ACC401SEM

ACCOUNTING ENVIRONMENT
SEMESTER 1, 2022

TOPIC 1

ACCOUNTING & DECISION MAKING

Lecture 1

Learning outcome

1. Define Ethics and explain the role of ethics in Accounting society

2. Define Accounting, the Accounting Environment and factors

influencing the accounting environment

3. Discuss the contributions of accounting into the decision making

process & explain the steps in decision making process

4. List and discuss the factors to consider when making economic

decisions

ETHICS AND ACCOUNTING

 Ethics in business

 Since 1990’s ..ethics & moral behaviors in business .. receiving lot of attention.. by..

 Media, professional associations & regulatory bodies.

 More importantly companies , conduct of directors, conduct of accountants & auditors etc.

 Increasing pressures from stakeholders groups, community concerns.

 Need for formal code of ethical & moral behavior.

 Many business today vote for a high standard of ethical behavior as their long – term interest of
business entities.

 The audit & assurance services of accounting acts as a controlling influence in maintaining ethical
behaviors in business entities

 Ethics and professional accounting bodies..

 E.g. CPA- Australia, ICA & FIA (Fiji)

 The institution governs the ethical conduct of its members

 It sets down rules of professional conduct for members

 Are mandatory for all members, & severe penalties (including expulsion) imposed on those who
break.

 Issues the joint Code of Professional Conduct (CPC)

 CPC- covers areas as competence, compliance, with law & accounting g standards, confidentiality, of
client information, fees charged, advertising and publicity, solicitation of business, and
independence.
  Ethics in practice… in every business & every work

 Must appreciate the importance of ethic behaviors, analyze the consequences of unethical acts,
indentify your stakeholders, enhance your ability to choose a right course of action always….. “doing
the right thing always”.

 Common ethical issues faced by members/ professionals :

 evasion and manipulation of records/ documents

 conflict of interest and use of insider information for personal gains

 Coping with superior’s instructions to carry out unethical acts

 breach of confidence, deceiving the users groups

ACCOUNTING & ENVIRONMENT OF ACCOUNTING

 Accounting is defined as a systematic approach which measures, records, reports and interprets
financial and other information about an entity to interested parties to enable them to make
appropriate decisions.

 “Accountants” ….provides this information by recording, processing, analyzing and then reporting
and interpreting business transactions and events as per the user needs.

THE ACCOUNTING PROCESS

The Model of accounting process

Identification Measurement Recording Communication

Transactions Quantification Recording,

in monetary classification,
terms summarisation

Analysis and Accounting

interpretation reports
MANAGEMENT vs. FINANCIAL ACCOUNTING

Management accounting-Referred to as managerial accounting

Financial accounting-Referred to as external financial reporting

Management accounting Financial

• Internal focus • External focus
– Planning/ Selection/ • Reporting information
Recruitment – Performance
– Controlling – Position
– Decision-making – Cash flows
• Cost behaviour • Financing and investing
Budgeting…..etc • Compliance

 The Growth in Accounting Environment – many factors….

 Increasing demand for information of a financial & non-financial nature by society/ user groups

 Increase in scale/ and size of business(business complexity) & transactions

 Advancement of information and communication technology (ICT)…Digital economy & competition &
cost & leadership strategies

 Lessons from Corporate collapses & emergence of corporate and governance regulations

 Pressures from global investment market(investors security & protection regulations)

 Adoption of global regulations including accounting standards & other supporting regulations such as
auditing standards, listing rules and amendments in taxation legislations ..etc

DECISION MAKING PROCESS

 What are Decisions??

 Decisions are made in everyday life

 Decisions may constitute in financial / nonfinancial form

 Decisions involve choices (your one best option)

 Good Decisions helps to keep focus on your goals/ objectives

 Why do we make ….Decisions ???

 Because Resources are limited???

 Constraints we may have …

 Each decision has outcomes that will affect future decisions…… which needs to be monitored/
assessed.

Steps to follow in decision-making

1. Establish goals
2. Gather available information on alternatives
3. Determine consequences of alternatives
4. Choose course of action

MAKING ECONOMIC DECISIONS

 Involves the use of economic resources
 Must also consider factors as;
◦ Personal taste
◦ Social factors
◦ Environmental factors
◦ Religious and/or moral factors
◦ Government policy & affecting regulations

USING INFORMATION IN ECONOMIC DECISIONS… scenario based

 Example …Starting a small business

 What all information you need ???

◦ What Services/Goods to provide

◦ What to charge..Price?

◦ Who are your Potential customers

◦ What Equipment/s to purchase

◦ What type of labours you need

◦ Administrative costs…etc..

 Example : Darren’s Lawn-mowing

 Set up cost
 Second-hand van $22 000
Trailer 1 500
Rotary lawn mower 950
Cylinder mower 1 600
Chainsaw 1 150
Edger 600
Hedge trimmer 700
Blower 1 000
Shredder 1 400
Brush-cutters 800
Other tools, ladders, brooms (approx.) 850
Total cost $32 550

 Operating costs

 Clients
Lawn-mowing and trimming (regular) 60

Gardening, with shredding (regular) 12

Tree-lopping and shredding (as requested) 20

 Charges
Lawn-mowing $33

Gardening 66
Fuels and oils, repairs and maintenance $220
Tree-lopping 99
Part-time employee 150
 Estimated cash receipts
$370
5 lawns mowed for each of 6 days @ $33 ea $ 990

1 garden for each of 6 days for $66 each 396

$1386
How to use … ACCOUNTING INFORMATION for future DECISIONS

 How much information sufficient and relevant ?  Accounting information

 Plans of future activities assists owners and
managers to effectively
 Actual vs. future events(budgets) and efficiently run their
business, plan & control.
 Outcomes and results of activity analyse

 Plan & Control through economic decisions

Discussion: Accounting information & Decision making

List down all accounting information that could help these managers to make each of the following
decisions below:

Scenario 1.

The managing director of a KIMS Car Rental Company is deciding whether to add luxury cars to the Company's
rental car fleet.

Scenario 2.

The production manager in an assembly plant of Fiji Meats Ltd is deciding whether to have routine
maintenance performed on a assembly machine weekly or fortnightly.

Scenario 3

The manager of a MASSIVE Department Store is deciding on the number of security personnel to employ for
reducing shoplifting.

Scenario 4

The Suva City Council is deciding whether to build an addition onto the council library.

TOPIC 2 – LECTURE 2
ACCOUNTING TERMS & CONCEPTS
LEARNING OUTCOMES
At the end of this lecture, students should be able to:
• Determine the importance of different source documents.
• Understand major accounting terms and concepts in relation to source documents.

Definition of Source Documents

o Are papers/records that shows the nature of a transaction and provides all information needed to account
for a transaction done by a business.
o Source documents are tangible (able to touch and see) and shows a contract between 2 parties.
o Only exception is when there is an internal business dealing within a company. Example – Drawings.
o However, there needs to be some kind of record such as Internal Memo.

How Long Businesses Should Keep Source Documents?

 Most companies are required to keep documents for 3 to 7 years (depends on a country’s tax law).

Why are source documents retained?

 Reference purposes
 For locating errors
 Proof/evidence of a business transaction

Common Types of Source Documents

1. Cash Sales Slip
2. Sales Invoice
3. Purchase Invoice
4. Cheque Butts
5. Cash Receipts Daily Summary
6. Bank Advices or Bank Statements

CASH SALES SLIP

Is a business form showing details of a transaction in which goods or services are sold to customer for cash.

SALES INVOICE
 Many businesses do not have cash sales; they make sales on account/credit.
 When sales are made on credit businesses have debtors/accounts receivable.
 For these type of transactions a sales invoice will be used as a source document.

PURCHASE INVOICE
 Are the receipts when a company makes a purchase (or buys) goods/services.
 Purchase can be on cash or on credit.
 When purchases are made on credit businesses have creditors/accounts payable.

CHEQUE BUTTS
 Many businesses make payments through cheques
 Cheques leave a paper trail as a record of transaction with the business known as a cheque butt.
 Cheque butt must be attached with a receipt to prove purchase/payment.

CASH RECEIPTS DAILY SUMMARY

 Is a business summary that lists the money coming in each day from their customers.

 This document normally shows:

 Name of customers
 Dollar amounts
 The reason for which money is being received
 Person who received money.

BANK ADVICES
 There will be times when the company’s bank automatically initiates a change in bank account.
 The bank must legally inform the business by sending a document called a Bank Advice or Bank
Statement.

Bank Debit Advice – informs the business of a decrease made in businesses bank account.

Bank Credit Advice – informs the business of an increase made in businesses bank account.

TOPIC 2 – LECTURE 1
ACCOUNTING TERMS & CONCEPTS

LEARNING OUTCOMES
At the end of this lecture, students should be able to:
• Apply main accounting assumptions made in the preparation of financial reports.
• Evaluate different forms of business organizations.
• Understand the content and reporting aims of different basic financial statements.
• Identify the relationship between assets, liabilities and equity.
• Understand the relationship between revenues and expenses.

Accounting Concepts / Assumptions

Accounting Entity Concept
 Sometimes also called: entity concept or separate legal entity concept.
 Once a business is formed, it becomes a separate legal entity.
 The business becomes an artificial person – can sue & be sued.
 Financial affairs of the owner and business is kept separate and distinct.

Monetary Concept
 Transactions that are financial in nature to be recorded in financial reports
(in dollars and cents).
 Transactions that do not have monetary value are not to be accounted in
accounts.

Historical Concept
Transactions should be recorded at its original cost for what they were initially
paid for.

Going Concern Concept

 The concept assumes that the business will remain in existence for the
foreseeable future.
 Financial statements are prepared on the assumption that business will
continue indefinitely in future.
Accounting Period Concept
 The life of the business is divided into equal time periods.
 Allows the company to prepare financials on a timely basis.
Fiscal year vs. calendar year
Concept of Conservatism
 Also known as “Prudence”
 If there is a choice or uncertainty in the results to be reported, the
preference should be to understate profits rather than overstating.
Concept of Disclosure
Financial statements should include all information concerning the business
activities.
Will help in decision making.
Stakeholders expect full disclosure in financial reports.

Concept of Accrual Accounting

 Transactions are recognized in financial statements by matching revenues
to expenses at the time in which the transaction occurs rather than when
payment is made or received.
 Includes credit transactions
Concept of Cash Accounting
 Transactions are recognized in financial statements by matching revenues
to expenses only when payment is made or received.
  Includes only cash transactions (no credit).

Matching Concept
 Matches all revenues with expenses to be recorded in Profit/Loss
Statement.
 Costs concerning for a future period must be carried forward as a
prepayment and not charged in current Profit/Loss Statement.

Concept of Objectivity
 Accountants are required to prepare accounts on the basis of objective
(not biased) and factual information.
 Opposite of objective information is subjective information (biased).
Concept of Realization
 Helps the accountant to determine the point when he feels that a
transaction is certain enough for the profit to be made and realized in the
profit and loss statement.
 Occurs when a sale is made to a customer. Revenue is created at the very
moment sale is made and not when payment is received.
 Hence, profit/sale can be taken to profit/loss account as soon as a sale is
made, even though payment has not been received.
 Sale is complete when goods are delivered, profits cannot be realized
only when orders are received but not yet fulfilled.
 A long term contract is an exception to this rule.

Types of Business Organizations

1. Sole Trader
 Also known as single proprietorship [only one owner]
 The single owner will supply cash or assets to the business
 Entitled to all profits
 Liable to pay off all the debts
 Not a separate legal entity
 But business is treated separate from the owner
 The owner’s personal records are kept separate
2. Partnership
 Business owned by 2 or more people acting as partners
 Easy to form [no special legal requirements needed]
 Partnership Agreement
  Agreement can be verbal or written but will help resolve disputes
between partners
 Partners supply resources
 Profits and losses are shared
 Not a separate legal entity
 Unlimited liability [individual partners are personally liable for the debts
of the partnership]
Example: professional practices
3. Company
 Separate legal entity
 Owners are called shareholders
 Limited liability
 Have board of directors
 2 common types of companies:
- Private companies
- Public companies
4. Not-for-Profit Organization
Example sporting clubs, government agencies and departments

Appropriate structures for such entity is provided by law

Such laws can also impose special accounting and reporting requirements for
NPO’s

Basic Financial Statements

 INCOME STATEMENT
Two major components are:
a. Income
 Represents an increase in the wealth of the owners.
 Conceptual framework defines income as increases in economic benefits
during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increase in equity other than
those relating to contributions from equity participants

b) Expenses
 Are decreases in equity
 Decrease in economic benefits during the accounting period in the form
of outflows or depletion of assets or incurrence of liabilities that result in
decrease in equity, other than those relating to distributions to equity
participants
2. BALANCE SHEET
The basic accounting model for a balance sheet is
Assets = Liabilities + Equity

 Assets
Resources controlled by the entity
As a result of past events
From which future economic benefits are expected to flow to the entity
Assets can be tangible and intangible
Can be current and fixed assets

b) Liabilities
Present obligations of an entity arising from past events
Expected to result in an outflow from the entity of resources embodying
economic benefits
Debts owed by entity to outside parties [creditors]
Amounts owed to suppliers of goods and services on credit [accounts payables]
Amounts borrowed from banks or other lenders [loans payable]

c) Equity
Owner’s claim to the assets of the entity after deducting all its liabilities
Risk takers in the entity
If assets are sold creditors claims must be satisfied first before the owners
claims are recognised
Equity is a residual claim on the assets and the accounting model expresses this
idea
Assets – Liabilities = Equity

Refer class discussion question for preparing basic balance sheet.

3. STATEMENT OF CASH FLOWS

Reports on the cash flows in and out of the entity.
Three components are:
 Operating Activities
Are those associated with the provision of goods and services
Such as collecting cash for services provided, selling goods to customers,
purchasing goods for sale, paying suppliers for goods/services
purchased, collecting from customers outstanding debts, paying wages
& paying income tax to government
b) Investing Activities
Associated with the acquisition and disposal of long term resources used in the
entity’s production, selling or administrative tasks.
Such as purchasing an office building, constructing a factory, purchasing long
term investments, purchasing plant & machinery, selling long term assets

c) Financing Activities
Those which relate to the raising of funds or an equity to carry out its operating
and investing activities
Such as raising capital by issuing shares, borrowing money from a bank,
repaying borrowed funds and receiving more fees by attracting new members to
a club

4. STATEMENT OF CHANGES IN EQUITY

Serves as connecting link between the balance sheet and the income statement
Explains the changes that took place in equity during the period