Step 1 KCQs

Writing a reflection has always been my personal challenge that I have yet to conquer ever since I was in high school. I never receive a good mark when it comes to reflective writing which are especially common in HR courses. Maybe because I have never been good at listening to myself, because I would rather spend the time on other things rather than reflect and really learn from past, situations and surroundings. After completing ACCT11059 a few years ago, it felt almost nostalgic to be doing this course. Maybe because I really like reading these study guides because it was coming from an author’s point of view and not the typical text book type reading which are difficult to understand and totally unrelatable.  Another aspect of this course that I enjoy is that I am not bombarded with technical terminologies and difficult equations which I was expecting when choosing accounting course. As you might have guess, currently I am studying Bachelor of Business major in Human Resources which have are not required to learn accounting, however since I really enjoyed the last course and I needed another elective to complete before I can graduate I thought this course would be perfect to end my study. Why? Because accounting is fun and as Martin said that accounting is a way of looking a business and how it all interlinks to complete the business model. And as a non-accounting student, this course is like accounting for dummies which is a bonus for me who is terrible at maths and numbers.

Coming back to the first chapter, the first question that springs to mind is what does the author mean by firm account are not the economic and business realities of the firms themselves? Does that just mean that not all aspects get recorded in its accounts? Or does he mean there are other factors that influence the economic and business realities of the firms? I am not completely sure, but that’s my guess. I really enjoyed the author’s use of simile in explaining human anatomy in comparison to bookkeeping and accounting. I find it helpful and relatable to comprehend which fills in the bigger picture for me as a non-accountant student. However, the next question is who is Dr Martin Turner? Why does he have an extensive knowledge on human anatomy? Isn’t this course supposed to be accounting? My curiosity runs wild now, and this makes me want to learn more and more.

1.1  Keeping Records

First, I really like the attention to detail that the author adds the hyperlinks which leads to YouTube videos and journal articles which are very engaging and knowledgeable. Especially the article by Daniel Lee-Wickner topic of ‘Why Don’t People Like to Read?’ is very insightful and relatable as I also struggle to sit down and read a book for a long period of time, but I love reading articles and news on internet and other social medias. Coming back to readings, I am starting to feel like I am connecting to the author like a mentor and protégé, because not only is the author giving insights into accounting and bookkeeping, he also encourages students to read and inspire them towards achieving their career goal. The more I read, the more I feel like the author is taking me through a historical journey and understand how everything comes into existence and how it shapes the present accounting system. Keeping records is especially important as it will allow to look back on the past performance and using it as a guidance in achieving the desired outcomes. I, myself keeps all the records of banking statements, bills, etc to keep on track of my weekly expense and ensuring that I don’t exceed my limits of spending, as well as making sure that each bill are being paid on time. Other important things I normally keeps record of is my unit grades, pasts assignments and exams as it would assist me in learning from the past performance and develop an action plans to improve and achieve my target goals. This relates to what Martin wrote as ‘unless things a firm does are first recorded and included in a firm’s accounting system in some way, then a firm’s financial accounts can give us no guidance or help in understanding the impact of those activities of a firm on its economic and business realities’. This then suggests that keeping record is way a firm assess the past performance to plan business model to achieve the competitive advantage.  Reading this far, I still cannot fully recall what is double-entry accounting from the previous course because it was a while ago since I have completed that unit. I am sure that I will find that out surely if I keep on reading. The key concept is to understand the established idea of accounting which lays the foundations for the present accounting system. Double-entry accounting is part of understanding the business model and the mostly used as an electronic recording system such as MYOB that I am familiar with. My family runs a local restaurant in Geraldton which gives me an opportunity to assist mum in doing bookkeeping. We would normally go by the traditional style of using a book and excel, complete it weekly which is very similar to Martin and sending to accounting firm to finish off the rest. Because our business is small, we don’t need to do much with our bookkeeping and takes little amount of time to complete and very straightforward to do. However, because playing with legal documents and tax, we must take extra care into every single detail ensuring its accuracy. Experiencing a bit about bookkeeping is what drew me to this unit because I wanted to explore all aspects of accounting and learn of other possible benefits from understanding fundamental of accounting.

Looking back, I barely remember about what was taught in ACCT11059, so I don’t remember whether Martin has talked about Luca Pacioli already in that unit but reading about the ‘Father of Accounting’ is very intriguing. I am very surprised to the fact that double-entry accounting dates back even earlier than 15^th century because to be honest I did not think people in those days would need this sort of complicated maths. When Martin wrote the heading ‘We Build on the Past’, I can truly understand and appreciates the efforts of our predecessors that have developed something as confusing yet fascinating as accounting and to this day it is still being accepted worldwide. Which leads me to this phrase, ‘The process belongs to the world of the past. Yet we are caught up in that past and it constrains and leads us forwards as we participate in the digital age’, how it all links is truly fascinating. Double-entry accounting allows the firm to assess its economic realities that representing its current assets and liabilities. Although double-entry accounting seems like double handling or as Martin stated an ‘historical accident’, yet it frames the way we record transaction today which means it works! Generations before us lays the foundations for us to continue developing and enhancing our way of life in every situation, and knowing this fact makes accounting all and more fascinating!

Being in a 21^st century means technological advancement allows us to accomplish tasks more rapidly with a click of a button. Like everything in life, technology can be a double-edge sword whether used carefully or not. I have yet to use MYOB and other advance accounting software packages because I still finds comfort in using old school technology such as paper and pen and my trusty calculator. I do wonder though as to when will I be able to learn more about MYOB in my university life, as well as whether I can apply this into my every life? Will hard copies recording be completely disappeared? And if technologies have failed us, how will most firms react? Do they have a backup plans in case to prevent data lost?

1.2  Two sides to Everything

Right now, I am ready to delve down into details about accounting and what double-entry bookkeeping is about. Key concept in this section is to understand, engage, connect and being able to implement it in our daily lives, hence Martin used of Kettering quotes which emphasise the difference between knowing and understanding as understanding proves usefulness and knowing does not. Martin explains in detail of differences and the used of journals (long list of transactions recorded daily), and ledger (transactions arranges in individual accounts). This section has my most interests since it delves down into the details of each elements of double-entry accounting and why things are done in this way. My way of understanding is that everything starts off as a journal entry to Ledger to Trial balance (debits & credits). In this case debits and credits of each ledgers must balance, if not the mistakes/ error is detected. However, Martin did mention that error can still occur without being picked up by a trial balance which makes me wonder how are we going to prevent such error to occur?

By now, I am starting to understand how everything works but I have yet to grasp the concepts of double-entry accounting if I haven’t practice it myself. I guess we all learn differently, but I learn better through doing rather than reading.

Proprietorship

Now, this section clarifies a few things in my head. The first is that it explains that firm can be seen as a separate entity from proprietors or owners. The key idea underlying double-entry accounting is an awareness of the distinction between the two switches a light bulb on top of my head that now I can fully comprehend why double-entry is what it is. The entity concepts imply that the transactions associated with a firm must be recorded as a separate document to it of its owners mainly because it does not directly impact on the business. For example, if I were to do grocery shopping for my household, the transaction would be separate to my restaurant statement. Although the owner is responsible for the management of the firm, the nature of accounts associated with the proprietors would be in the equity of the statement. Coming back into this course for the second time, clarifies a lot of misconceptions surrounding accounting and the idea of double-entry accounting which helps me into understanding what each section in the annual reports actually means.

Debit mean ‘to own’ and credit means ‘to entrust’, this would explain the differences between debiting an asset account as firm owes its equity owners to manage that asset and provide returns on investment, as well as crediting equity or liability account as they have entrusted a firm with their investment. It’s going to take some time for me to get my head around these concepts because I’m just used to the fact that debiting is a negative or decreasing while crediting is positive which means increasing. So, to increase asset it should crediting but then when Martin explains it in a sense of owing to the equity investors then it would make sense to be using the work debiting. So, what about liabilities? Still confused.

Accounting equation is what helps explaining how each account interlinks.

Equity = Assets – Liabilities

Or

Assets = Equity + Liabilities

The equations are rather straightforward as it is seeming, as assets less liabilities equal equity. The second equation confuses me a little with equity plus liabilities equal assets because ever since at school it was taught that liabilities is negative in nature. However, as Martin repeatedly mentioned that all transactions and other economic events of firms have two aspects to them by nature, a duality that will have effect of preserving the fundamental accounting equation throughout a firm’s accounts. In this way, liabilities are also part of the firm’s assets and liabilities is also part of what the proprietors own or responsible for. 

After reading this section, one thing I’ve gained is that double-entry accounting is used for the broader understanding of a firm business realities and not for the sole purpose of making sure that account balances, it is just a by-product. Thus, double-entry is used to assess the past performance of the firm and planning a business model to achieve its desire outcomes. Even though I know the significant of financial reports and accounting, I now understand the real importance from reading this study guide!

1.3  Five Elements of Accounting

The five elements of accounting are something that you would normally see on annual reports. I have heard and seen it on the news and internet, and of course from the previous course, however I have yet to fully grasp the concepts behind each elements of accounting.

Assets

‘A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’, this definition is straightforward explaining that assets are something that will add value to a firm in the future. In the case of my restaurant, everything inside the restaurant would be consider as an asset. The building would also be considered as an asset even if we don’t legally own it out right, but we still have control over it. Thus, the building is a liability because it is on lease contract, however it is still an asset as it adds values or future benefits towards a business. This would explain why this equation works: Assets = Equity + Liabilities.

Liabilities

Martin provides the definition of liabilities as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from entity of resources embodying economic benefits’. To me liabilities means debts but because Martin said that it need not be, hence it could also due to business practices or due to notions of equity or fairness which I need further explanations to this part.

Equity

My understanding of equity is what the owners or proprietors receive after the liabilities have been taken off the assets. Martin explanation breathes life into the entity concept that was discussed earlier that assets and liabilities represent current value of a firm, equity then represents the current value of the interest of its owners in the firm. Although I much prefer his version of explanation, I still make sense in my own terms. If I were to invest my hard earned money into a business such as restaurant, I would need to know whether I will have received enough returns on investment or high value of equity. Or whether the decision to expand the restaurant will affects positively or negatively towards the equity. Are the liabilities greater than revenue or is it too risky to continue? This information would assist the proprietors and those responsible in decision making that will affects the future of the firms.  A firm’s value is changing day-by-day and moment-by-moment which means that business a living and breathing. The dynamic of the firm is what makes it interesting that constantly shifting the current values of a firm. I guess that would explains the whole dynamic of stock market which is something that I’ll never fully understand but at least I am on the way of comprehending the realities and economic events of the firms.

Revenue and Expenses

Finally, I have reach the area of expertise, well more like what I’m familiar with. The terms revenue and expenses that determines profits or loss are more common used and understood more easily than assets, liabilities and equity which more or less the same thing. As Martin states that firms have temporary accounts for revenue and expenses to hold various additions or reductions in our equity, which then transfers into the equity at the end of a period. The firm then start the next period with zero amounts in the revenue and expenses accounts.

What I don’t understand is that I thought all this time that revenue is the same as income or profits. But it was interesting to note that they both are different, as revenue is limited to gains arising in to course of the ordination activities, for example daily sales from operations of a restaurant. And income gains on the disposal of non-current assets or on the revaluation of marketable securities, for instant if I were to lease a property that is owned in the name of the restaurant or firm out to other businesses. Revenue increases the value of the interests of the equity investors in a firm and expenses reduce the value of the interests of the equity investors in a firm. To be completely honest, accounting is far from plain black and white because of too many different elements that interlinks, but I will try my very best to get through it with the hope that my brain will not explode.

Accrual Accounting

The concept of accrual accounting is oddly and risky process that requires the assessment of economic consequences of current business activity based on assumptions and judgement or forecasts. It is quite different concept from what I’m used to but not totally unfamiliar with this process since other area of business requires predicting, risk-taking and forecasting which deals with intuitive judgement and assumptions. I remember some aspects of accrual accounting from last unit, however I will need to research further on this concepts in order to fully understand how it works and why the company chooses this process.

Extended Accounting Equation

Building on from the previous equations of Assets = Equity + Liabilities, Martin has factored in other elements that was introduce of the five elements of accounting. Here he adds:

Assets = Equity + (Revenue – Expenses) + Liabilities

Or

Assets + Expenses = Equity + Revenue + Liabilities

This equation just adds a little twist to the previous one. However, the outcomes still the same which determines the value of firms.

It may take some time for me to take all the information in because accounting is not usually in my area of interests, in saying that I find that this study is enjoyable to read and not too far from my own knowledge that are totally unrelatable. These are the old concepts and a few new ones but because I don’t remember it all from previous unit, reading this made me feel like I’m learning it all about it for the first time again. I really need to revisit the whole chapter and re-read some of the sections that I didn’t understand and do some further research on my own on difficult concepts such as accrual accounting. Nevertheless, after reading the whole section of study guides it is safe to say that I am even more curious than ever and thirsty for more knowledge!