CH 01

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Learning objectives
• Define the main types of accounting
• Describe how decision makers use accounting information
Chapter 1 • Describe professional career opportunities in accounting

• Describe how accounting is regulated in Australia
• Explain the role of ethics and sustainability in accounting
The role of accounting in business • Identify the three main types of business organisations
1/29/2024 201044 - The role of accounting in business 1 1/29/2024 201044 - The role of accounting in business 2
Learning objectives 1.1. Defining accounting

• Describe the basic accounting principles and their Accounting encompasses the information system that
applications in business
• measures business activity
• Recall the accounting equation and its function
• processes the data into reports
• Apply the accounting equation to analyse transactions
• communicates the results to decision makers
• List the different financial statements and demonstrate how
they are prepared and used
• Use financial statements to evaluate business performance It is divided into two main types, namely
and make decisions • financial accounting
• managerial accounting
Copyright © 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442551923/Horngren, Best, Fraser,
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1.3. The accounting profession:

1.2. Decision makers: The users of Career opportunities
accounting information
• Lucrative career with many opportunities
• Individuals
• Professionally qualified accountants pass the educational and
• Businesses experience requirements of a professional body
• Investors • Professional bodies recognised in Australia include
• Creditors - Institute of Chartered Accountants in Australia
• Government regulatory agencies - CPA Australia
• Tax authorities - Institute of Public Accountants
• Non-profit organisations - Chartered Institute of Management Accountants
• Other users, e.g. employees and labour unions
1.4. Accounting regulation 1.5. Corporate social responsibility

• Financial reports prepared by accountants play a central part in
informing financial decisions
• The ICAA and CPAA have a joint code of ethics for professional
accountants as part of their professional standards
• It includes the following principles
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour
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1.6. Types of business organisations 1.7. Accounting measurements:

Concepts and principles
• The primary objective of external financial reporting is to provide
useful information for making investment and lending decisions
• Useful information must be relevant, valid and reliable
1.7. Accounting measurements: 1.7. Accounting measurements:

Concepts and principles Concepts and principles
• Basic measurement concepts and principles include • The entity concept defines the entity for which accounting data is
collected
- Entity concept
• The accounting period concept defines the unit of time for which
- Accounting period concept accounting data is collected
- Cost principle • The cost principle states that accounting measures are based
- Matching principle upon transaction costs
- Profit recognition principle • The matching principle relates inputs and outputs of goods and
- Conservatism principle services to one another
- Going concern assumption
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1.7. Accounting measurements: 1.8. The accounting equation

Concepts and principles It measures the resources of a business and the claims to those
resources
• The profit recognition principle states that profit should be
recognized when the sales and any other revenues or gains
relating to the relevant activity are earned and can be reliably
measured
• The conservatism principle constrains management’s natural
optimism Assets Liabilities Equity
• The going concern assumption assumes that the business as a
whole will continue operating for the foreseeable future
1.8. The accounting equation 1.8. The accounting equation

• Assets are a resource controlled by the entity as a result of past • Income refers to all increases in equity other than
events and from which future economic benefits are expected to investments by owners
flow to the entity • Revenue is that part of income arising from ordinary
• Liabilities are debts that are payable to outsiders called activities
creditors • Expenses decrease equity by using up assets or increasing
• Equity is the residual interest in the assets of the entity after liabilities in order to deliver goods or services to customers
deducting all of its liabilities
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1.9. Accounting for business 1.9. Accounting for business

transactions transactions
• Accounts record the impact of events that are considered to Transaction 1: Starting the business
affect the value of entities’ assets and liabilities On 1 May 201N, Sheena Bright invests $30,000 of her own
• A transaction is an event that involves at least two parties money to start the business by depositing this amount in a bank
exchanging resources account title ‘Smart Touch’.
• Each transaction affects at least two accounts Transaction 2: Purchase of land
• Some transactions affect only one side of the equation; some Smart Touch purchases land for an office location, paying cash
affect both sides of $20,000.
Transaction 3: Purchase of office supplies
Smart Touch buys stationery and other office supplies,
agreeing to pay $500 within 30 days.
1.9. Accounting for business 1.9. Accounting for business

transactions transactions
Transaction 4: Earning of service revenue Transaction 6: Payment of expenses
Smart Touch earns service revenue by providing training During the month, S.T pay $3,300 in cash expenses: lease
services for clients. Sheena Bright earns $5,500 revenue and expense on a computer, $600; office rent, $1,100; employee
collects this amount in cash. salary (part-time assistant), $1,200; electricity and gas, $400
Transaction 5: Earning of service revenue on credit Transaction 7: Payment of account
Smart Touch performs services for clients who don’t pay S.T pays $300 (pay on account) to the store where it purchased
immediately. In return for its training service, Smart Touch $500 worth of office supplies in transaction 3.
receives clients’ promises to pay $3,000 within one month. Transaction 8: Personal transaction
Sheena Bright remodels her home at a cost of $40,000, paying
cash from personal funds.
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1.9. Accounting for business

1.9. Accounting for business transactions
transactions Assets Liabilities Owners´ Type of
equity owners‘equity
transaction
Transaction 9: Collection on account Cash Land Office Accounts Accounts Sheena
supplies receivable payable Bright, capital
The business collects $1,000 from the client in transaction 5.
(1) +30 000 (1) +30 000 Owner
Transaction 10: Sale of land investment
(2) -20 000 (2) +20 000
S.T sells some land owned by the agency. The sale price of
$9,000 (in cash) is equal to the cost of land to Smart Touch. (3) +500 (3) +500
Transaction 11: Withdrawal of cash (4) +5 500 (4) 5 500 Service revenue
Bright withdraws $2,000 cash from the business for personal

(5) +3 000 (5) +3 000 Service revenue
use.
(6) -600 (6) -600 Expenses
1.9. Accounting for business

transactions Practice Exercise E 1.7
Assets Liabilities Owners´ Type of
equity owners‘equity (b) Increase asset (Accounts Receivable)
transaction
Increase O’E (Service Revenue)
Cash Land Office Accounts Accounts Sheena
(c) Increase asset (Office furniture)
supplies receivable payable Bright,
capital Increase Liability (Accounts Payable)
(6) – 1 100 (6)-1 100 Expense
(d) Increase asset (Cash) - Decrease asset (A/R)
(6) – 1 200 (6) – 1 200 Expense
(e) Decrease asset (Cash) - Decrease liability (A/P)
(6) -400 (6) -400 Expense (f) Increase asset (Cash) - Decrease asset (Land)
(7) -300 (7) -300 (g) Increase asset (Cash) - Increase O’E (Service Revenue)
(9) +1 000 (9) -1 000 (h) Decrease asset (Cash) - Decrease O’E (Rent expense)
(10) +9 000 (10) -9 000 (i) Increase asset (Supplies) - Decrease asset (Cash)
(11) -2 000 (11) -2 000 Drawings
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1.10. Preparing the financial statements: 1.10. Preparing the financial statements:
The users perspective The users perspective
A complete set of financial statements comprise • The Statement of Comprehensive Income presents a summary of
an entity’s income and expenses and all changes in equity, other
• Statement of Comprehensive Income (Income Statement) than new owner investments and drawings, for a specific period of
• Statement of Changes in Equity time
• Statement of Financial Position (Balance Sheet) • The Statement of Changes in Equity shows the changes in
owners’ equity during a specific time period
• Statement of Cash Flows
• The Statement of Financial Position lists all the entity’s assets,
• Note
liabilities and owners´ equity as at a specific date
• The Statement of Cash Flows reports the cash coming in and the
amount of cash going out during a period
1.11. Using financial statements to

1.10. Preparing the financial statements: evaluate business performance and
The users perspective make decisions
Financial statements can be used in several ways, for example
Each financial statement should have a heading showing
• The Statement of Comprehensive Income provides
• the name of the business
information about profitability for a particular period
• the name of the financial statement
• The Statement of Changes in Equity informs users about how
• date or time period covered by the statement much of the earnings were kept and reinvested in the company
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1.11. Using financial statements to 1.11. Using financial statements to

evaluate business performance and make evaluate business performance and make
decisions decisions
Income Statement
Financial statements can be used in several ways, for example SMART TOUCH LEARNING
Income Statement
• The Statement of Financial Position provides valuable For the month ended 31 May 201N
information to financial statement users about the economic
Revenue
resources the company owns (assets) as well as the debts the Service revenue $8 500
company owes (liabilities). Expenses
Salary expense $1 200
• The Statement of Cash Flows provides information about Rent expense, office 1 100
three types of business activities Lease expense, computer 600
Electricity and gas expense 400
Total expenses 3 300
Profit $5 200
1.11. Using financial statements to 1.11. Using financial statements to

evaluate business performance and make evaluate business performance and make
decisions decisions
• Balance Sheet
• Statement of changes in equity
SMART TOUCH LEARNING
SMART TOUCH LEARNING
Statement of changes in equity
Balance Sheet
For the month ended 31 May 201N
As at 31 May 201N
Sheena Bright, capital, 1 May 201N $0
Assets Liabilities
Add: Investment by owner 30 000
Cash $19 900 Accounts payable $200
Profit for the month 5 200
Accounts Receivable 2 000
35 200 Office supplies 500 Owners’equity
Less: Drawings by owner (2 000) Land 11 000 Sheena Bright, capital 33 200
Sheena Bright, capital, 31 May 201N $33 200
Total Assets $33 400 Total Liabilities and $33 400
Owners’ equity
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Summary: Chapter 1 Tasks in class

• Accounting is typically divided into financial accounting and Textbook: Chapter 1
managerial accounting
• Different users review a company’s financial statements for different • Quick Check
reasons
• Starters
• There are several measurement concepts and principles
• The accounting equation measures the resources of a business and • Exercises
the claims to those resources
• Transactions are events involving at least two parties exchanging
resources
• A complete set of financial statements consists of four financial
statements
Tasks at home
1/ Homework:
Textbook: Chapter 1
The end of Chapter 1
• Problems
• Apply The role of accounting in business
2/ Self-study:
Key References [2]: Chapter 1 and Chapter 2

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29/01/2024

Chapter 1 • Describe professional career opportunities in accounting

Learning objectives 1.1. Defining accounting

1.3. The accounting profession:

1.4. Accounting regulation 1.5. Corporate social responsibility

1.6. Types of business organisations 1.7. Accounting measurements:

1.7. Accounting measurements: 1.7. Accounting measurements:

- Going concern assumption

1.7. Accounting measurements: 1.8. The accounting equation

1.8. The accounting equation 1.8. The accounting equation

1.9. Accounting for business 1.9. Accounting for business

• Each transaction affects at least two accounts Transaction 2: Purchase of land

1.9. Accounting for business 1.9. Accounting for business

1.9. Accounting for business

Bright withdraws $2,000 cash from the business for personal

1.9. Accounting for business

1.11. Using financial statements to

1.11. Using financial statements to 1.11. Using financial statements to

1.11. Using financial statements to 1.11. Using financial statements to

Summary: Chapter 1 Tasks in class

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