ACCY901

Accounting Foundations for Professionals

Topic 1
An introduction to Accounting

Subject coordinator & lecturer

– Dr Andy Wang BCom(Hons), MAccg, PhD, CPA
– Email: [email protected]
– Telephone: 02 4298 1145
– Consultation: by appointment via email.
Subject outline

Key information
‾ Moodle site: general subject information
‾ Textbook: Carlon, S., McAlpine-Mladenovic, R., Palm, C., Mitrione, L., Kirk, N.,
& Wong, L. (2019). Financial Accounting: Reporting, Analysis and Decision
Making. 6th Edition. John Wiley and Sons Australia.
‾ Lecture program
‾ Tutorial program
‾ Assessment tasks:
1) Tutorial preparations (response to weekly questions):10%
2) Mid-session test: 20% due in week 6 (BEGINNING)
3) MYOB Exercise: 15% due in week 8
4) Final exam: 55%

To be eligible to pass this subject, students must complete all assessment tasks for this
subject. In addition, you must achieve a total mark of 50% or over and obtain a
minimum of 50% in the final examination or major piece of assessment (where there is
no final exam).
Expectations
• Lecture attendance
• Prior reading (text and readings)
• Tutorial attendance and participation
• Attempt all tutorial work before tutorial
• Lecture Questions
• Complete all assessment items on/by the specified date
• If you have a problem contact me as soon as possible (eg before an
assessment item is due)

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Chapter 1 – An introduction to Accounting

Learning Objectives

1) Describe the main accounting assumptions

2) Describe the purpose and structure of (a) the income statement, (b) the
balance sheet, (c) the statement of changes in equity, (d) the cash flow
statement
3) Describe important characteristics of accounting information
4) Identify the users of financial reports and describe users’ information needs
5) Describe the financial reporting environment
6) Explain the accounting concepts, principles, qualitative characteristics and
constraints underlying financial statements

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What is Accounting?
• Primary function of accounting is to provide financial information for
decision making that is
– Management accounting provides information for decision making
within the business.
– Financial accounting provides information to assist external users’
decision making.

• Accounting is often referred to as ‘language of business’.

– Communication of information.
– Professional terminology and jargon:
o Accounting terms, concepts and symbols.
o Accounting information should be relevant and reliable.

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The accounting process
• Accounting is the process of identifying, measuring, recording and
communicating the economic transactions and events of a business
operation.
– Transactions are economic activities relevant to a particular business, which are
the basic inputs into the accounting process, examples:
• sale of item to customer
• purchase of office stationery from supplier
• more examples????

Identifying Measuring Recording Communication

Taking into Quantifying in Analysing, recording, Preparing accounting
consideration all monetary terms classifying and reports, analysing
transactions which summarising and interpreting
affect business entity transactions

Commonly referred to as ‘bookkeeping’

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Diverse roles of accountants
• Commercial accountants:
– Work in industry and commerce.
– Undertake roles such as management accounting and
financial accounting.
• Public accountants:
– Provide their professional services to the public and
work in a range of offices from small to multi-national.
– Auditing is a primary service.
– Also taxation and advisory services.
• Government accountants:
– Employed by local councils, state government and
federal government.
– Variety of roles such as financial accounting and
auditing.
• Not-for-profit accountants:
– Work in the not-for-profit sector.
– Engage in planning, decision making, preparing
financial and management reports for both internal and
external users.

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Forms of Business Organisations
• Why is this relevant to accounting?
• Common types structures:

• Single proprietorship or sole trader

― Owned by one person
― Simple to set up
― Common form of business structure
― Separate accounting entity, not separate legal entity

• Partnership
– Owned by two or more partners
– Simple to set up
– Separate accounting entity, not separate legal entity

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 Forms of Business Organisations
• Company or corporation
– Owned by shareholders
– Separate accounting entity
– Separate legal entity
– Limited liability
• Protection for owners

• There are numerous business structures with relative advantages and

disadvantages.

• More structures:
― Trusts
― Cooperatives
― Not-For-Profit entities
§ Associations
§ Government

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Users and uses of financial information

• Internal Users of accounting information – managers – what

information do they need when carrying out their:
– Planning activities
– Control activities
– Feedback and evaluation activities?

• External Users of accounting information:– what kind of information

will they need?
– Owners (shareholders)/ investors
– Bankers and other lenders
– Other creditors
– Government
– Customers
– Suppliers (employees and unions)
– Competitors
– Stakeholder groups/ including special interest groups

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Management accounting vs financial accounting

Source: Langfield-Smith K, Thorne H, Smith, D. & Hilton RW 2014, Management Accounting: Information for Managing and Creating Value, 7th edn, McGraw-Hill, North Ryde.

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Financial statements

• The Conceptual Framework defines the elements of financial statements.

Statement of Profit Statement of Statement of Statement of Cash

or Loss Changes in Equity Financial Position Flows

Reports revenues Reports total Reports assets, Reports information

less expenses for a comprehensive liabilities and equity regarding cash
particular period of income for the at a particular point receipts and cash
time. period and other in time. payments for a
changes in equity. particular period of
Income Balance time.
Statement Sheet

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Statement of profit or loss
• Often called Income Statement
• Reports financial performance over a specific time period (e.g.
month, year, etc.)
• Shows income and expenses
Income > Expenses = Profit
Income < Expenses = Loss

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Statement of financial position
• Also known as Balance Sheet
• Reports financial position of an entity at a specific point in time
• Shows assets and claims to those assets (liabilities and equity) at a
specific point in time
• Based on the basic accounting equation.

ASSETS = LIABILITIES + EQUITY

• Assets must balance to the claims on assets.

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Statement of financial position

ASSETS = LIABILITIES + EQUITY

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 The classification of Balance Sheet
• Normally classify based on liquidity or business operating cycle (normally one
year)
• Current assets:
– Assets that are cash, held for the purpose of being traded, or expected to be
converted to cash or used in the business within one year.
o Cash
o Inventory
o Prepayments
o Accounts Receivable

• Non-current assets:
– Assets that are not expected to be sold or consumed within one year.
o Land
o Buildings
o Machinery
o Motor vehicles

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The classification of Balance Sheet
• Same principles applied to liabilities

• Current Liabilities:
― Obligations that are to be paid within the coming year or the
entity’s operating cycle.
§ Accounts payable
§ Taxes payable
§ Accrued wages

• Non-Current Liabilities:
― Obligations that are not classified as current.
§ Bank loans
§ Bonds/debentures payable
§ Mortgage payable

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Statement of changes in equity
• Reports amount of profit for period and other changes in equity such as
adjustments to retained earnings

• Retained earnings refers to accumulated profit which has not been distributed
to shareholders

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Cash flow statement
• Main purpose is to provide financial information about cash receipts and
cash payments of an entity for a specific time period.
• Informs users about what is happening to entity’s most important resource –
CASH.

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Interrelationships between the statements

• The financial statements are interrelated:

– The statement of financial position is linked to the statement of profit or
loss and the statement of changes in equity by the ending retained
earnings balance.
– The statement of cash flows is linked to the statement of financial
position by the ending cash balance.

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 Interrelationship - example

Statement of
Income Cash Flow
Changes in Balance Sheet
Statement Statement
Equity
Revenue - Beginning retained Assets = Liabilities + Equity Operating activities
Expenses = Profit earnings + Profit –
Investing activities
Dividends = Ending
retained earnings Financing activities

Example:
Example: Assets: $10,000 (includes
Example: cash $6,000) Example:
Sales Revenue:
$5,000 Beginning retained Liabilities: $7,500 Cash Operating Act: $5,000
earnings: $1,000 Equity: Cash Investing Act: ($1,000)
Minus total Plus profit: $2,000 $2,500 Cash Financing Act: $500
expenses:
Minus dividends: $500 Liabilities + equity: Net cash inflow: $4,500
$3,000 Equals ending retained $10,000 Beg cash: $1,500
Equals profit: earnings: $2500 End cash: $6,000
$2,000

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The Financial Reporting Environment

• Australian Securities and Investments Commission (ASIC)

• Australian Securities Exchange (ASX)
― listing and disclosure requirements: periodic reports, continuous disclosure
• International Accounting Standards Board (IASB)
― International Financial Reporting Standards (IFRS)
• Australian Accounting Standards Board (AASB):
― 1 January 2005 fully adoption of IFRS (harmonisation program)
• Financial Accounting Standards Board (FASB)
― US Generally Accepted Accounting Principles (US-GAAP)

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 Concepts and principles
• Monetary principle:
– Items included in accounting records must be able to be expressed in monetary
terms (e.g. $).
• Accounting entity concept:
– Every entity can be separately identified and accounted for.
– Owner’s transactions are separate from entity’s transactions.
• Accounting period concept:
– The life of a business entity can be divided into artificial periods (accounting
period)
– Useful reports covering those periods can be prepared for the entity.
• Going concern principle:
– Business will remain in operation for the foreseeable future.
• Cost principle:
– All assets are initially recorded in the accounts at their purchase price or cost.
– To provide useful information, sometimes entities need to deviate from cost
principle (e.g. revaluation of non-current assets).

Also known as Accounting Assumptions

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 Qualitative characteristics and constraints…
Understandability Relevance Reliability
• Does the information make • the information contained in • the depiction of an economic
sense to a reasonable user? financial statements is able to event is complete (i.e. all
influence the economic decisions information necessary to
made by users. represent the event are
included), neutral (i.e. free from
bias), and accurate (i.e. free
from material error).

Comparability Consistency Materiality

• Can the company be • Can accounting information • Does the item reported make
compared to similar be compared within the same a different to decision making?
companies? entity over time?
• Are the same methods used
year to year?

Conservatism Constraints
• Is the amount over-valued? • If the information is perfect, will it be too
late to be useful?
• Does the cost of providing the information
outweigh the benefits?

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Lecture Question
Asset, liability, equity, income and expense amounts for ABC Ltd at 30 June
2016 are presented below:

Cash at bank $ 22 800 Advertising expense $ 36 000

Accounts receivable 117 600 Insurance expense 8 000
Supplies 26 400 Rent expense 33 000
Equipment 125 600 Supplies expense 12 600
Accounts payable 33 700 Telephone expense 12 200
Capital ? Electricity expense 17 000
Consulting fee revenue 386 000 Wages expense 111 000

A. Prepare an income statement for the business for the year

ended 30 June 2016.
B. Prepare a balance sheet as at 30 June 2016.

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Things to do…
• Get the textbook – online, library, bookshop

• Do your homework questions before the tutorial

• Remember you must upload a copy of your tutorial preparation

before the week’s tutorial

• Read through Chapter 2 BEFORE next week’s lecture. This will help
you understand what’s going on…

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