lecture week 1 the accounting environment0

8/4/2019 Lecture Week 1 the Accounting Environment0

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Lecture week 1

The Accounting Environment



Financial Accounting Applications

Coordinators: Connie Vitale & Kerrie Mezzina

Email for unit: [email protected]

� Campbelltown lecturer: Connie Vitale ± Room Building 11.12

± Phone (02) 46 203465

± Email (preferred) [email protected]

� Bankstown lecturer: Kerrie Mezzina-Room Building 20.1.17

-Phone (02) 9772 6710

-Email (preferred) [email protected]



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�Parramatta lecturer: Jean Mccartney

-Room Building ED.G.38

-Phone (02) 9685 9219-Email (preferred) [email protected].



Learning Objectives

1. Identify the common types of business

entities

2. Understand and identify the functions

carried out by managers

3. Identify the basic financial statements

used in business to report to users for

decision-making purposes



Learning Objective Continued

4. Explain the main assumptions made in the

preparation of financial statements

5. Analyse the effects of business

transactions on the accounting equation

and on financial statements



What is Accounting ?

Accounting is a service activity

It is the process of identifying, measuring,recording, analysing & communicating

quantitative (economic) information to

permit informed judgements and economic

decisions by users of the information



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ASSUMPTIONS MADE AND

CHARACTERISTICS OF INFORMATION

� Assumptions

± Accounting entity assumption

� Need to identify boundaries

± Accrual basis assumption

� Transactions and events recorded when they

occur

± Going concern assumption

� Entity will continue indefinitely

± Period assumption

� Profit determined for a period of time



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Accounting Assumptions and Characteristics of

Information

� Accounting Information should have the following

characteristics:

± Relevance

± Reliability ± Comparability and consistency

± Understandability

± Materiality

� It should also be judged on Benefits vs costs toproduce

± Information on Income is costly to produce



Types of Business Entities

Q.What are the main types of business structures?

� Single proprietorship/Sole trader

±owner � Partnership

±partner � Company/Corporation

±shareholder



Users of accounting information

Who are the ³users´ of the information providedby accountants ?

± Internal users (decision makers within the firm)

� Management

± External users (decision makers outside thefirm)

� Owners / shareholders / investors

� Creditors / suppliers

� Government and regulatory agencies

� Customers / consumers

� Competitors

� Special interest groups (greenies, greybrigade)

� Employees (Trade Unions) and Others« ?



Financial Accountants use these Basic Financial

Statements

� Income statement (Statement of Comprehensive

Income)

± Operating efficiency over a period of time

� Balance Sheet (Financial Position) ± Economic condition at a point in time (freeze frame it

now!)

� Cash flows

± (inflows and outflows of cash over a period of time) ± Operating activities

± Investing activities

± Financing activities



What are Accounts ?

� An account is the basic summary device of accounting.

� Each account provides a record of increases anddecreases in that specific item.

� Accounts are grouped into five categories:

� Assets

� Liabilities

� Owners Equity

� Revenues

� Expenses

Reported on the Balance

Sheet (Statement of Fin Position)

Reported on the Income

Statement (Statement of

Comprehensive Income)



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The statement of cash flows

� Statement of cash flows reports

± Cash in

± Cash out

± By activity type



Accounts

� Assets are the economic resources controlled by an entity thatwill provide a future economic benefit.

± Assets are recorded at their historical (original) purchasecost.

± Assets may be current (economic benefit is used within 12 months)or non-current (provide economic benefits for more than 12

months).

� Liabilities represent the debts of an entity. They reflect a currentobligation to sacrifice economic benefits at some given time in

the future. ± Liabilities are also classified as either current (payable within

12 months) or non-current (due over 12 months).

� Owners Equity is the net assets of a firm (ie Assets ± liabilities)



Account types

� Revenue: inflows of economic benefits, ie income earnedfrom performing services or selling goods

� Expenses: outflows of economic benefits, ie the costsincurred in operating a business

Revenue and Expense recognition

Under the current accounting standards we must report using accrual accounting principles

Accrual basis Cash basis

Revenues Recognises credit

transactions

Only recognised

when cash

received

Expenses Recognises credit

transactions

Only recognised

when cash paid



Examples of Accounts

Account Type Account Name (some examples only)

Assets Current Assets: Cash, A/c receivable, Inventory, Supplies

Non-current Assets: Furniture, Motor vehicles, Building

Liabilities Current Liabilities: A/c payable, Rent payableNon-current Liabilities: Bank Loan, Mortgage

Owners equity Share capital, Retained earnings, Dividends (for a

company) OR«C apital and Drawings (for a sole trader

or partnership)

RevenueSales revenue, Service revenue, Interest revenue, Rental

revenue, Advertising revenue etc

Expense Wages expense, Electricity expense, Supplies expense,

Rent expense, Bank charges, Fuel expense, Telephone

expense etc

This is not a complete list but provides some examples of

accounts that may be affected by business transactions



Business transactions

External transactions: exchange of economic

resources and/or obligations involving an external

party Internal transactions: exchange of economic

resources and/or obligations that do not involve an

external party eg WIP in a manufacturing

environment.

Non-Business transactionsPrivate (personal) transactions

³Transactions´ which result in no exchange of

economic resources / economic value. Eg legalcontracts

Types of transactions



Worked Example

� Example will be completed in the Lecture.

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The balance sheet- T format

DON¶S AUTO REPAIRS Balance Sheet

As at 30 June 2010

ASSETS LIABILITIES Cash at Bank $ 50 340 Accounts payable $ 20 760 Accounts receivable 17 790 Mortgage payable 201 000 Repair supplies 14 610 221 760 Repair equipment 110 700

Land 60 000 EQUITY Building 255 000 Don Brady, Capital 286 680

$508 440 $508 440

ASSETS =L

IABIL

ITIES + EQUITY



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The balance sheet - narrative formatcontinued

ASSETS Cash at Bank $ 50 340

Accounts receivable 17 790 Repair supplies 14 610 Repair equipment 110 700

Land 60 000 Building 255 000

$508 440 Less LIABILITIES

Accounts payable $ 20 760

Mortgage payable 201 000 221 760

NET ASSETS $286 680 EQUITY Don Brady, Capital 286 680

$286 680

ASSETS

± LIABILITIES

= EQUITY



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The balance sheet continued

� Equity

± The residual interest of the owner/s in the

assets (less liabilities) of the entity

ASSETS = LIABILITIES + EQUITY

ASSETS ± LIABILITIES = EQUITY

or



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The statement of changes in equity

DON¶S AUTO REPAIRS Statement of Changes in Equity For the year ended 30 June 2010

Don Brady, Capital - 1 July 2009 $ 237 330 Net profit for the year 94 350

331 680 Less: Drawings 45 000

Don Brady, Capital - 30 June 2010 $ 286 680



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The income statement

DON¶S AUTO REPAIRS Income Statement

For the year ended 30 June 2010

INCOME

Repair revenue $442 500 EXPENSES Advertising expense $ 20 250 Repair supplies expense 91 710

Salaries and wages expense 127 800 Rent expense 40 260 Telephone expense 20 190 Light and Power expense 47 940 348 150

PROFIT $ 94 350



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The statement of cash flows continued

DON¶S AUTO REPAIRS Statement of cash flowsFor the year ended 30 June 2010

CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $424 710 Cash paid to suppliers and employees (342 000)

Net cash from operating activities $ 82 710 CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of land and buildings (315 000)Purchase of repair equipment (110 700)Net cash used in investing activities (425 700)

CASH FLOWS FROM FINANCING ACTIVITIES

Amount borrowed under mortgage 201 000 Investment by owner 237 330 Drawings by owner (45 000)Net cash from financing activities 393 330

Net increase (decrease) in cash held 50 340 Cash at beginning of year 0

Cash at end of year $ 50 340

lecture week 1 the accounting environment0

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