Chapter 1 + 3: Here's what I think

So you've all read the chapters, and you've all made your own understanding of the theory, so I'm not going to bore you with a recap of everything that you have all already seen before. Instead, let me tell you what I felt as I attempted to untangle my thoughts about the my studies so far, and help you to understand my perspective (so far) on this "game" we know as accounting. 

Perhaps the thing that I found most crucial from the two chapters, the thing that has shaped my learning and all my workings so far, was the recognition that learning will not deepen unless we have an interest in the topic. When you attempt to connect a new concept to your own prior knowledge and previous life experiences, then it will become much easier to understand and will ultimately become easier to remember. As you will notice throughout my blog, I have made a conscious effort to try to connect my learning to my own experience, in an attempt to turn accounting, which at first seemed boring and complex, into something that I can relate to my every day life. I would recommend this method to anyone else who is finding it difficult to get into this subject. It is one thing to regurgitate information from a page, its another to make your own understanding and retain your knowledge of accounting for future reference. 

Chapter one recognises that the purpose of any business is to create value. It then goes on to define value in a qualitative manor and states that it is something that truly matters to us. I found this contradictory to chapter three which argues that the only way we establish something's value or worth is by placing a quantitative figure on it. In my personal opinion, both of these definitions are relevant to accounting and both would be considered by an equity investor or shareholder when evaluating an annual report. If both were not important, then why would a firm bother to include not only the financial statements within the annual report, but also the glossy marketing attributes of a firm, which highlight their consideration for the environment and their contribution to the community, among other things? 

So on that note, I think I am now ready to put it out there, to offer you my view of accounting so far. So here it is; accounting in my opinion, is partially a form of marketing. Sure I can appreciate that accounting is essential in terms of keeping track of transactions, and knowing if you are working at a profit or a loss, but everything else about it just screams manipulation of perception. As a marketing student, I have been taught that the important and persuasive information within any campaign should be mentioned early and often. So tell me again why all of the financial highlights and positive information about a firm's contributions to the society/environment always come first in an annual report. Of course, investors need to know that a firm is producing profits and is financially stable, however unless they themselves have an accounting background, it is not the financial statements that help them understand what is truly happening in the firm, it's all that 'glossy' stuff that comes first. 

Ultimately, understanding accounting is the key to understanding a business, which completely explains why so many directors within firms have accounting backgrounds. There are still so many elements that I have read and am struggling to understand. Particularly, I initially tore my hair out understanding why debits are recorded as positives and credits as negatives. It wasn't until I began to understand the entity rule that I started to see this concept more clearly. Please correct me if I am wrong here, because there's still so much I need to learn, but my own understanding is that everything a business does is to the consequence of the equity investors. Furthermore, despite an actions effect on the firm itself, a revenue of expense is only considered if it is to add or take value from the equity investors.

So how does one truly know what is a safe investment? With which company should you buy shares and when? Chapter three discusses the use of ratios, and evaluating the financial statements and turning the raw data into information which assists in predicting a firm's longevity and future successes or downfalls. But this all makes me question, how much can you truly trust numbers? Sure a ratio would accurately predict a firms future with the assumption that all other variables remained the same, however a firms value is forever changing, as is the market within which it operates, as is the tastes of the consumers. Other factors, other than financial data must also be considered, like how responsive a firm is to change in tastes, or how resilient it is to a rise in raw material costs. What counter plans, if any, does a firm have set in place?

At this point in time, I am unsure as to how important I believe accounting is in reflecting what is really going on in a firm. Accounting certainly is essential element of every business, however there are other elements that are crucial in evaluating a firm and its future successes. I would love to hear your feedback and I look forward to continuing this journey with all of you, and further developing my opinion of this "game" known as accounting.