Lecture video 2
Lecture 2: Reporting results to users, for individuals and businesses
The next part of our definition: Is this for an individual or business?
Accounting isn't just for businesses; we can use it for ourselves as individuals as well. It's very useful for us to know how to record our monetary transactions. I'm pretty sure I'm not the only one who knows the moment I have cash in my wallet, it disappears, and I never know where it's gone. If I have drawn R50, in a week's time I look at my wallet, the R50 is not there, and I can't quite remember where it went. Paid for parking over here; maybe bought a coke over there, and to try and remember a week or two weeks later what I did with the money can be difficult. And if I'm required to justify where that money is going; if I had to report back to someone, and tell them what I was spending my money on, I would find it very difficult because I can't
Just as we want to have a systematic and orderly identification recording of monetary values for businesses, it would probably be good if I did that for myself as well, so that we could realise and make sure that we keep track of how much money we're spending and what we are spending our money on and that type of thing. It's very useful for us as individuals, and in FAC we're going to focus on business only.
It is a process that assists people and assists businesses as well. Their cash flow, their financial decision-making; so it's not always just about putting financial statements together. They're very valuable to get information out of, and it's very valuable to know what's going on with your money, but it's not always just as easy as saying, “I have R100 in the bank, what am I going to do with that?”
It's not necessarily just for businesses, but we're going to focus predominantly on businesses. When we look at reporting the results, sometimes we've got to give our financial information to someone else, but they don't necessarily need to know anything or everything.
Take a look at banks for example. You go to the bank and ask them for a study loan. What are they going to ask you? They're going to ask you how much income do you have; does anybody give you money; is there anything else we should know about your finances; do you have any costs; do you have to pay rent; do you have to pay for a car or transport? And then they’ll ask you to list all your expenses and how much. What they want to know is how much money do you have over, that you'll be able to pay them back with, and what financial position are you in. Have you ever not paid someone and are you blacklisted or whatever? Companies and institutions, and places that are giving you loans would want to know what's going on, but how do you give them that information? How do you show that to them?
It makes sense to have a report that says - here's all my income. Here is all my I-flow, this is what's happening in my business (could be shareholders or investors). The point here is that other people that weren't involved in your information need to make sense of it.
How many times have you written notes in your study files, and how many times do you make notes during class, or anywhere that you're going, and if someone else had to read those notes that you wrote, and if someone else had to go through the stuff that you wrote in your study notes, they'd never be able to make sense of it, because it makes sense to you. You created the information.
Financial information is exactly the same thing. When it's my money, and it's my information, I know exactly what I meant when I wrote that down. And when someone else reads it makes no sense to them.
In terms of financial information, we want to make sure it makes sense to everyone else as well. We need to know what it is that they're looking for, what type of information they’re looking for. Do they care how much money you pay for parking? Maybe, maybe not. Do they care how much money you've got left in the bank? Maybe, maybe not. Do they care how much money you owe other people? Maybe, maybe not.
What is it that they actually want to know from us? Very importantly for you, there are formats for this. You don't get left up to your own devices, and you don't get to choose how you're going to present this. There are formats, which we call standards, that say to you when you present this information to others, you will present it this way. This is how it will look to make sure that everybody does exactly the same thing, and then we're all on exactly the same
We're going to provide this information to the users, so we're going to keep thinking about who's going to use my information. These are people that are going to make some kind of decision, some kind of monetary decision on the basis of my information, even if they're going to give me that study loan that I was looking for. Keep in mind, if I lied to them, or I haven't told them everything about my financial situation; when they give me their loan, they are giving it to me on the basis of incorrect information. And if they didn't or if they did know all the information, maybe they wouldn’t give me the loan.
People are going to be very interested in your information. They are going to make decisions based on that information, and that means that your financial statements and your information have to be correct. You need to know who the users are for your information so that you can ensure that you give them all the information that they need. When we are looking at our financial statements, and we said this is what we're going to put together, you keep in mind who you're presenting this to, so that you make sure that you take care of their needs.
Very common question: How does accounting differ from bookkeeping?
Bookkeeping is part of accounting, remember we spoke about identifying and recording transactions? That's the bookkeeper's job. The bookkeeper’s job is to make sure that all the transactions or the monetary transactions are systematically and orderly dealt with, that they're identified and recorded properly, and they create the financial information. Your accountants generally take the information from there.
We take the information from the bookkeepers, and we present it to the users. We make the decisions; we're the ones who create the decisions and decide what to do. Do we go get a loan, do we ask for more investment, do we need shareholders? And then we present the information to others.
Bookkeeping is like the beginning of the process - creating the financial information. And accounting is about how we report that information to others in the decisions that we make based on their information.
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