Week 1

Objectives;

1. Define what accounting is

2. Identify the users of accounting information and the decisions they make

3. Introduce Accounting Standards and the Conceptual Framework

4. Explain the nature of a reporting entity

5. Define assets, liabilities, income, expenses and owner’s equity

6. Understand the two recognition criteria that must be met before an item can be included in the financial statements

7. Apply the definitions and recognition criteria to an unusual transaction

8. Explain the basic concepts of the four key financial statements and describe their purpose

1. What is accounting

An information system or process that economic events of an entity to permit informed judgements and decision by interested users of the information.

2. Identify the users of accounting information and the decisions they make

Internal user: managers who plan, organise and run the business (detailed and frequent information is needed by these managers to make business decisions on day-by-day basis ).

External users: vary in their nature and information requirements. e.g. investors (to make decision to buy, hold or sell shares), creditors/lenders (to evaluate risks of giving credit and lending money), government and regulatory bodies (to determine an entity’s compliance with rules and regulations).

Forms of business organisations

Sole proprietorship; Partnership (accountants, solicitors, doctors); Company (Organised as a separate legal entity and owned by shareholders)

9. Introduce Accounting Standards and the Conceptual Framework

3. Introduce Accounting Standards and the Conceptual Framework

Accounting standard: Australia has adopted standards that are consistent with those produced by the International Accounting Standards Board (IASB).

While these accounting standards provide ‘rules’ for dealing with various accounting issues, there exists an underlying ‘conceptual framework’ upon which the standards are based.

This framework attempts to derive a theory for determining the information to be provided in financial statements

The conceptual framework is used as the basis for developing specific accounting rules and regulations. It is a set of inter-related concepts which define the NATURE, SUBJECT and BROAD CONTENT of accounting”

4. Explain the nature of a reporting entity

Definition of the Reporting Entity

Defines a ‘Reporting Entity’ as any entity in which it is reasonable to expect the existence of users who depend on general-purpose financial statements for information to enable them to make economic decisions.

If an entity meets this definition, it must prepare financial reports.

5. Define assets, liabilities, income, expenses and owner’s equity

1)Assets:

Definition: A resource controlled by the entity as a result of a past events and from which future economic benefits are expected to flow to the entity.

Recognition criteria for assets: 2 essential components: (1) Probable future economic benefits; (2) Reliable measurement. Once the definition is satisfied, an asset should only be recognised (included) in the balance sheet if the recognition criteria are satisfied.

2)Liabilities: future outflow of economic benefits

Definition: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Recognition Criteria: Two essential components: (1) Probable future outflow of economic benefits (2) Reliable measurement.

3)Owner equity:

Definition: the residual interest in the assets of the entity after deduction of its liabilities. (Assets = Liabilities + Owner equity)

4)Income (Revenue):

Definition: increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.”

Recognition Criteria for income: (probable occurrence, Reliable measurement)

5)Expenses:

Definition: decreases in economic benefits during the accounting period in the form outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

6. Understand the two recognition criteria that must be met before an item can be included in the financial statements.

7. Apply the definitions and recognition criteria to an unusual transaction,

8. Explain the basic concepts of the four key financial statements and describe their purpose.

Key financial statements:

Balance sheet (A, L and OE) – measures financial position at a point in time

Statement of comprehensive income / income statement (I, E) – measures financial performance over a period of time.

Statement of cash flows (the asset cash) – measures cash receipts and cash payments over a period of time

Statement of changes in owners’ equity (OE) – presents a summary of changes that occurred in the entity’s equity between two successive reporting dates

*Important Terms

Recognised: meet definition and recognition criteria, and is therefore included in the financial statements.

Disclosed: Meets definition but not recognition criteria, and is therefore included as a note to the financial statements.