Accounting in action

WHAT IS ACCOUNTING?
LO1

Accounting is an information system that

• Identifies
• Records
• Communicates
the economic events of an organisation to
interested users

PowerPoint presentation by Dr Anne

2
Abraham, University of Western Sydney
 WHAT IS ACCOUNTING?
continued

The Accounting Process

PowerPoint presentation by Dr Anne 3
3
Abraham, University of Western Sydney
 Why is accounting important?
LO2
• It assists people to make decisions about the
allocation of scarce resources
• It provides information to assist users to
understand the past, present and future
position of an entity
• It is a means of measuring business activity
and communicating this information to
decision makers

PowerPoint presentation by Dr Anne

4
Abraham, University of Western Sydney
The role of corporate governance in enhancing
LO3
the quality of financial reporting
• Corporate governance is the system in which entities
are directed, managed and administered
• It concerns
– the decision-making processes of an entity
– ensuring alignment between the goals of managers and
shareholders
• Better quality accounting information expected to be
provided to shareholders if these are adopted

PowerPoint presentation by Dr Anne

5
Abraham, University of Western Sydney
 Who uses accounting data?
LO4

Internal users External users

• Managers who plan,
organise and run the
business
• e.g., marketing managers,
production supervisors,
chief financial officers,
other employees
• Investors to make decisions
to buy, hold or sell shares
• Creditors to evaluate risks
of giving credit and lending
money
– e.g., suppliers, bankers
• Government and regulatory
bodies
– e.g., SEC, BIR, Local
Municipality

PowerPoint presentation by Dr Anne

6
Abraham, University of Western Sydney
 Brief history of accounting
• Origins attributed to 1494 work of Luca Pacioli
• Separation of owners and managers led to the
need to report on financial status
– Industrial revolution of 19th century
– Emergence of large entities
• More complex transactions necessitated for
reporting improvements
• Computers are the drivers of the present
information age
PowerPoint presentation by Dr Anne
7
Abraham, University of Western Sydney
Distinguishing between bookkeeping
and accounting
• Bookkeeping
– Involves only recording of economic events
– Only one part of accounting
• Accounting
– Entire process of identifying, recording and
communicating economic events
– Can be divided into
• Financial accounting
• Managerial accounting
PowerPoint presentation by Dr Anne
8
Abraham, University of Western Sydney
 THE BUILDING BLOCKS
OF ACCOUNTING
• Ethics
LO5
– The standards of conduct by which actions are
judged as right or wrong
• Sustainability reporting LO6
– Meeting the needs of the present without
compromising the ability of future generations to
meet their own needs
– Variously called
• Corporate social responsibility reporting
• Triple bottom line reporting
PowerPoint presentation by Dr Anne
9
Abraham, University of Western Sydney
 Generally accepted accounting
LO7 principles (GAAP)
• Philippine Accounting Standards Board (PASB)
• International Financial Reporting Standards
(IFRS )
• Cost principle states assets should be recorded
at their historical cost

PowerPoint presentation by Dr Anne

10
Abraham, University of Western Sydney
LO8
Assumptions
• Monetary unit assumption
– Only data that can be expressed in terms of
money is included in the accounting records
• Economic entity assumption
– Can be any organisation or unit in society
– Activities of the entity must be kept separate and
distinct from activities of the owner and all other
economic entities

PowerPoint presentation by Dr Anne

11
Abraham, University of Western Sydney
 Assumptions continued
• Types of business entities
– Proprietorships
• Owned by one person
• e.g. beauty salons, book stores, dentists
– Partnerships
• Owned by more than one person
• e.g. accountants, lawyers, doctors
– Companies
• Organised as a separate legal entity and owned by
shareholders
• San Miguel, PAL, Chevron
PowerPoint presentation by Dr Anne
12
Abraham, University of Western Sydney
 Basic accounting equation
LO9

• The basic accounting equation provides the

underlying framework for recording and
summarising the economic events of an entity
OWNER’S
ASSETS = LIABILITIES +
EQUITY

PowerPoint presentation by Dr Anne

13
Abraham, University of Western Sydney
Basic accounting equation continued
• Assets
– Resources owned by a business
– Used in carrying out such activities as production,
consumption and exchange
• Liabilities
– Claims against assets
– Consist of existing debts and obligations

PowerPoint presentation by Dr Anne

14
Abraham, University of Western Sydney
Basic accounting equation continued
• Owner’s equity
– Represents the ownership claim to total assets
OWNER’S
ASSETS – LIABILITIES =
EQUITY

– Owner’s equity is increased by investments by the

owner and by revenue
– Owner’s equity is decreased by drawings and
expenses
PowerPoint presentation by Dr Anne
15
Abraham, University of Western Sydney
 USING THE BUILDING BLOCKS
LO10
• A transaction
– is a record of an economic event of an entity
– may be internal or external
– affects two or more components of the basic
accounting equation
• Transaction analysis is the process of
identifying the specific effects of transactions
and events on the accounting equation

PowerPoint presentation by Dr Anne

16
Abraham, University of Western Sydney
Transaction identification process

PowerPoint presentation by Dr Anne 17

17
Abraham, University of Western Sydney
 Transaction analysis
Example
• Loc Nguyen decides to open a computer
programming service which he names
Softbyte
(1) On 1 September, he invests $15 000 cash in the
business
Assets = Liabilities + Owner’s Equity
L. Nguyen,
Cash = Capital
(1) +$15 000 = +$15 000 Investment

PowerPoint presentation by Dr Anne

18
Abraham, University of Western Sydney
 Transaction analysis continued
(2) Softbyte purchases computer equipment for
$7000 cash
Assets = Liabilities + Owner’s Equity
L. Nguyen,
Cash + Equipment = Capital
Old balance $15 000 $15 000
(2) -7 000 +$7 000
New balance $ 8 000 + $7 000 = $15 000
$15 000 $15 000

PowerPoint presentation by Dr Anne

19
Abraham, University of Western Sydney
 Transaction analysis continued
(3) Softbyte purchases $1600 supplies on credit
from Acme Supply Company
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $8 000 $7 000 $15 000
(3) +$1 600 +$1 600
New bal. $8 000 + $1 600 + $7 000 = $1 600 + $15 000
$16 600 $16 600

PowerPoint presentation by Dr Anne

20
Abraham, University of Western Sydney
 Transaction analysis continued
(4) Softbyte receives $1200 cash from customers for
services provided
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $8 000 $1 600 $7 000 $1 600 $15 000
(4) +1 200 +1 200 Service Revenue
New bal. $9 200 + $1 600 + $7 000 = $1 600 + $16 200
$17 800 $17 800

PowerPoint presentation by Dr Anne

21
Abraham, University of Western Sydney
 Transaction analysis continued
(5) Softbyte receives a bill for $250 for advertising
and decides to pay later
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $9 200 $1 600 $7 000 $1 600 $16 200
(5) + 250 - 250 Advertising Exp
New bal. $9 200 + $1 600 + $7 000 = $1 850 + $15 950
$17 800 $17 800

PowerPoint presentation by Dr Anne

22
Abraham, University of Western Sydney
 Transaction analysis continued
(6) Softbyte provides $3500 of services for
customers of which $1500 is for cash and the
rest is on account
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 200 $1 600 $7 000 $1 850 $15 950
(6) +1 500 +2 000 +3 500 Service Rev
New bal. $10 700 + $2 000 + $1 600 + $7 000 = $1 850 + $19 450
$21 300 $21 300

PowerPoint presentation by Dr Anne

23
Abraham, University of Western Sydney
 Transaction analysis continued
(7) Paid cash for monthly expenses: Store rent $600,
Salaries $900, Utilities $200
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $10 700 $2 000 $1 600 $7 000 $1 850 $19 450
(7) -1 700 - 600 Rent Exp
- 900 Salaries Exp
- 200 Utilities Exp
New bal. $ 9 000 + $2 000 + $1 600 + $7 000 = $1 850 + $17 750
$19 600 $19 600

PowerPoint presentation by Dr Anne

24
Abraham, University of Western Sydney
 Transaction analysis continued
(8) Softbyte pays its $250 advertising bill in cash This
was previously recorded as an Accounts Payable in
(5)
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 000 $2 000 $1 600 $7 000 $1 850 $17 750
(8) - 250 - 250
New bal. $ 8 750 + $2 000 + $1 600 + $7 000 = $1 600 + $17 750
$19 350 $19 350

PowerPoint presentation by Dr Anne

25
Abraham, University of Western Sydney
 Transaction analysis continued
(9) Softbyte receives $600 in cash from customers
who had been billed for services in (6)
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 8 750 $2 000 $1 600 $7 000 $1 600 $17 750
(8) + 600 - 600
New bal. $ 9 350 + $1 400 + $1 600 + $7 000 = $1 600 + $17 750
$19 350 $19 350

PowerPoint presentation by Dr Anne

26
Abraham, University of Western Sydney
 Transaction analysis continued
(10) Loc Nguyen withdraws $1300 cash from
Softbyte for his personal use
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 350 $2 000 $1 600 $7 000 $1 600 $17 750
(9) -1 300 -1 300 Drawings
New bal. $ 8 050 + $1 400 + $1 600 + $7 000 = $1 600 + $16 450
$18 050 $18 050

PowerPoint presentation by Dr Anne

27
Abraham, University of Western Sydney
 FINANCIAL STATEMENTS
LO11

• Four financial statements are prepared from

the summarised accounting data
• Each statement provides management,
owners and other interested parties with
relevant financial information
• Each set of financial statements is
accompanied by explanatory notes and
supporting schedules that are an integral part
of the statements
PowerPoint presentation by Dr Anne
28
Abraham, University of Western Sydney
FINANCIAL STATEMENTS continued
1. Statement of comprehensive income
– Presents income and expenses
– Reports profit (or loss) for a specific period of time
2. Statement of changes in equity
– Summarises the changes in owner’s equity for a
specific period of time

PowerPoint presentation by Dr Anne

29
Abraham, University of Western Sydney
FINANCIAL STATEMENTS continued
3. Statement of financial position
– Reports the assets, liabilities and owners equity at
a specific date
4. Statement of cash flows
– Summarises information about the cash inflows
(receipts) and cash outflows (payments) for a
specific period of time

PowerPoint presentation by Dr Anne

30
Abraham, University of Western Sydney
 Income Statement
SOFTBYTE
Income Statement
for the month ended 30 September 2010

Income
Service revenues $ 4 700
Expenses
Salaries expense $900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1 950
Profit $ 2 750
PowerPoint presentation by Dr Anne
31
Abraham, University of Western Sydney
Statement of Changes in Equity

SOFTBYTE
Statement of Changes in Equity
for the month ended 30 September 2010

L. Nguyen, Capital 1/09/09 $ 0

Add: Investments $15 000
Net profit 2 750 17 750
Less: Drawings 1 300
L. Nguyen, Capital 30/09/10 $16 450

PowerPoint presentation by Dr Anne

32
Abraham, University of Western Sydney
Statement of Financial Position
SOFTBYTE
Statement of Financial Position
as at 30 September 2010
Assets
Cash $ 8 050
Accounts receivable 1 400
Supplies 1 600
Equipment 7 000
Total assets $18 050
Liabilities and owner’s equity
Liabilities
Accounts payable $ 1 600
Owner’s Equity
L. Nguyen, Capital 16 450
Total liabilities and
PowerPoint owner’s
presentation equity
by Dr Anne
Abraham, University of Western Sydney
$18 050 33
 Statement of Cash Flows
SOFTBYTE
Statement of Cash Flows
for the month ended 30 September 2010
Cash flows from operating activities
Cash receipts from customers $ 3 300
Cash payments for expenses (1 950)
Net cash provided by operating activities $ 1 350
Cash flows from investing activities
Purchase of equipment (7 000)
Cash flows from financing activities
Investments by owner 15 000
Drawings by owner (1 300) 13 700
Net increase in cash 8 050
Cash at beginning of period 0
Cash at end of period
PowerPoint presentation by Dr Anne $ 8 05034
Abraham, University of Western Sydney
 Interrelationship
of financial statements
• Profit must be computed first, so the income
statement is prepared first
• The statement of changes in financial position
depends on results of income statement and
statement of changes in equity
• The ending cash figure in the statement of
cash flows is reported in the statement of
financial position

PowerPoint presentation by Dr Anne

35
Abraham, University of Western Sydney
Interrelationships for Softbyte
• Profit of $2750 shown on income statement is
added to the beginning balance of owner’s
capital in statement of changes in equity
• Ending owner’s capital of $16 450 is reported
on the statement of financial position
• Ending cash of $8050 on the statement of
cash flows matches cash figure on the
statement of financial position

PowerPoint presentation by Dr Anne

36
Abraham, University of Western Sydney
Interrelationships for Softbyte

PowerPoint presentation by Dr Anne

37
Abraham, University of Western Sydney
Accounting in action

end