Accounting in Governance study notes

Week 1 Lecture 1
-Introduction to Accounting and governance
Learning objectives
Role of Accounting
The primary role of any accountant is to provide information for decision making.
Use of Accounting information
Internal users include any person in the hierarchy of employment.
External users include any person outside of the organisation that has an interest in the
business.
Management vs Financial Accounting
Management accounting provides information for internal decision making.
Financial accounting provides information for external decision making.
Diverse roles of Accountants
-Commercial accountants
-Public accountants
-Government accountants
-Not-For-Profit accountants
Forms of business organisation
-Sole trader
-Partnership
-Company
Accounting and Governance
Accounting plays a crucial role in corporate governance.
Accounting provides essential information for government mechanisms to operate effectively
and efficiently.
Internal systems check e.g., Internal control, risk management, independent board.
External system checks e.g., ASX Corporate governance principles/recommendations.
Stewardship-Financial statements that show how the managers have accounted for the
resources entrusted to them by shareholders.
Governance is important to:
-Prevent fraud, corruption, and organisational scandals
-Protect investors and promote investor confidence
-Enhance orgainsation reputation
-Lower cost of capital

-Revision of Accounting Concepts/Principle and Accounting cycles

Learning objectives
Accounting concepts and principles
1.Monetary principle
2.Cost principle
3.Accounting entity principle
4.Going concern principle
5.Accounting period concept 6. Full disclosure principle

Accounting cycle
 Journalise and post
adjusting entries.

Prepare adjusted trial

Prepare the trial balance.
balance.

Prepare financial
Post to ledger accounts statements.

Journalise Journalise and post-

transactions. closing entries.

Transaction Analysis Prepare post-closing

trial balance.
Accounting in governance study notes
Week 1 Readings Chapter 1 pg. 4-26

Corporate Governance frameworks

-Agency theory
A Conundrum between the interests of managers (Agents) and shareholders (Principal)
-Stakeholder theory
A focus on the broader range of stakeholders benefits over the sole focus on shareholder ROI.
-Transaction cost theory
-Enlighted shareholder theory
A seemingly stakeholder beneficial approach with the sole aim of shareholder ROI.
-Institutional theory
The integration of a foreign nation code of compliance into an institution operating in a
different economic, social, and cultural environment.

ACCA Corporate governance and risk management principles

1.Boards, shareholders, and stakeholders share a common understanding of the purpose and
scope of corporate governance.

2. Boards lead by example

3. Boards appropriately empower executive management and committees.

4. Boards ensure their strategy actively considers both risk and reward over time.

5. Boards are balanced.

e. Executive remuneration promotes organizational performance and is transparent.

7. The organization’s risk management and control are objectively challenged, independently
of line management.

8- Boards account to shareholders and, where appropriate, other stakeholders for their
stewardship.

9. Shareholders and other significant stakeholders hold boards to account. 10. Corporate
governance evolves and improves over time.
Accounting in Governance study notes
Week 2 Lecture 2
Accounting regulation in Australia

Sources of Accounting regulation

-GAAP -Accounting standards - Conceptual framework

Company law- Corporations act 2001

Accounting regulation bodies

 Australian Accounting standards board (AASB)
-Development of accounting standards, formulation of accounting standards for
worldwide interpretation and development of conceptual framework.
 Financial reporting council (FRC)
-Oversee and advise (AASB) and the Auditing and assurance regulatory body.
 Australian securities and investment commission (ASIC)
-Administers corporations act and monitors the policy use by listed companies
promotes confidence in the financial system.
 Australian securities exchange (ASX)
-Administers listing rules
 International Accounting standards board (IASB)
-Developed a single set of high-quality accounting standards (IFRS) which oversees
the (IASB) which is privately funded.
 International financial reporting standards interpretations committee (IFRSIC)
-Analyses of financial reporting issues which are not covered in IFRS standards
The conceptual framework
What is the Conceptual Framework of Financial Reporting?

• “A conceptual framework consists of a set of concepts defining the nature, purpose and
content of general-purpose financial reporting to be followed by preparers of general-purpose
financial reports and standard setters”

Role of the conceptual framework

• Provides guidance to prepares of financial reports, especially where no standard exists.

• Assists standard setters – improving the standard setting process and consistency in
accounting practice.

Historical development

•FASB developed its conceptual framework in 1978 •In 1990s, AASB developed four
Statements of Accounting Concepts (SACs)

• In 2005, adoption of the IASB’s Conceptual Framework for Financial Reporting (the
Conceptual Framework).

•Later versions of IASB’s conceptual framework were issued in 2010, and 2018.

Content of the conceptual framework

 Definition of the reporting entity

 Objective of general-purpose financial reporting

 Qualitative characteristics of useful financial information

 The elements of financial statements - Definition, recognition, measurement

Definition of the reporting entity

“'an entity that is required, or chooses, to prepare financial statements.”  Governments and
regulatory authorities of each jurisdiction determine which.

type of entities is required to prepare general purpose financial reports.  What are the
indicators that would determine whether an entity should be?

classified as a reporting entity.

1. Separation of management from the ownership 2. Economic or political influence

3. Financial Characteristics.

 A reporting entity must provide financial reports for users that comply with accounting
standards issued and/or adopted by the AASB.

Objective of general-purpose financial reporting

General purpose financial reports are those intended to meet the information needs common
to a range of users who are unable to command the preparation of reports tailored to meet
their own needs.

• The Conceptual Framework primary users are resource providers.

 Shareholders

 Suppliers/creditors

 Lenders

 Other users are government agencies; members of the public; and suppliers,
customers, and employees (when not resources providers).

The role of professional judgement

REQUIRED

 Framework requires professional judgment in relation to substance over form.

 Accounting treatment of some transactions is unregulated.

ISSUES

• Difficult to accept that judgement is neutral and unbiased • Different judgments can
lead to different disclosures.
Accounting in Governance study notes
Week 3 Lecture 3
Internal control, Bank reconciliation and cash management

Internal control systems-Essential part of risk management. Consists of all the processes
used by management and staff to:

i. Provide efficient and effective operations; and comply with laws, regulations, and
internal policies.

ii. Safeguard assets; and enhance the accuracy and reliability of accounting records.

Two aspects of internal control:

 Administrative controls provide operational efficiency and adherence to policy and

procedures.

 Accounting controls are the methods and procedures used to protect assets and ensure
that transactions are recorded appropriately.

Principles of internal control

 Establishment of responsibility.

 Segregation of duties:

 Related activities.

 Accountability for assets.

 Documentation procedures.

 Physical, mechanical, and electronic controls. Independent internal verification.

Limitations of internal control: cost versus benefits • human imperfection • business size

Internal control principles applied to the sales and receivables and purchases and payments
cycles.
Sales and receivables cycle:

 Establishment of responsibility

 Segregation of duties – different personnel are involved in the sales transaction to

ensure.

independent verification at each step.

 Documentation procedure – signatures required at certain stages to identify

responsible party.

 Physical, mechanical, and electronic controls

 Independent internal verification of Purchases and payments cycle:

 Establishment of responsibility –
appropriate level of skill and knowledge to assess invent tory levels.

 Segregation of duties

 Documentation procedure

 Physical, mechanical, and electronic controls

 Independent internal verification

Sales and receivables cycle illustrated and application of Internal control principles.
Purchases and payments cycles illustrated and application of Internal control
principles.

Subsidiary ledgers, control accounts and special journals

Control accounts and subsidiary ledgers

Subsidiary ledgers are groups of accounts with a common characteristic. Two common
subsidiary ledgers are:

Accounts Receivable (customers) which collects transaction data of individual customers.

Accounts Payable (suppliers) which collects transaction data of individual creditors.

Details from subsidiary ledgers are summarised in the general ledger control account.

Control accounts and subsidiary ledgers

Advantages of subsidiary ledgers

  Show transactions in a single account providing up to date information.

 Free the general ledger of excessive details.

 Provide effective control.

 Enable segregation of duties.

Special journals -Special journals are used to record similar types of transactions.

Advan
tages of special journals:

 Enable segregation of duties.

 Simplifies posting process to general ledger.

Cash $$$
Cash is the asset most subject to theft, and hence a good internal control system for handling
cash and recording cash transactions is essential.

Cash $$$ Cash consists of:

• cash on hand (notes and coins)

• cash at bank (cheque accounts)

• cash equivalents (bank overdrafts, deposits on money market, 90-day bank acceptance
bills).

Internal control over cash receipts

Internal control over cash payment

Bank

1. The use of a bank contributes significantly to good internal control over cash by:

Helping a company safeguard its cash by using a bank as a depository and minimising the
amount of cash that must be kept on hand.

2. Providing a double record of all bank transactions: - one by the business - one by the bank.
Bank reconciliation

Cash at Bank account balance rarely agrees with balance as per bank statement.

Two main reasons:

1. Timing differences: occur when the parties record the same transaction in different periods:

i. Outstanding electronic fund transfer (EFT) –lag between when the EFT requested is
recorded by the business and when paid by the bank.

ii. Outstanding deposits – lag between when receipts are recorded by the business and
when recorded by the bank.

iii. Reversal entries, and all items recorded by the bank but not yet by the business.

2. Errors by either party in recording transactions.

• Banks reconciliation: Comparing balance per accounting records to the bank statement
balance and reconcile to the adjusted or correct balances.

Reconciliation Procedure:
i. Complete bank reconciliation statement: Balance as par bank statement-Outstanding
deposits increase the bank account. Outstanding EFTs decrease the bank account.

Balance should equal the adjusted balance as per Cash at Bank account (1)

ii. Prepare adjusted balance as per Cash at Bank account (1)

• Original balance of Cash at Bank account

• Add(less): Reversal entries, and all items recorded by the bank, but not yet

by the business (entity).

• Add(less): Errors made by the business (entity) .

Bank reconciliation example

Steps in reconciliation

1. Compare current bank statement to:

a. Previous month’s bank reconciliation, and

b. Current month's cash receipts and cash payments journal.

 Tick items that match.

 Correct errors in cash books

 Bank statement errors added to bank reconciliation.

2. a. Identify ‘unticked’ items on bank statement:

ADJUST CASH AT BANK BALANCE FOR REVERSAL ENTRIES, DIRECT DEPOSITS,

AND OWN ERRORS.
b. Examine cash journals and unticked items (outstanding deposits and EFTs):

LIST IN BANK RECONCILIATION.

c. Unticked items from opening reconciliation are carried forward to current bank
reconciliation.

3. Total cash journals and post to Cash at Bank ledger, to determine balance as per cash at
bank balance if not given.

4. a. Complete bank reconciliation statement: Outstanding deposits increase the bank account.

ADD Outstanding EFTs decrease the bank account. LESS

Adjusted bank balance should equal the balance as per Cash at Bank account (1)

b. Prepare adjusted balance as per Cash at Bank account (1)

 Reversal entries, and all items recorded by the bank, but not yet by the business
(entity).

 Errors made by the business (entity).

Basic principles of cash management

Accounting in Governance study notes
Week 4 Lecture 4
Accounting for receivables

1. Identify the different types of receivables.

2. Understand how receivables are reported in financial statements.

3. Understand how to value accounts receivable.

4. Prepare journal entries relating to bad debt.

5. Estimating allowance for bad debts.

6. Manage receivables.

LO1: Receivables
Receivables: are amounts due from individuals and

businesses.
• Accounts receivable are amounts owed to the business.

by customers on account (debtors).

• Other receivables include non-trade receivables such as

interest receivable, loans, advances, etc.

• Notes receivable are amounts owed to the business for which formal instruments of credit
are issued evidencing the debt – promissory note.
LO2: Financial statement presentation of receivables

 Reported in the statement of financial position (balance sheet)

 Classified as current and non-current.

 Receivables due within 12 months or entity's operating cycle included in current asset
section of statement of financial position.

 Account receivables are normally classified as current assets

LO2: Accounts receivable

Accounts receivable are generally the most significant receivables for most firms.

Three accounting issues associated with accounts receivable are:

Recognising accounts receivable

 For service entity, when service is provided.

 For merchandiser, at the point of sale Valuing accounts receivable

Accelerating cash receipts from receivables/managing receivables

LO3: Valuing accounts receivable

At what amount should account receivables be reported on the statement of financial

position?

Unrecoverable amount (bad debt) should be accounted for. Bad debts occur when a customer
fails to pay an account.

• Bad debt is considered as a loss and hence included as part of expenses.

LO 4: Valuing accounts receivable –

Accounting for uncollectable accounts

1. Direct write-off method

 Bad debts expense is recognised when the uncollectable account is specifically

identified and written off.

 This method reduces the usefulness of financial statements if bad debts are material.
LO4: Valuing accounts receivable –

Accounting for uncollectable accounts

2. Allowance method for uncollectable accounts

 This method provides a more accurate picture as to the amount of accounts receivable
expected to be collectable at the end of the reporting period.

 It records estimated bad debts expense in the period where the related sales are
recorded.

o At the end of each accounting period an estimation is made of the total bad debts
(doubtful debts) expected to be realised from that period’s sales.

 This method is recommended if bad debts are material.

LO4: Valuing accounts receivable –

Accounting for uncollectable accounts

 Receivables reported at their NRV.

 Receivables in a period is reduced by estimated uncollectable.

receivables (doubtful debts).

• Allowance for doubtful debts is a contra asset account

LO4: Allowance method Journal entries:

a. Recording estimated uncollectable in Bad Debts Expense(Dr)and Allowance for Doubtful
Debts (Cr) accounts.

Statement of Financial Position (Dec 31):

LO4: Allowance method Journal entries:

b. Recording actual uncollectable in Allowance for Doubtful Debts (Dr) and Accounts
Receivable (Cr) accounts.

Statement of Financial Position: Dec 31, 2022, Vs. Mar 1 2023

LO4: Allowance method

c. Recording recovery of an uncollectable account Two journal entries:

LO5: Estimating the allowance for bad debts.

Methods:

a) The percentage of net sales.

Example:

Mick is an electrician who owns and runs his own business named ‘Mick’s Electrical
Services’. At the end of the first year of operations in December 2022, Mick estimates that
12% of its $7,000 net credit sales will prove uncollectable.

Required:
• How much is the estimated uncollectable (allowance for doubtful debts)?

Answer:
• $7,000 x 12 /100 = $840

Note: Note that is example is only for calculating the estimated uncollectable, and recordings
will eventually be made.

LO5: Estimating the allowance for bad debts.

Methods:

b) Ageing of accounts receivable.

Estimation is based on the age of the customers (debtors), i.e.., length of time owing, with
older accounts more likely to become bad.

LO5: Estimating the allowance for bad debts.

b) Ageing of accounts receivable.

LO5: Estimating the allowance for bad debts.

 If no existing doubtful debts, the following adjusting entry is required: Dr Bad debt
expense 26,170.

Cr Allowance for doubtful debts 26,170

 If there was existing balance of the allowance account of say $12000 (Cr), the
following adjusting entry is required:

Total: $26,170, which represents the required balance in allowance for doubtful debts at year-
end!

LO6: Managing receivables.

  If no existing doubtful debts, the following adjusting entry is required:
Dr Bad debt expense 26,170 Cr Allowance for doubtful debts 26,170

 If there was existing balance of the allowance account of say $12000

(Cr), the following adjusting entry is required Bad debt expense 14,170
Cr Allowance for doubtful debts $14,170

• What if the existing balance was$12,000 (Dr)? Dr Bad debt expense 38,170 Cr
Allowance for doubtful debts 38,170
Accounting in Governance study notes
Week 5 Lecture 5

Learning objectives

1. Identify the differences between a service business and a merchandising business.

2. Understand the differences between the perpetual and periodic inventory systems.

3. Terms relating to inventory.

4. Prepare journal entries for inventory transactions under both perpetual and periodic
inventory systems.

5. Calculate cost of sales under the periodic inventory system.

6. Understand a fully classified Statement of Profit or Loss for a merchandising

business.

LO1: Service Vs. Merchandising business

LO1: Merchandising businesses

Merchandising businesses buy and resell inventory. Revenues are referred to as sales
(revenue).
Expenses are divided into two categories:

 COST OF SALES

 OPERATING EXPENSES.

LO2: Inventory systems

Perpetual System:

 Detailed records of the cost of each inventory purchased and sold is maintained.

 Records continuously show the inventory that should be on hand.

 Suitable for low volume and high value inventories: e.g. car dealerships, furniture
stores.

 Use of bar codes and optical scanners has led to wide use:e.g. supermarkets,
department stores.
LO2: Inventory systems

Periodic system:

 Inventory system in which detailed records are not maintained.

 Cost of sales is determined only at end of accounting period by a physical inventory

count (i.e., stocktake).

 Used widely by small businesses: e.g. convenience stores, cafes.

LO2: Inventory systems

LO3: Terms

Freight cost
  Cost of freight is added to the cost of inventory where cost is charged to buyer. Cost is
allocated to Freight-in account and is part of cost of sales.

 Freight costs incurred by the seller are an operating expense to the seller. These costs
are included as part of delivery or freight-out expenses.

A sales return is the return of goods by the customer. The customer will receive a
refund in the form of either credit note or cash.

A sales allowance occurs where the customer keeps the goods and a reduction in price
is granted. A purchase return is the return of goods to the supplier.

LO3: Terms

Purchase discounts

Settlement discounts (discount received) are discounts given by suppliers for prompt payment
of account.

• Example:
– Sauk Stereo settles account outstanding of $3500 and receives discount of $70

due to the terms of 2/7, n/30.

Trade discounts are a % reduction in the list price of inventory sold. • Example:

– List price quoted is $5000 and trade discount given of 10% (assuming perpetual inventory
system is used).

LO3: Terms

Sales discounts (discount allowed)

Are discounts given to customers for prompt settlement of their accounts.

• Example:
LO4: Recording purchases of inventory: Perpetual Vs. Periodic

LO5: P/L statement - Cost of sales

Perpetual system: cost of sales is maintained and available.

Periodic system: have to physically count the ending stock and calculate COS.

Cost of goods purchased = Purchases – Purchase returns and allowances + Freight-in

LO5: P/L statement - Operating expenses

Selling expenses:

cost of making the sale

e.g. advertising, delivery expenses.

Administration expenses:

cost of operating activities of the general, accounting and personnel offices

e.g. salaries, rent.

Financial expenses:

costs of financing the business

e.g. interest expense, discounts allowed.

LO6: P/L Statement – Perpetual system

LO6: P/L Statement – Periodic system
More detail is required in the periodic system.

Detailed operating expense categories are not given here, due to space limit.

SUMMARY - PERPETUAL

 Involves keeping a running record of each purchase and sale

 The inventory account and COS account is updated after every purchase or sale

 As a result, the balance in the inventory account is the ENDING inventory amount.

 A stocktake is only performed to verify the accuracy of this recorded ending

inventory

 If the recorded inventory and the stocktake differ, then an entry to record the correct
amount needs to be processed
SUMMARY - PERIODIC

 No running record of each purchase and sale

 Additional inventory purchased is recorded in the “Purchases” account, instead of the

Inventory account

 The balance in the inventory account therefore does not change until the end of the
accounting period

 A stocktake is performed to determine the closing inventory balance

 This closing balance is then used to determine the Cost of Sales