Accounting: A Very Short Introduction

Citation

Nobes, C. (2014). Accounting: A Very Short Introduction. Oxford University Press. Very Short Introductions.

Chapter Summary

The book has eight chapters and a short epilogue, about 125 pages of text. Chapters 1–6 deal with financial accounting and reporting to outsiders (history, mechanics, company reports, international standards, regulation and audit); Chapters 7–8 turn to management accounting for decisions and control inside an organisation. Most chapters are framed by a set of plain questions, such as why a balance sheet balances or how a profitable company can go bust, which the chapter then answers.

Chapter 1: Introduction

The opening chapter argues that keeping accounts was a key driver in the invention of writing and numbers, and then maps the field: bookkeeping, financial accounting, auditing and management accounting, as distinct from insolvency, tax, consultancy and finance, which the book leaves aside. It explains how accountancy bodies and firms are organised, the rules and standards that govern them, and the range of reporting entities, from sole traders to partnerships and companies.

Chapter 2: The international evolution of accounting

The chapter asks what accounting is for and how its purposes shape its methods. It explains double-entry bookkeeping, which emerged in thirteenth-century Italy, and how it allows profit and financial position to be calculated, then traces how different countries contributed to accounting, why publication of accounts came to be required to protect shareholders and creditors, and how globalization led to International Financial Reporting Standards alongside US generally accepted accounting principles.

Chapter 3: The fundamentals of financial accounting

The core technical chapter. It explains the logic of double entry, why any transaction has two effects, what a balance sheet tries to show and why it balances, which costs become assets and which become expenses, how cash flows fit in, and how a profitable company can fail for lack of cash. The three basic statements, balance sheet, income statement and cash flow statement, are introduced here.

Chapter 4: Financial reports of listed companies

Moving to the annual reports of listed companies, the chapter covers the four main statements (adding the statement of changes in equity), defines tangible, intangible and financial assets and liabilities, and distinguishes depreciation from impairment. It also asks why some expected expenses and losses are not recorded as liabilities, how an investor or lender can use ratios to compare companies, and how managers can use accounting to mislead.

Chapter 5: International differences and standardization

This chapter shows how far accounting numbers for the same company can differ under different rules, which countries use IFRS, and how politics and economics have shaped accounting. It explains the benefits of international standardization for groups and investors and compares US GAAP with IFRS: more detailed, more rule-based and with fewer options.

Chapter 6: Regulation and audit

Using the United Kingdom and the United States as examples, the chapter examines how the state regulates financial reporting, why the UK was first to require published audited statements, and why the US has the oldest and toughest regulator. It then explains the purpose of audit, how an audit is carried out and what auditors are responsible for, and asks whether audit really works.

Chapter 7: Internal decision-making: costs and volumes

The first of two management accounting chapters defines the field as providing financial information to managers for decisions and control. It covers types of cost, relevant and irrelevant costs, break-even analysis and the choice of operating volume, and the treatment of indirect costs.

Chapter 8: Accounting as control

This chapter covers budgeting and its six aspects (planning, motivation, delegation, communication and coordination, control, and performance evaluation), together with cash-flow forecasts, flexible and zero-base budgets, standard costing and the balanced scorecard.

Epilogue

A short closing overview asks how important accounting has been in history, whether accounting can be relied on now that disclosure rules and enforcement have been strengthened, whether accounting caused the global financial crisis, whether financial reporting is as good as it can get, and whether auditors can be trusted.

Key Concepts

Chapters 1–3: Foundations

• Branches of accounting: bookkeeping, financial accounting, auditing and management accounting, each serving a different user.
• Double-entry bookkeeping: recording every transaction as a debit and a credit, which makes the accounts balance and lets profit and financial position be calculated.
• The basic financial statements: the balance sheet (position at a date), income statement (performance over a period) and cash flow statement.
• Profit versus cash: a business can report profits yet fail because cash does not arrive in time.

Chapters 4–6: Reporting, standards and audit

• Assets and their measurement: tangible, intangible and financial assets, and the difference between depreciation and impairment.
• Accounting ratios: measures derived from the statements that help investors and lenders compare companies.
• IFRS and US GAAP: the two main sets of standards, the first more principle-based, the second more detailed and rule-based.
• Audit: an independent check of financial statements, with its own purpose, procedure and limits.

Chapters 7–8: Management accounting

• Relevant costs: costs that change with a decision, as distinct from those that do not.
• Break-even analysis: finding the volume at which revenue covers fixed and variable costs.
• Budgeting and standard costing: planning and controlling operations against targets.
• Balanced scorecard: a control tool that combines financial and non-financial measures.

Critical Analysis

Strengths

• The whole discipline in one short book. The book covers financial reporting, regulation and audit, and management accounting, so a reader gets a map of the field and its vocabulary, terms such as debits, pre-tax income and goodwill, in a few hours. Many introductions cover only financial accounting.
• Question-led explanation. The chapter abstracts show each chapter built around plain questions (why does a balance sheet balance? which costs become assets? can an audit really work?), which suits readers without a technical background.
• International perspective. The author is a professor of accounting at Royal Holloway, University of London, and the University of Sydney, specialising in international accounting, and the book gives whole chapters to how accounting evolved across countries and to international differences and standardization.
• Critical questions as well as techniques. The book discusses how managers can use accounting to mislead, whether audit works, and whether accounting played a part in the global financial crisis.

Limitations

• Not a working textbook. At about 125 pages it explains concepts rather than training technique, and the two management accounting chapters run to only about thirteen pages each. Students who need to prepare statements or perform calculations will need a textbook.
• Finance is left out. The introduction explicitly excludes finance, tax and insolvency, so investment appraisal and sources of finance, which feature in many business courses, are not covered.
• Dated in places. Published in 2014, it predates later IFRS changes such as the standards on leases, revenue and financial instruments that took effect from 2018 onwards; figures such as the number of countries using IFRS should be checked against current sources.

Where It Fits in the Course

This is the shortest and least technical book in the financial economics list, suited to reading before or alongside the first weeks of an accounting module. Atrill and McLaney's Accounting and Finance for Non-Specialists covers similar ground at textbook length and with worked examples and exercises, and adds business finance (investment appraisal, financing and working capital), which Nobes leaves out. Reading Nobes first gives the overview and vocabulary that make the textbook easier to absorb.

For financial accounting in depth, the Libby textbook Financial Accounting is the full-length treatment of the recording process and the statements. Atrill's Financial Management for Decision Makers and Management Accounting for Decision Makers by Atrill and co-authors extend, respectively, the finance topics Nobes omits and the management accounting of his Chapters 7–8. Nobes's chapters on international differences, regulation and audit are a useful complement to all of them, since textbooks tend to treat those topics briefly.

How to Use This Book

The book suits first-year economics and business students, students of law, engineering or other fields who will meet accounts in their work, and general readers who want to understand financial news. It assumes no prior knowledge of accounting, finance or economics.

A suggested plan:

• Core (Chapters 1, 3 and 4): read Chapter 3 carefully, ideally with a pencil, working through each transaction's two effects; it is the foundation for any later accounting course. Then use Chapter 4 with the annual report of a real listed company, finding each statement and calculating a few of the ratios it describes.
• Context (Chapters 2, 5 and 6): history, international standards and audit. Particularly useful for students interested in regulation, law or international business.
• Management accounting (Chapters 7–8): a quick preview before a costing or budgeting module.
• Epilogue: a good basis for seminar discussion on trust in accounting and audit after the financial crisis.

The book can be read in two or three sittings. Afterwards, move to a textbook with exercises for practice, and check the current status of the standards the book mentions on the IFRS Foundation's website.