Edexcel A-Level Accounting: Social and ethical accounting (YAC11) – Revision Notes

For full explanations and two longer worked examples, read the study guide first.

These notes cover topic 1.6, Social and ethical accounting, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018: learning outcomes 1.6.1 to 1.6.4. The topic is in Unit 1 (WAC11), the International AS unit, so it applies to both the International AS and the full International A Level. There are no tiers.

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Topic 1.6 at a glance

Spec ref	In one line
1.6.1	Accounting decisions affect the local community, environment, workforce, health and safety, and use of natural resources
1.6.2	Non-financial factors can matter as much as the figures
1.6.3	The same decision helps some stakeholders and harms others
1.6.4	Analysis and decisions must be honest: a true and fair representation

Key definitions

• Social accounting: considering the effects of accounting decisions on society, not only on profit.
• Non-financial factor: something relevant to a decision that cannot be measured reliably in money, such as morale, quality, reputation or community impact.
• Stakeholder: a person or group with an interest in the business.
• Ethics: acting honestly and fairly; in accounting, presenting a true and fair representation of the information.
• Contribution of a department: its gross profit less the costs that would disappear if it closed.

1.6.1 The five social contexts

Context	Typical decision	Possible effect
Local community	Closing a branch; relocating	Lost local jobs and spending; a service disappears
Environment	Cheaper packaging or transport	More waste or emissions
Workforce	Redundancies; new pay scheme	Job losses; insecurity; lower morale
Health and safety	Cutting maintenance or training	Higher accident risk for staff and customers
Natural resources	Choosing materials or machines	More or less water, energy or raw material used

Remember the feedback loop: social harm often returns as a cost later (fines, compensation, staff turnover, lost customers).

1.6.2 Non-financial factors

The accounts only record items with a money value (money measurement, 1.1.9). So they leave out:

• staff morale and motivation
• quality and reliability
• reputation and customer loyalty
• effects on the community and environment
• legal and safety requirements
• how reliable the forecast figures are

Use them to test a financial answer. If the figures say “do it” but the non-financial factors are strongly against, say the decision may not go as planned and explain why.

1.6.3 Stakeholders

Stakeholder	Wants	Watch for
Owner	Profit, return, survival	Short-term gain versus long-term reputation
Employees	Jobs, fair pay, safety	Redundancy, workload, piecework pressure
Customers	Price, quality, safety	Cost cuts that reduce quality or safety
Suppliers	Orders, prompt payment	Lost orders; late payment
Lenders	Repayment and interest	Being misled by inflated figures
Community	Jobs, clean environment	Closures, pollution, traffic
Government	Tax, employment, compliance	Unemployment, lost tax

Conflict is the key word: owner versus employees on wages, owner versus community on relocation, customers versus suppliers on price.

1.6.4 Ethics: where it arises

Area of judgement	Unethical push	Concept broken
Depreciation method	Switching only to raise profit	Consistency
Allowance for irrecoverable debts	Cutting it while bad debts rise	Prudence
Revenue	Recording sales before goods are delivered	Realisation
Expenses	Leaving out an accrued expense	Accruals
Inventory	Valuing above cost or net realisable value	Prudence
Ratios and projections	Showing only good ratios; unrealistic growth	True and fair representation

Ethical decisions also cover choices that are legal but unfair: unsafe suppliers, deliberate late payment of small suppliers, hiding faults.

Method in steps: evaluating a decision

1. Calculate the financial effect (profit, contribution, cost saving, ratio).
2. Interpret it in one sentence: does the figure support the decision?
3. Apply the social context: pick the areas from 1.6.1 that the scenario raises.
4. Add non-financial factors that could change the outcome.
5. Name stakeholders who gain and lose, and say why.
6. Judge: make a decision, give the main reason, and say what it depends on.

Method in steps: an ethics scenario

1. Identify each proposed treatment.
2. State the correct treatment and the concept it follows.
3. Calculate the effect on profit (and on any ratio given).
4. Say who would be misled and what harm could follow.
5. State what the accountant should do: explain, refuse, record, escalate.

Small worked reminder

A sole trader has revenue of 300,000 and profit for the year of 27,000 (all figures in $), a profit margin of 9.0%. Switching to recyclable packaging adds 4,500 a year to costs. New profit = 22,500, so profit as a percentage of revenue = 22,500 ÷ 300,000 = 7.5%. The financial case is against; the environmental case, and possibly customer loyalty, is for. A good answer weighs both and reaches a judgement.

Small worked reminder: ethics and ratios

A trader’s draft profit is 18,600. Current assets are 21,360 and current liabilities 12,000 (all figures in $). The trader wants to leave out an electricity bill of 1,350 owed at the year end “because it arrives next month”.

• Correct treatment (accruals): include the 1,350 as an expense and as a current liability.
• Correct profit = 18,600 − 1,350 = 17,250.
• Current ratio without the accrual = 21,360 ÷ 12,000 = 1.78 : 1.
• Current ratio with the accrual = 21,360 ÷ 13,350 = 1.60 : 1.

Leaving the bill out makes the business look both more profitable and more liquid than it is. Anyone using these figures, such as a lender or a supplier deciding on credit terms, would be misled. That is why the omission is unethical, not only an error: the person preparing the accounts knows the bill is owed.

Must-know distinctions

• Unethical versus illegal: many unethical treatments are not crimes; say which concept is broken instead.
• Loss after apportioned overheads versus negative contribution: only a negative contribution means closure would raise profit.
• Financial versus non-financial factors: one is in the accounts, the other is not.
• Stakeholder versus shareholder: a sole trader has an owner, not shareholders.
• Short term versus long term: a cost cut can raise this year’s profit and lower future profit.

Quick self-test

1. List the five social contexts named in 1.6.1.
2. Define a non-financial factor and give one example.
3. Which accounting concept explains why staff morale does not appear in the accounts?
4. A department has gross profit of 30,000, its own wages of 34,000 and apportioned overheads of 8,000. What is its profit or loss? What happens to the business’s total profit if it closes and the overheads remain?
5. Trade receivables are 45,000. The owner cuts the allowance for irrecoverable debts from 4% to 2%. By how much does profit change?
6. Goods with a selling price of 6,000, priced at cost plus 25%, are recorded as sold before delivery. By how much is profit overstated, and which concept is broken?
7. Name one stakeholder who gains and one who loses when staff are replaced by machines.
8. Which concept is broken by changing the depreciation method only to raise profit?
9. Give two ways a social harm can come back into the accounts as a cost.
10. Why might a lender be harmed by an over-optimistic profit projection?

Answers

1. Local community, environment, workforce, health and safety, use of natural resources.
2. A factor relevant to a decision that cannot be measured reliably in money, such as staff morale.
3. Money measurement.
4. Loss of 30,000 − 34,000 − 8,000 = (12,000). Its contribution is 30,000 − 34,000 = (4,000), so closing it raises total profit by 4,000.
5. Allowance falls from 1,800 to 900, so profit rises by 900.
6. Cost = 6,000 ÷ 1.25 = 4,800, so profit is overstated by 1,200; realisation.
7. Gains: owner (lower wage costs). Loses: employees made redundant (or the local community).
8. Consistency.
9. Any two: fines, compensation claims, clean-up costs, lost customers, higher staff turnover.
10. It may lend on the basis of profits that will not be earned, so the loan and interest may not be repaid.

Where marks are usually lost

• Writing general points about “society” with no link to the business in the question.
• Naming a stakeholder without saying how this particular decision affects it.
• Recommending closure of a department because of a loss after apportioned overheads, without checking contribution.
• Giving only one side in an Evaluate answer, or giving no final judgement.
• Stating that an ethical breach is “against the law” instead of naming the concept or the misleading effect.
• Forgetting that reducing the allowance for irrecoverable debts adds the decrease to profit.
• Treating every social effect as a cost; some decisions benefit the community or workforce.
• Listing non-financial factors without saying how they could change the decision.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Unit 1: The Accounting System and Costing, topic 1.6 Social and ethical accounting, outcomes 1.6.1-1.6.4.