Transition Accounting

Units 3 and 4

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• .

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 Definition of Accounting
• Accounting is the process of collecting and
recording financial data; reporting, analysing
and interpreting financial information; and
advising users about possible courses of
action to assist decision-making.

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 THE ACCOUNTING PROCESS

Communication
Identification Recording Accounti
ng
Reports
Ge
r
7 M ald Tr
e
Fre acCau nholm
d er l
icto y Driv
nN e
B

200
0

Prepare
accounting reports

Select economic events Record, classify,

(transactions) and summarize

Analyse and interpret

for users
 QUESTIONS ASKED BY INTERNAL USERS

What is the cost of manufacturing

Is cash sufficient to pay bills? each unit of product?

Can we afford to give employees Which product line is the most

pay raises this year? profitable?
QUESTIONS ASKED BY EXTERNAL USERS

How does the company compare in

Is the company earning size and profitability with its
satisfactory income? competitors?
What do we do
if they catch
us?

Will the company be able to pay its debts as they come due?
Answering Financial Questions

The information to answer these questions

come from Accountants.

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 Users of financial information
The users of accounting information include:
• the owner
• Accounts Receivable – a customer to whom
inventory has been sold on credit, and the amount
is still owing for these sales.
• Accounts Payable - a supplier from whom goods or
services have been purchased on credit, and the
amount is still owing.
• banks and other lenders
• prospective owners
• the government through the Australian Taxation Office
(ATO).
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 Users of financial information
• The Year 12
course
concentrates
specifically on
trading
businesses. 9
 The Accounting process
• The Accounting process is used to generate financial information from
financial data leading to the provision of advice to assist decision-making.
• The Accounting process involves four ‘phases’ or ‘stages’:

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 The Accounting process
Stage 1 - collecting financial data. In the form of source
documents – receipts, cheque butts, invoices, etc - which
provide both the evidence that a transaction has occurred
and the details of the transaction itself.

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 The Accounting process
Stage 2 - recording financial data. Once the source
documents have been collected, the data each contains
must be written down or noted in a more useable form,
or ‘recorded’, using Accounting records such as
journals, ledgers, or inventory cards.

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 The Accounting process
Stage 3 - reporting financial information. This involves
taking the information generated by the Accounting records
and preparing financial statements that communicate
financial information to the owner in an understandable
form.

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 The Accounting process
Stage 4 - advising the owner on an appropriate course
of action. An accountant is expected to provide business
owners with both accounting reports and a range of
options appropriate to their aims/objectives, together with
recommendations as to the suitability of those aims/
objectives.

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 Accounting assumptions
Accounting assumptions are the generally
accepted rules governing the way accounting
information is generated, and include:

• Period assumption
• Accrual basis assumption.
• Going concern assumption
• Entity assumption

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 Accounting assumptions
Period assumption – Reports are prepared for a particular period of time, such as a month or a
year, in order to obtain comparability of results.
Profit determination involves a process of recognising the revenue for a period and deducting
the expenses incurred for that same period.
A distinction can be made between assets, which will provide benefit to future reporting
periods, and expenses that are totally consumed within one reporting period.

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 Accounting assumptions
Accrual basis assumption – Revenue is recognised when it is earned. Expenses are
recognised when they are incurred.

Accrual basis profit for an accounting period is determined by subtracting expenses incurred
for a period from revenue earned in that same period.

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 Accounting assumptions
Going concern assumption – the assumption that the
business will continue to operate in the future, and its records
are kept on that basis. It is assumed that the entity will not be
wound up in the near future but will continue its activities.

Accounting entity assumption – the assumption that the records of assets,

liabilities and business activities of the entity are kept completely separate from
those of the owner of the entity as well as from those of other entities. A separate
set of accounting records is maintained for each entity, and the financial
statements prepared provide information on that entity only.

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 Qualitative characteristics

Qualitative characteristics are the qualities we would like our financial reports to possess, and include:
•Timeliness
•Understandability.
•Relevance
•Faithful representation
•Comparability
•Verifiability

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 Qualitative characteristics
• Timeliness – having information available to decision-makers in time to be capable of influencing their decisions.
• Having information available sooner, rather than later, can enhance its capacity to influence decisions, and a
lack of timeliness can rob information of its potential usefulness.
• Generally, the older the information, the less useful it is.

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 Qualitative characteristics
• Understandability – requires financial information to be comprehensible to
users with reasonable knowledge of business and economic activities. To
be understandable, information should be presented clearly and concisely.

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 Qualitative characteristics
• Relevance – information is capable of making a difference to the decisions made by users.
• Relevance requires financial information to be related to an economic decision.
• Information is relevant to a decision if it helps users to form predictions about the outcomes of past, present
or future events, and/or confirms or changes their previous evaluations by providing suitable feedback.

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 Qualitative characteristics
• Faithful representation – The information reported must be a faithful
representation of the real-world economic event it represents. The
user is assured that the information presented is complete, free from
material error and neutral (without bias).

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 Qualitative characteristics
•Comparability – enables users to identify and understand similarities in, and differences among, items.
Information about an entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another date.
Can the reports be compared over time?

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 Qualitative characteristics
•Verifiability – the ability to ensure that different knowledgeable and independent observers can reach a
consensus (arrive at the same conclusion) that a particular depiction of an event is faithfully represented.
Verifiability is maintained by retention of source documents used to record the transaction and checked
through auditing. The purpose of verifiability is to hold the accounting professional accountable for their
work.

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 BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

 Elements of Accounting reports
Accounting reports should include:

•assets
• liabilities
• owner’s equity
• revenues
• expenses.

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 Elements of Accounting reports
• Asset – a present economic resource controlled by the entity as a result of past events.
• An economic resource is a right that has the potential to produce future economic benefits.
• Current assets are cash and other types of assets held primarily for the purpose of sale or trading, or are
reasonably expected to be converted to cash, sold or consumed by a business within 12 months after the end
of the reporting period.
• Non-current assets are expected to be used by the business entity for a number of years and are not held for
resale.

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 Elements of Accounting reports
• Liability – a present obligation of the entity to transfer an economic resource as a result of past
events.
• Current liabilities are obligations of the entity that are reasonably expected to be settled
within 12 months after the end of the reporting period.
• Non-current liabilities are obligations of the entity that are not required to be settled
within 12 months after the end of the reporting period.

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 Elements of Accounting reports
• Owner’s Equity – the residual interest in the
assets of the entity after deducting all its
liabilities.

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 OWNER’S EQUITY

 Owner’s Equity is equal to total assets minus

total liabilities.
 Owner’s Equity represents the ownership
claim on total assets.
 Subdivisions of Owner’s Equity:
1. Capital
2. Drawings
3. Revenues
4. Expenses
 INCREASES AND DECREASES IN
OWNER’S EQUITY

INCREASES DECREASES

Investments
Investments Withdrawals
Withdrawals
by
byOwner
Owner by
byOwner
Owner
Owner’s
Equity
Revenues
Revenues Expenses
Expenses
 Elements of Accounting reports
• Revenue – increases in assets or decreases in liabilities that result in increases in owner’s
equity, other than those relating to contributions from the owner.

• Revenue arises in the course of the ordinary activities of a business and includes items such
as sales, fees, interest, dividends, royalties and rent.

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 Elements of Accounting reports
• Expense – decreases in assets or increases in liabilities that result in a decrease in owner’s equity, other than
those relating to distributions to the owner.
• Expenses encompass losses as well as those expenses that arise in the course of the ordinary activities of the
business. Expenses that arise in the course of the ordinary activities of the entity include, for example, cost
of sales, wages and depreciation.

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TRANSACTION ANALYSIS

Marc Doucet decides to open a

computer programming service.

BANK

Softbyt
e
 TRANSACTION ANALYSIS
TRANSACTION 1
On September 1, he invests $15,000 cash in the
business, which he names Softbyte.

Trans. # Assets = Liabilities + Owner's Equity

M. Doucet,
Cash Supplies Equipment Creditors Capital
(1) 15,000 = 15,000 Investment

There
Thereisisan
anincrease
increasein
inthe
theasset
assetCash,
Cash,$15,000,
$15,000,and
and
an
anequal
equalincrease
increasein
inthe
theowner’s
owner’sequity,
equity, M.
M.Doucet,
Doucet,
Capital,
Capital,$15,000.
$15,000.
 TRANSACTION ANALYSIS
TRANSACTION 2

Softbyte purchases computer equipment for $7,000 cash.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Creditors
Payable Capital
15,000
15,000 15,000 Investment
15,000
(2) -7,000 7,000
Balance 8,000 + 7,000 = 15,000

Cash
Cashisisdecreased
decreased$7,000,
$7,000,and
andthe
theasset
asset
Equipment
Equipmentisisincreased
increased$7,000.
$7,000.
 TRANSACTION ANALYSIS
TRANSACTION 3
Softbyte purchases computer paper and supplies expected to last
several months from Chuah Supply Company for $1,600 on account.

Trans. # Assets == Liabilities

Liabilities ++ Owner's
Owner's Equity
Accounts M.
M. Doucet,
Cash Supplies Equipment
Equipment Creditors
Payable Capital
Balance 8,000
8,000 7,000
7,000 15,000
15,000
(3) 1,600 1,600
Balance 8,000 + 1,600 + 7,000 = 1,600 + 15,000

The
Theasset
assetSupplies
Suppliesisisincreased
increased$1,600,
$1,600,and
andthe
theliability
liability
Creditors
Creditorsisisincreased
increasedby
bythe
thesame
sameamount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Creditors
Payable Capital
Balance 8,000
8,000 1,600
1,600 7,000
7,000 1,600
1,600 15,000
15,000
(4) 1,200 1,200 Service Revenue
Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200

Cash
Cashisisincreased
increased$1,200,
$1,200,and
and
M.
M.Doucet,
Doucet,Capital
Capitalisisincreased
increased$1,200.
$1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5
Softbyte receives a bill for $250 for advertising its business
but pays the bill on a later date.

Trans. # Assets = Liabilities + Owner's

Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Creditors
Payable Capital
Balance 9,200 +
9,200 1,600 +
1,600 7,000 =
7,000 1,600 +
1,600 16,200
16,200
(5) 250 -250 Advertising Expense
Balance 9,200 1,600 7,000 1,850 15,950

Creditors
Creditorsisisincreased
increased$250,
$250,and
andM.
M.Doucet,
Doucet,
Capital
Capitalisisdecreased
decreased$250.
$250.
 TRANSACTION ANALYSIS
TRANSACTION 6
Softbyte provides programming services of $3,500 for
customers and receives cash of $1,500, with the balance
payable on account.
Trans. # Assets == Liabilities
Liabilities ++ Owner's Equity
Owner's
Account Accounts M.
M. Doucet,
Doucet,
Cash Receivable
Debtors Supplies Equipment
Supplies Equipment Payable
Creditors Capital
Capital
Balance 9,200
9,200 ++ 00 ++ 1,600
1,600 ++ 7,000
7,000 == 1,850
1,850 15,950
15,950
(6) 1,500 2,000 3,500 Service Revenue
Balance 10,700 2,000 1,600 7,000 1,850 19,450

Cash
Cashisisincreased
increased$1,500;
$1,500;Debtors
Debtorsisisincreased
increased
$2,000;
$2,000;and
andM.
M.Doucet,
Doucet,Capital
Capitalisisincreased
increased
$3,500.
$3,500.
 TRANSACTION ANALYSIS
TRANSACTION 7
Expenses paid in cash for September are store rent,
$600, salaries of employees, $900, and utilities, $200.

Trans. # Assets = Liabilities + Owner's Equity

Account Accounts M. Doucet,
Cash Debtors
Receivable Supplies Equipment Creditors
Payable Capital
Balance 10,700
10,700 2,000
2,000 1,600
1,600 7,000
7,000 1,850
1,850 19,450
19,450
(7) -600 -600 Rent Exp.
-900 -900 Salaries Exp.
-200 -200 Utilities Exp.
Balance 9,000 + 2,000 + 1,600 + 7,000 = 1,850 + 17,750

Cash
Cashisisdecreased
decreased$1,700
$1,700and
andM.
M.Doucet,
Doucet,
Capital
Capitalisisdecreased
decreasedthe
thesame
sameamount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 8
Softbyte pays its advertising bill of $250 in cash.

Trans. # AccountAssets = Liabilities

Accounts + M. Doucet,
Owner's Equity
Cash Receivable Supplies Equipment Payable M.Capital
Doucet,
Balance Cash
9,000 Debtors
2,000 Supplies
1,600 Equipment
7,000 Creditors
1,850 Capital
17,750
Balance 9,000 2,000 1,600 7,000 1,850 17,750
(8) -250 -250
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750

Cash
Cashisisdecreased
decreased$250
$250and
andCreditors
Creditorsisis
decreased
decreasedthe
thesame
sameamount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 9
The sum of $600 in cash is received from customers who
have previously been billed for services in Transaction 6.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Debtors
Receivable Supplies Equipment Creditros
Payable Capital
Balance 8,750 +
8,750 2,000 +
2,000 1,600 +
1,600 7,000 =
7,000 1,600 +
1,600 17,750
17,750
(9) 600 -600
Balance 9,350 + 1,400 + 1,600 + 7,000 = 1,600 + 17,750

Cash
Cashisisincreased
increased$600
$600and
andDebtors
Debtorsisis
decreased
decreasedby bythe
thesame
sameamount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 10
Marc Doucet withdraws $1,300 in cash from
the business for his personal use.

Trans. # Assets = Liabilities

Liabilities ++ Owner's
Owner's Equity
Account Accounts
Accounts M. Doucet,
Cash Debtors
Receivable Supplies Equipment
Equipment Payable
Payable Creditors
Capital
Balance 9,350
9,350 1,400
1,400 1,600
1,600 7,000
7,000 1,600
1,600 17,750
17,750
(10) -1,300 -1,300 Doucet, Drawings
Balance 8,050 + 1,400 + 1,600 + 7,000 = 1,600 + 16,450

Cash
Cashisisdecreased
decreased$1,300
$1,300and
andM.
M.Doucet,
Doucet,
Capital
Capitalisisdecreased
decreasedby
bythe
thesame
sameamount.
amount.
 FINANCIAL STATEMENTS

After transactions are identified, recorded,

and summarized, four financial statements
are prepared from the summarized
accounting data:
1. An income statement presents the
revenues and expenses and resulting
net income or net loss of a company for a
specific period of time.
 FINANCIAL STATEMENTS

In addition to the income statement and statement of

owner’s equity, two additional statements are
prepared:
2. A balance sheet reports the assets, liabilities, and
owner’s equity of a business enterprise at a
specific date.
3. A cash flow statement summarizes information
concerning the cash inflows (receipts) and
outflows (payments) for a specific period of
time.
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS

SOFTBYTE
Income Statement
For the Month Ended September 30, 2018
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $ 2,750

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the Balance Sheet .
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS

Owner’s capital SOFTBYTE

of $16,450 at Balance Sheet
the end of the September 30, 2018
reporting Assets
period is shown Cash $ 8,050
on the balance Debtors 1,400
sheet. Cash of Supplies 1,600
$8,050 on the Equipment 7,000
balance sheet is Total assets $ 18,050
reported on the
cash flow Liabilities and Owner's Equity
statement. Liabilities
Creditors $ 1,600
Owner's Equity
M. Doucet, Capital 16,450
Total liabilities and owner's equity $ 18,050
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS

SOFTBYTE
Cash Flow Statement
Cash of For the Month Ended September 30, 2018
$8,050 on the Cash flows from operating activities
balance sheet Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950) $ 1,350
is shown as Net cash provided by operating activities
the final total Cash flows from investing activities
of the cash Purchase of equipment $ (7,000)
column Net cash used by investing activities (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by financing activities 13,700
Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050
 Holiday Homework

Read and summarise Chapters 1 and 2 of Cambridge

Textbook.

Complete chapters 1 and 2 review questions and

exercises.

These will be checked by your teacher first week of

2021.