrual accounting records them when they are earned or incurred, even if payment happens later.

Assets, liabilities and equity: Assets are resources (cash, equipment, buildings). Liabilities are obligations (loans, unpaid bills). Equity is the owner’s residual interest. The basic equation is: Equity = Assets − Liabilities.

Main financial statements: The balance sheet shows assets, liabilities and equity at a point in time. The income statement shows revenue, expenses and profit or loss over a period. The cash flow statement shows actual cash in and out.

Accuracy and integrity: Reliable accounting builds trust. Misstated financials can lead to fines, legal action and loss of reputation, as seen in major corporate scandals.

Practice question: A business makes $100,000 in sales but has only collected $70,000 so far. Under accrual accounting, revenue recorded is still $100,000.

Financial accounting: Focuses on preparing external reports such as balance sheets and income statements for shareholders, lenders and regulators.

Management accounting: Produces internal reports such as budgets, forecasts and cost analyses to help managers plan, control and make decisions.

Tax accounting: Deals with preparing tax returns and ensuring compliance with tax laws, including deductions, income and GST.

Compliance vs decision-focused: Compliance accounting keeps a business legally compliant. Decision-focused accounting uses the same data to improve efficiency, profitability and strategy.

Role of auditors: Auditors examine financial statements to give independent assurance that they fairly present the company’s financial position, increasing credibility and helping detect errors or fraud.

Practice question: Management accounting is mainly used by internal managers, not outside shareholders.

Side hustles and freelancing: A freelance designer who earns $2,000 and spends $600 on supplies has a profit of $1,400. Without basic accounting they may focus on the income and ignore the costs.

Personal decision-making: Tracking income, bills and savings helps people see where money goes and identify areas to cut back or redirect to goals.

Budgeting as mini-accounting: A budget records inflows and outflows and shows whether there is a surplus or deficit each period.

Risks of ignoring accounting: Small businesses that neglect accounting may not know if they are profitable, can miss tax deadlines and may struggle to obtain loans, increasing the risk of failure.

Practice question: A café makes $5,000 in sales and spends $6,000 on rent, wages and supplies. Profit = $5,000 − $6,000 = −$1,000 (a loss).

Digital tools: Accounting software such as Xero, MYOB and QuickBooks automates data entry, links to bank feeds and produces real-time reports.

Benefits over spreadsheets: Software reduces formula errors, centralises payroll, invoicing and tax reporting and saves time.

Cloud and automation: Cloud systems allow access from any device and provide automatic backups. Invoices raised in the system are tracked automatically for payment.

AI and accountants: Artificial intelligence is taking over repetitive tasks such as reconciliations, but increases demand for accountants who can interpret data, advise clients and ensure compliance.

Practice question: A business may prefer cloud-based accounting because it reduces errors, automates tasks and can be accessed anywhere, unlike a single spreadsheet file.

Legal requirements: Businesses must keep accurate accounting records to meet obligations for tax, GST, superannuation and other regulations.

ATO and compliance: The Australian Taxation Office relies on accounting records to verify income, deductions and GST claims.

Risks of poor records: Incomplete or inaccurate records can lead to audits, fines, penalties and reputational damage.

Accountants and audits: Accountants help maintain proper documentation and ensure that financial statements meet accounting standards, protecting businesses during audits.

Practice question: One legal consequence of not keeping accurate accounting records is that the ATO may impose fines or penalties.

Using data for decisions: Businesses analyse accounting data to see which products and services are profitable, where costs can be reduced and whether expansion is viable.

Profit vs cash flow: Profit is revenue minus expenses and can include unpaid invoices. Cash flow tracks actual money received and paid. A business can show profit but still struggle to pay bills if cash is tight.

Example of growth: A café reviews its accounts and finds one supplier charges 25% more for coffee beans. Switching supplier reduces costs and improves margins.

Investors and accounting: Investors study financial statements to assess risk and potential returns. Strong, transparent accounting builds confidence and attracts capital.

Practice question: A business with $20,000 profit but negative cash flow may not have enough cash to pay wages and suppliers, highlighting the importance of monitoring both profit and cash.

Why basics matter: Understanding accounting helps young Australians read payslips, track superannuation, manage budgets and prepare for running a side hustle or business.

Core principle: The most important relationship is the accounting equation: Equity = Assets − Liabilities. It reflects net worth for a person or a business.

Building good habits: Regularly tracking income and expenses, reconciling bank accounts and reviewing goals builds discipline and financial awareness.

Golden rule: Record everything. Ignoring small transactions leads to distorted results and poorer decisions.

Practice question: If someone has assets of $10,000 and liabilities of $4,000, equity = $10,000 − $4,000 = $6,000.