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HORNGREN

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Accounting and theBusiness

EnvironmentChapter

1

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

1 - 3Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education AustraliaHorngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1. Use accounting vocabulary for decision making

2. Apply accounting concepts and principles to business situations

3. Use the accounting equation to describe an organisation’s financial position

4. Use the accounting equation to analyse business transactions

5. Prepare and use the financial statements

6. Evaluate the performance of a business


Objective 1

Use accounting vocabularyfor decision making.


is an information system that...is an information system that...

measures business activities,measures business activities,

processes information, and...processes information, and...

communicates financial information.communicates financial information.

Accounting...


is called the language of business.is called the language of business.

Accounting...


External usersmake decisionsabout the entity.

External usersmake decisionsabout the entity.

Internal usersmake decisionsfor the entity.

Internal usersmake decisionsfor the entity.

Users of Accounting Information


Management AccountingManagement Accounting

Financial AccountingFinancial Accounting

Fields of Accounting


ICAA and CPPA joint

Code ofProfessional

Conduct

ICAA and CPPA joint

Code ofProfessional

Conduct

Standards ofEthical

Conduct of individualcompanies

Standards ofEthical

Conduct of individualcompanies

Standards of Professional Conduct


Proprietorships(sole traders)Proprietorships(sole traders)

PartnershipsPartnerships

CompanyCompany

Types of Business Organizations


ProprietorshipsProprietorships

What are some advantages?– total undivided authority– no restrictions on type of business –

must be legal What are some disadvantages?– unlimited liability– limitation on size – fund raising power


Partnerships

What are some advantages?– better credit standing – possibly– more brain power, but consultation with

partners required What are some disadvantages?– unlimited personal liability for partners– need for written partnership agreement


Companies

What are some advantages?– separate legal existence– limited liability of shareholders (owners)– transferability of ownership relatively easy What are some disadvantages?– separation of ownership and control– extensive governmental regulation


Objective 2

Apply accountingconcepts and principlesto business situations.


To provide information usefulfor making investment and

lending decisions

To provide information usefulfor making investment and

lending decisions

Generally AcceptedAccounting Principles

What is the primary objective of financial reporting?


The Entity Concept Example

Assume that Jan decides to open up a petrol station and coffee shop.

The petrol station made $250,000 in profits, while the coffee shop lost $50,000.


The Entity Concept Example

How much money did Jan make? At a first glance, we would assume that

Jan made $200,000. However, by applying the entity concept

we realize that the petrol station made $250,000 while the coffee shop lost $50,000.

Jan’s business operations are also separate from her personal affairs.


The Time Period Concept

Or the ‘accounting time period concept’. Unit of time for which accounting data is

collected and the financial statements prepared.

In Australia many companies prepare their statements for the financial year – from July 1 to June 30 the following year.


Information mustbe reasonably

accurate.

Information mustbe reasonably

accurate.

Information mustbe free from bias.Information mustbe free from bias.

Information must report what

actually happened.

Information must report what

actually happened.

Individuals wouldarrive at similar

conclusions usingsame data.

Individuals wouldarrive at similar

conclusions usingsame data.

The Reliability (Objectivity)

Principle


Assets and servicesacquired

should be recordedat their actual cost.

Assets and servicesacquired

should be recordedat their actual cost.

The Cost Principle


Relates the inputs andoutputs of goods and

services to one another.

Relates the inputs andoutputs of goods and

services to one another.

The Matching Principle


Recognise revenue whenit is ‘earned’.

GAAP recommends the accrual basis of accounting.

Recognise revenue whenit is ‘earned’.

GAAP recommends the accrual basis of accounting.

The Profit Recognition Principle


Constrains managements’natural optimism.

Constrains managements’natural optimism.

Conservatism


The entity will continueto operate in the future.The entity will continueto operate in the future.

The Going Concern Concept


Australian Accounting Standards

Standards to govern measurement rules and level of disclosure.

Australian Accounting Standards Board is responsible for technical accounting standards.

Australia (like the rest of the world) is moving towards the adoption of International Accounting Standards.


Objective 3Objective 3

Use the accounting equationto describe an organisation’s

financial position.


EconomicResources

Claims toEconomicResources

The Accounting Equation

Assets = Liabilities + Owner’s Equity


Assets

What is an asset? It is something a company owns which

has future economic value e.g.– cash– accounts receivable– land and building– equipment– goodwill


Liability

What is a liability? It is something a company owes.

– money– service – legal retainers– product – magazines

E.g.– accounts payable


Owner’s Equity

What is owner’s equity? It is what’s left of the assets after

liabilities have been deducted.– the same as net assets– the owner’s claim on the entity’s assets


Transactions that AffectOwner’s Equity

OWNER’S EQUITYINCREASES

OWNER’S EQUITYDECREASES

Owner Investmentsin the Business

Revenues Expenses

Owner Withdrawalsfrom the Business

Owner’s Equity


Revenues

What are revenues? They are amounts received or to be

received from customers for sales of products or services.

– sales– performance of services– rent received– interest received


ExpensesExpenses

What are expenses? They are amounts that have been paid

or will be paid later for costs that have been incurred to earn revenue.

– salaries and wages– services– supplies used– advertising


Objective 4Objective 4Objective 4Objective 4

Use the accounting equation to analyse

business transactions.


Accounting for Business Transactions

What is a transaction? It is any event that both affects the

financial position of the business and can be reliably recorded.

It is ‘money’ into or out of the business.



1 Paula Lee invests $30,000 to begin Paula Lee eTravel.

2 Lee purchases land, paying $20,000 in cash.

3 She buys office supplies, agreeing to pay $500 in 30 days.

4 She earns and collects $5,500 revenues.



5 Lee performs services, and the client agrees to pay $3,000 within one month.

6 During the month, she pays $3,100 for expenses incurred.

7 Lee pays $300 to the store from which she purchased $500 worth of supplies.

What is the effect of these transactions on the accounting equation?


Owner’s Assets = Liabilities + Equity

1) Cash + $30,000 + $30,0002) Cash – 20,000

Land + 20,0003) Supplies + 500 + 5004) Cash + 5,500 + 5,5005) Receivable + 3,000 + 3,0006) Cash – 3,100 – 3,1007) Cash – 300 – 300 Totals + $35,600 + 200 + $35,400




Notice that the equation always stays in balance.

Each transaction affects at least two accounts, sometimes more.

Some transactions affect only one side of the equation; some affect both sides.



Other transactions that took place were as follows:

The business collected $1,000 from the client.

She sold some land at cost for $9,000. She withdrew $2,100 from the business. (See the final result, p21 of your textbook)



Prepare and usefinancial statements.


– are the finalproduct of the

accounting process.

– are the finalproduct of the

accounting process.

– tell how thebusiness is performing

and where it stands.

– tell how thebusiness is performing

and where it stands.

Financial Statements...


Financial StatementsFinancial Statements

– Statement of financial performance– (For the Year [or Month] Ended 30/6/2004)

– Statement of owner’s equity– (For the Year Ended 30/6/04

– Statement of financial position– (As at 30/6/04)

– Statement of cash flows– (For the Year Ended 30/6/04



Evaluate the performanceof business.


Relationships Among the Statements:Statement of Financial

Performance

Revenue:

Fees earned $8,500

Expenses:

Salary expense $1,200

Electricity and phone expense 400

Equipment rental expense 400

Office rent expense 1,100 3,100

Net profit $5,400


P. Lee, capital, April 1, 2004 $ 0

Plus Contribution of capital 30,000

Net profit $ 5,400

Less Drawings – 2,100

P. Lee, capital, April 30, 2004 $33,300

Relationships Among the Statements:Statement of Owner’s Equity


Relationships Among the Statements:Statement of Financial Position

Assets

Cash $ 20,000

Accounts receivable 2,000

Supplies 500

Land 11,000

Total assets $ 33,500

Liabilities

Accounts payable $ 200

Owner’s Equity

P. Lee, capital 33,300

Total liabilities and

owner’s equity $33,500


Relationships Among the Statements:Statement Of Cash Flows

Cash flows from operating activities:Cash receipts from services rendered $6,500Cash payments:

To suppliers $ 2,200employees 1,200

3,400Net cash flows fromOperating activities $3,100Cash flows from investing activitiesPurchase and sale of land

($11,000)


Cash Flows from Financing Activities:

Beginning Balance 0

Investment by Owner$30,000

Drawings 2,100

Net Cash Flows from Financing Activities$27,900

Net Increase in cash$20,000

Cash at Beginning of Year 0

Cash at End of the Year $20,000

Relationships Among the Statements:Statement Of Cash Flows


End of Chapter 1

to accompany horngren harrison bamber best fraser willett

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