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Course learning objective After completing this topic, you should be able to identify the purpose of financial statements, the accounting equation, the accounting cycle, and the role of the accountant. Introduction Once a number cruncher, the accountant of today holds more of an advisory role and is key to an organisation executing on its strategic objectives. However, the basic principles and fundamentals that have underpinned the technical aspects of accounting methodologies and systems are still used today. The fundamental accounting principles discussed in this topic include what accounting is, the purpose of financial accounting, double entry book keeping, the accounting cycle, and the impact of technology. Most importantly, this topic covers the basics of professional ethics accountants should act with integrity and professionalism when using their judgement to deal with accounting issues. What is accounting Accounting is the process of maintaining financial records of a business’s transactions. All businesses maintain some form of accounting records. The level of detail and extent of that information will vary significantly by entity but generally an entity establishes its accounting and reporting function to meet the needs of its internal stakeholders for example, senior management and external stakeholders for example, government agencies who have established statutory reporting requirements. The history of accounting dates back thousands of years, with the earliest documented accounting records originating from ancient civilisations like the Egyptian, Roman, and Greek empires. However, probably the most significant breakthrough came in the 1400s when Luca Pacioli, an Italianborn Renaissance mathematician, developed the double entry accounting system, described later in this topic. With this innovation came the early, primitive versions of the modern financial statements of today. The two main aspects of a system of accounting are recording and summarising transactions. Recording transactions The transactions of a business are recorded as they arise. This may be done using specialist software packages or internally designed systems. It may even be done manually for a small business. A coding system may be applied to allow the efficient structuring and retrieval of information. Summarising transactions The summarising of the information recorded is generally done according to the needs of the users of that information, whether they be internal users or external users. Accounting information is used both internally and externally. Internally the information is used to monitor performance, plan for the future, and make decisions. The information being maintained and stored and its presentation is specific to each business. Externally the information may be reported to many different users. The presentation and its preparation will be standardised and often regulated. The purpose of financial statements and financial reporting Users of financial statements The financial statements are a source of information for many different stakeholders both internal and external to an entity.