Manufacturers made things and sold them to retailers. Retailers displayed these things in stores where customers could buy them. Lawyers, doctors and skilled artisans provided services to their customers, and charged for them on the basis of the skills and knowledge they applied. Banks received money from savers and paid interest, then they lent the money to borrowers and charged interest. In those days the most exotic type of business operation was insurance. Insurance companies would charge a small premium in return for taking a big risk. It all worked out for them because there were lots of small premiums received regularly, but only a few big risks to occasionally pay out on.
However, you would have to go back in time quite a long way to find such a world existing. In those days accounting information was fairly simple – what the business paid and what the business received!
Then, over time new business models developed.
- Manufacturers and retailers realised that leasing instead of selling their products provided more convenience for customers. But this created cash flow problems so they linked up with banks and finance companies, and the benefits were shared around.
- Manufacturers introduced warranty schemes, as a reassurance to customers that their products were reliable and good quality. But this left them with an open ended obligation to pay rectification costs many years into the future.
- Air miles, gift vouchers, and discount vouchers were introduced by various companies as inducements to customers to spend money now, or in the future. But all of these would have unpredictable effects on future costs.
- Banks recruited mathematicians and economists who developed a wide range of ‘virtual finance products’ – options, futures, and swaps – where the price today and in the future depended on the constantly changing market prices of underlying assets such as currencies, oil, metals, as well as prevailing interest rates. These are sold to companies large and small, around the world, as a means of controlling risk.
To support these new business models the accountants developed new ways to systematically analyse, deconstruct, and simplify the complexity of new types of business transaction and present this in a clear and useful way to the owners and managers. They also developed internationally standardised ways to present this information, so that investors can better understand the relative performance of businesses, despite not having detailed knowledge of what the businesses actually do.
An important aspect of preparing and presenting information is the application of ethical principles. There are potentially many ways that accounting can be applied in a business, but we should always seek the most fair, the most realistic, the most truthful approach. The ethical principles are of paramount importance because those of us who are the recipients of financial information, the company managers, customers, suppliers, and investors need to able to trust and rely upon that information.
When you attend GLOMACS courses in Finance and Accounting you will learn, in general and specific terms, how accounting informs, supports, and guides the decisions that are made by all of the stakeholders in the business world. Your trainer will present accounting as it should be – accurate, true, fair, honest, and ethical.