You are on page 1of 50

Learning Objectives

1. Use accounting vocabulary 2. Apply accounting concepts and principles 3. Use the accounting equation 4. Analyse business transactions 5. Prepare the financial statements 6. Evaluate business performance

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Objective 1

Use accounting vocabulary.

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Accounting...
is an information system that... measures business activities, processes information, and... communicates financial information. And is called the language of business.
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Accounting Information and Its Users
External users make decisions about the entity. e.g. Investors This is Financial Accounting Internal users make decisions for the entity. e.g. Management This is Management Accounting

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Standards of Professional Conduct
ICAA and CPAA¶s Joint Code of Professional Conduct
1. Integrity 2. Objectivity 3. Professional competence and due care 4. Confidentiality 5. Professional behaviour
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Best. Willett: Accounting 6e © 2010 Pearson Australia .The Authority Underlying Accounting Horngren. Fraser.

Types of Business Organisations Proprietorships (sole traders) Partnerships Companies Horngren. Willett: Accounting 6e © 2010 Pearson Australia . Best. Fraser.

Proprietorships  What are some advantages? ± total undivided authority ± no restrictions on type of business ± must be legal  What are some disadvantages? ± unlimited liability ± limitation on size ± fundraising power Horngren. Willett: Accounting 6e © 2010 Pearson Australia . Best. Fraser.

Partnerships  What are some advantages? ± better credit standing . Best.possibly ± more brain power. but consultation with partners required  What are some disadvantages? ± unlimited personal liability for general partners ± need for written partnership agreement Horngren. Willett: Accounting 6e © 2010 Pearson Australia . Fraser.

Companies  ± ± ±  ± ± What are some advantages? separate legal existence limited liability of shareholders transferability of ownership relatively easy What are some disadvantages? separation of ownership and control extensive governmental regulation Horngren. Fraser. Best. Willett: Accounting 6e © 2010 Pearson Australia .

Fraser.Objective 2 Apply accounting concepts and principles. Willett: Accounting 6e © 2010 Pearson Australia . Best. Horngren.

Generally Accepted Accounting Principles  What is the primary objective of financial reporting?  To provide information useful for making investment and lending decisions. Fraser. Horngren. Best. Willett: Accounting 6e © 2010 Pearson Australia .

Willett: Accounting 6e © 2010 Pearson Australia .The Entity Concept Example  Assume that you decide to open up a garage and coffee shop.000 in profits.000.  The garage made $250. Fraser. Horngren. Best. while the coffee shop lost $50.

Willett: Accounting 6e © 2010 Pearson Australia .000. by applying the entity concept we realise that the garage made $250.  However. we would assume that you made $200. Horngren.  Importantly the business activities and the personal affairs of the owner are separate. Best.The Entity Concept Example  How much money did you make?  At a first glance. Fraser.000 while the coffee shop lost $50.000.

The Accounting Period Concept  Or the µaccounting time period concept¶. Willett: Accounting 6e © 2010 Pearson Australia . Fraser. Best.  In Australia many companies prepare their statements for the financial year ± from July 1 to June 30 the following year.  Unit of time for which accounting data is collected and the financial statements prepared. Horngren.

Willett: Accounting 6e © 2010 Pearson Australia . Best.)  Example ± If the garage purchases petrol pumps for $25 000. Fraser. (Reliable and objective. it would record these at the same amount Horngren.The Cost Principle Assets and services acquired should be recorded at their actual cost.

Best. Fraser.  What expenses do you incur to earn the revenue? Horngren.The Matching Principle Relates the inputs and outputs of goods and services to one another. Willett: Accounting 6e © 2010 Pearson Australia .

GAAP recommends the accrual basis of accounting.  Example ± If the garage repairs someone¶s car on credit. Willett: Accounting 6e © 2010 Pearson Australia . Horngren. they would still recognise the income.The Profit Recognition Principle Recognise revenue when it is µearned¶. Fraser. Best.

Conservatism (Prudence) Principle Constrains management¶s natural optimism.  Prevents overstating of profits  Anticipate no profits. Willett: Accounting 6e © 2010 Pearson Australia . Anticipate all losses Horngren. Fraser. Best.

The Going Concern Principle The entity will continue to operate in the future. Best. Willett: Accounting 6e © 2010 Pearson Australia . Fraser. Horngren.

Best.  Australian Accounting Standards Board is responsible for technical accounting standards. Horngren.Australian Accounting Standards  Standards to govern measurement rules and level of disclosure. like much of the rest of the world has adopted International Accounting Standards.  Australia. Willett: Accounting 6e © 2010 Pearson Australia . Fraser.

Best. Fraser. Horngren. Willett: Accounting 6e © 2010 Pearson Australia .Objective 3 Using the accounting equation.

Best.The Accounting Equation Economic Resources Claims to Economic Resources Horngren. Fraser. Willett: Accounting 6e © 2010 Pearson Australia .

Assets  What is an asset?  It is something a company owns which has future economic value. ± land ± building ± equipment ± goodwill Horngren. Fraser. Willett: Accounting 6e © 2010 Pearson Australia . Best.

Willett: Accounting 6e © 2010 Pearson Australia .Liabilities  What is a liability?  ± ± ± It is something a company owes. Fraser. Best. money service ± legal retainers product ± magazines Horngren.

± the same as net assets ± the owner¶s claim on the entity¶s assets Horngren. Best.Owners¶ Equity  What is owners¶ equity?  It is what¶s left of the assets after liabilities have been deducted. Willett: Accounting 6e © 2010 Pearson Australia . Fraser.

Best.Transactions that Affect Owners¶ Equity Horngren. Fraser. Willett: Accounting 6e © 2010 Pearson Australia .

Best. Willett: Accounting 6e © 2010 Pearson Australia . ± sales ± performance of services ± rent received ± interest received Horngren.Revenues  What are revenues?  They are amounts received or to be received from customers for sales of products or services. Fraser.

± salaries and wages ± electricity and gas ± supplies used ± advertising Horngren.Expenses  What are expenses?  They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. Best. Fraser. Willett: Accounting 6e © 2010 Pearson Australia .

Fraser. Horngren. Best. Willett: Accounting 6e © 2010 Pearson Australia .Objective 4 Analyse business transactions.

Willett: Accounting 6e © 2010 Pearson Australia . Best.Accounting for Business Transactions  What is a transaction?  It is any event that both affects the financial position of the business and can be reliably recorded. Horngren. Fraser.

4 She earns and collects $5. 3 She buys office supplies. agreeing to pay $500 in 30 days. Horngren. Best.000 to begin Paula Lee eTravel. paying $20.500 revenues.000 in cash. Fraser. 2 Lee purchases land.Accounting for Business Transactions 1 Paula Lee invests $30. Willett: Accounting 6e © 2010 Pearson Australia .

What is the effect of these transactions on the accounting equation? Horngren. Best. and the client agrees to pay $3.000 within one month. Fraser. Willett: Accounting 6e © 2010 Pearson Australia . she pays $3. 7 Lee pays $300 to the store from which she purchased $500 worth of supplies. 6 During the month.Accounting for Business Transactions 5 Lee performs services.300 for expenses incurred.

000 ± 20.000 + 500 ± 300 + 200 + . Willett: Accounting 6e © 2010 Pearson Australia . Fraser.000 + 500 + 5.200 Horngren.300 ± 300 + $35.000 + 20.500 + 3.Accounting for Business Transactions Assets = Liabilities 1) Cash 2) Cash Land 3) Supplies 4) Cash 5) Receivable 6) Cash 7) Cash Totals + $30.000 ± 3.500 + 3. Best.000 ± 3.400 = Owners¶ + Equity + $30.300 + $35.

Fraser.  Some transactions affect only one side of the equation. Best. Horngren. some affect both sides. sometimes more.  Each transaction affects at least two accounts. Willett: Accounting 6e © 2010 Pearson Australia .Accounting for Business Transactions  Notice that the equation always stays in balance.

Accounting for Business Transactions  Other transactions that took place were as follows:  The business collected $1. p 23 of your textbook) Horngren. Fraser.000. Willett: Accounting 6e © 2010 Pearson Australia .000 from the client. Best.  She sold some land µat cost¶ for $9.  She withdrew $2.000 from the business.  (See the final result.

Fraser. Best.Objective 5 Prepare the financial statements. Willett: Accounting 6e © 2010 Pearson Australia . Horngren.

. Fraser. ± are the final product of the accounting process. Horngren.. Best. Willett: Accounting 6e © 2010 Pearson Australia . ± tell how the business is performing and where it stands.Financial Statements.

Best.Financial Statements  Statement of Comprehensive Income  Statement of Changes in Equity  Statement of Financial Position ± Also called Balance Sheet  Statement of cash flows Horngren. Fraser. Willett: Accounting 6e © 2010 Pearson Australia .

g. Fraser.Statement of Comprehensive Income  Also called Income Statement  Summary of an entity¶s income and expenses over a period of time  Income part  Also shows changes in equity not resulting from owners  e. Changes in asset values  Sometimes produced separately Horngren. Best. Willett: Accounting 6e © 2010 Pearson Australia .

 Other comprehensive losses Horngren. Fraser.Statement of Changes in Equity  Shows increases in owners¶ equity from  Owner investments  Profits  Other comprehensive income  Shows decreases in owners¶ equity from  Owner drawings  Losses. Willett: Accounting 6e © 2010 Pearson Australia . Best.

Fraser. Willett: Accounting 6e © 2010 Pearson Australia . Best.Statement of Financial Position  Also called a Balance Sheet  Lists the entity's assets. Horngren. liabilities and owners¶ equity  Done at a point in time. such as the end of the month or year.

Best. Willett: Accounting 6e © 2010 Pearson Australia . Fraser.Statement of cash flows  Also called cash flow statement  Reports the cash coming in and cash going out each period Horngren.

The date or time period shown by the statement Horngren. Fraser. Name of the financial statement 3.Financial Statement Headings  Each statement should have a heading showing three things 1. Name of the business 2. Willett: Accounting 6e © 2010 Pearson Australia . Best.

Best.Objective 6 Evaluate business performance. Willett: Accounting 6e © 2010 Pearson Australia . Fraser. Horngren.

Relationships Among the Statements: Income Statement Revenue: Fees earned Expenses: Salary expense Electricity and gas expense Equipment rental expense Office rent expense Net profit $8. Fraser.200 400 600 1. Willett: Accounting 6e © 2010 Pearson Australia .100 3. Best.300 $5.500 $1.200 Horngren.

200 Horngren. capital. Willett: Accounting 6e © 2010 Pearson Australia . capital. Best. Fraser.000 $33. April 30. 2007 Add Investments by owner Net profit Less Drawings by owner Paula Lee.Relationships Among the Statements: Statement of Changes in Equity Paula Lee. April 1. 2007 $ 0 30.000 5.200 ± 2.

Relationships Among the Statements: Balance Sheet Assets Cash Accounts receivable Supplies Land Total assets $19. Fraser. capital Total liabilities and owner¶s equity $ 200 33. Best.200 $33.400 Liabilities Accounts payable Owner¶s Equity.000 $ 33.400 Horngren.900 2. Paula Lee. Willett: Accounting 6e © 2010 Pearson Australia .000 500 11.

Best.600) 2.000) .Relations Among the Statements: Cash Flows Statement Cash flows from operating activities: Cash receipts from services rendered Cash payments: To suppliers 2.400 To employees 3.000) Sale of land 9.900 (11. Fraser. Willett: Accounting 6e © 2010 Pearson Australia $6.000 Net cash flow from investing activities Horngren.300 Net cash flows from operating activities Cash flows from Investing activities: Acquisition of land (20.500 (3.

Willett: Accounting 6e © 2010 Pearson Australia $30. Fraser.000 19.900 0 $19.900 .000) 28.Relations Among the Statements: Cash Flows Statement Cash Flows from Financing activities: Investment by Owner Drawings by the Owner Net Cash Flows from Financing activities Net increase in cash Cash at Beginning of April Cash at End of April Horngren.000 (2. Best.