ACCT1101 Lecture 1

Chapter 1:

- Accounting defined:
o Defined as the process of identifying, measuring, recording, and communicating
economic information.
o Identification involves observing economic events.
o External transactions involve economic events between one entity and another
entity.
o Measurement must take place before the effects of transactions can be recorded.
o Recording provides a history of the economic activities of a particular entity

- External users
o Should I invest?
o Can the business pay?
 Wages? Loans?
o Will they make a profit?
o Are they behaving ethically?
o Is the business socially and environmentally friendly?

- Special purpose financial statements

- General purpose financial statements:

o It consists of an income statement, a balance sheet

Assets = Liability + Equity

Profit = Income – Expenses

Chapter 2:

- Single proprietorship or sole trader:

o owned by one person
o Simple to set up
o Common form of business structure
o Separate accounting entity
- Partnership:
o Owned by two or more partners
o Simple to set up
o Separate accounting entity, not separate legal entity
- Company or corporation
 o Owned by shareholders
o Separate legal entity
o Limited liability
- Role of managers:
o Management decision process:
 Planning
 Organising
 Directing
 Controlling

Basic financial statements

- Financial performance:
o The ability of the entity to utilise its assets effectively and efficiently.
o Business goals (profit)
- Financial positions
o The financial resources controlled by the entity.
o Financial structure
o Measuring of liquidity and solvency
- Cash flow statements

Assets:
o Present economic resources controlled by the entity.
o Result of past events.
o Economic resource is a right that has the potential to produce economic benefits.
Liabilities
o Present obligations of an entity
o Arising from past transactions or events
o Settlement is expected to result in an outflow o resources from the entity.
Income
o Increases in economic benefit.
o Inflows or enhancements of assets
o Decreases of liabilities.
o Results in equity.
o Separate to those relating to equity participants.
Expenses
o Decrease in economic benefits.
o Outflows or incurrences of liabilities
o result in decrease in equity.
o separate to those relating to equity participants.

Accrual basis assumptions:

- accounting is an event driven process

- the effects of transactions are recognised when they occur, not when the cash is
received/paid
 - it is argued in the Framework:
o the accrual basis provides information about the transactions and other event

Going concern assumption

- assume an entity will continue to operate in the future

- unless there is evidence to the contrary

The reporting period:

- life of the entity broken up into equal time intervals

- every 12 months for tax purposes

Fundamental qualitative characteristics:

- relevance
o useful for decision making
o influence economic decisions by users
- faithful representation
o info is presented faithfully without bias or undue error
o economic substance over form
- Comparability and consistency
o Users can identify similarities and differences between two sets of economic data
- Verifiability
o Independent observers can reach consensus that information faithfully represents
who is claims to