Lesson 1Introduction To Accounting

Task Team ofFUNDAMENTAL ACCOUNTING

Business School, Sun Yat-sen University

Outline

• The nature of firm;• The value of accounting;• The Evolution of accounting;• Accounting: A bird view

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Opening Story

• Everyone here is supposed to know the Outlaws of the Marsh;

• Question I: – Who plays the role of “CFO” of

the Marsh Mountain Liang?• There are two;

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Opening Story

– Some other positions related to accounting;

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Opening Story

• Question II:– Why does the Marsh

Mountaion Liang need such positions as CFO and Chief Controller?

– We must know that the title of SHUIHUZHUAN is also translated as All Men are Brothers.

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The Value of Accounting• Why does accounting exist in every

organization?• I explain this question in another way:

what kind of unique value does accounting possess?– The value must be fundamental and the

society could not go without;

• Another way to explain: Darwinism;– Natural selection and the fittest survive;

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The Nature of Firm• Although every organization needs

accounting, we just talk about enterprise accounting for simplicity;

• What is the nature of firm?• We discuss about human nature

first;

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The Nature of Man

• Ethic Man;– Human Nature: Virtue vs. Evil;– Confucis vs. Hsun Tzu

• Economic Man;– There is no ethics concept in

Economists’ dictionary;• It is not from the benevolence of the butcher,

the brewer, or the baker that expect our dinner, but from their regards their own interest. (Adam Smith);

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The Nature of Man

• We need a compound analytical tool;– Maslow and the Hierarchy of Needs: the most

common tool;

• Michael Jensen and William Meckling– REMM

• Resourceful,• Evaluator,• Maximizer,• Model.

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The Nature of Firm

• Classical theories;– A device to capture transaction costs;– A nexus of contracts;– Agency theory;– Economic Darwinism;– ,,,,

• REMM perspective:– A coalition of economic men;

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The Nature of Firm• On the coalition of economic men:• Why does REMM join a firm?– Maximization of his own interests;

• When does REMM quit from a firm?– Seek different chance to maximize his own interests;

• When we define human being as REMM, we have to solve the fundamental issue:– How does REMM trust each other?

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The Value of Accounting

• Without trust, we could not have even a family, let alone a firm;– 911 and the increase of trusting cost;

• REMMs have to find efficient ways to develop and maintain trust;– They know that they have to;– The problem is how;

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The Value of Accounting

• Historically, REMMs have created and experimented numerous ways;– Accounting is proven to be cost-effective;

• It is suitable to all kinds of firms,• No matter of their size,• No matter of the geographic locations;• No matter of ownership;

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The Evolution of Accounting• Now that accounting is connected with

human nature and trusting issue, we may trace the history of accounting to the early days of human beings, or Primitive Society;– the Incas and Quipu;

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• Sumer and CUNEIFORM • Phoenician and ALPHABET

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The Evolution of Accounting

• Why do our ancestors invent Alphabet?– To build trusting via enhanced memory;– This is the right value of Accounting.

• Chronology of spelling by Steve Bett;– 3200 BC Writing developed as an extension of the

accounting system in Babylon;

• A British accounting scholar claimed:– Phoenician invented ALPHABET

for the sake of accounting.

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The Evolution of Accounting• The primitive stage of accounting;– A tool to help to maintain the trusts;– Alphabet, numeric and organizational control;

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The Evolution of Accounting

• The birth of double-entry bookkeeping;– A. C. Littleton on the birth of DEB;

• Another story– The Crusaders (1095-1270);– Italian commodity economy, developed bank business;

• DEB: the symbol of accounting science;

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The Evolution of Accounting

• From Bookkeeping to Financial Accounting– Capital market: accounting information is widely

circulated;– The most common users: outside of the reporting entity;– GAAP: the symbol of the conversion;

• Financial Accounting is also called External Accounting;

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The Evolution of Accounting

• Industrial revolution and modern mass manufacturing process;– Business profiting model is changed;• Originally, buy low, sell high;• Now, buy raw materials, manufacture into products and

sell out;• The determination of the cost of manufactured

products is essential in profit determination;

– Cost Accounting is “invented”;

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The Evolution of Accounting

• From cost accounting to management accounting;– More complicated business activities;– Dynamic and keep-changing environment;– Much larger business scale;

• Decision making:much more complicated;

• Management Accounting is“invented”;

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The Evolution of Accounting

• From commodity market to capital market;• The developing of capital market raises two

issues:– Effective ways to raise and allocate capital;– Trust crisis;

• We have Corporate Finance and Auditing subjects respectively.

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Corporate Finance and Auditing

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Accounting Accounting FirmsFirms

FirmFirmFinancial statementsFinancial statements

InvestorsFinancial Accounti

ng

Financial Accounti

ngAuditingAuditing

FinanceFinance Management

Accounting

Management

Accounting

The Evolution of Accounting

• Accounting will evolve with the development of economy and technology;– The invention of computer and its adoption

into accounting practice;• Reduces time, effort and cost of

record-keeping;• Improves clerical accuracy;• Changes the way we store, process and

summarize large masses of data;

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The Evolution of Accounting

– Website and Internet;• dissemination of accounting information:

easy and no increment cost;– Internet based financial reporting system;

• Extensible Business Reporting Language (XBRL) was developed to provide users with an efficient and effective means of preparing and exchanging financial information over the Internet.

• Extensible Assurance Reporting Language (XARL) was designed to enable assurance providers to report on the integrity of information distributed over the Internet and help users and companies place warranted reliance on such information

– Events accounting: may be re-introduced under internet environment;

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The Evolution of Accounting

• SOX and its impact on accounting;– Enron filed for bankruptcy protect in December 3, 2001;– WorldCom reported billions of false profit in June, 2002;– Sarbanes-Oxley Act of 2002 was signed by President Bush

and becamea law in June 30, 2002;

– It mainly focuses on accounting;

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The Boundary of Accounting

• Accounting: a boundless discipline;• What should accountants supposed to do?– For instance, the job description of CFO;– The job description of chief controller;– No definite definition;– No generally accepted principles;

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What should we do?• 郭靖……纵身离开北斗星位，抢到“天璇”。他

此时武 功已胜全真诸子，兼之精通阵法奥妙，一加推动，阵势威力大增。北斗阵本以“天 权”为主，但他一入阵，枢纽移至“天璇”，阵法立时变幻。– The implication to us!

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• You may use knowledge freely as soon as you find the underlying regularity;

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Summary• The nature of firm: contemporary interest coalition

of REMM;• REMMs have to find cost-effective ways to build

trust;• Accounting is proven cheap and reliable;• Accounting is evolving with economy and technology,

etc;– Four main branches: Financial accounting, management

accounting, corporate financeand auditing;

– Computer and internet: already changedaccounting significantly;

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Case for open discussion

• Collect relevant comments and news reports on the financial fraud of Shanghai listed company Hongguang Industrial (600083), especially the first lawsuit filed by Ms. Jiang from Shanghai.

• Requirements:– Is the suit filed by Ms. Jiang merit or meritless?– Is the rejection by local court reasonable or not? Why?– Suppose that Ms. Jiang had won the case, what kind of

consequences are expected?

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The End of Lesson 1

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