Introductory Financial Accounting

ACCT5432
SEMINAR NOTES

SEMINAR 3

TOPIC 3

MEASUREMENT OF WEALTH
THE STATEMENT OF FINANCIAL POSITION
AN INTRODUCTION TO THE WORKSHEET

1
 AGENDA

• Wealth and Worth

• Measurement issues
• Statement of Financial Position
• Working out transactions before they
go into the system

OBJECTIVES OF TOPIC 3
• Define and provide examples of Income,
Wealth, Worth and Profit
• Identify problems involved with
measurement
• Define and provide examples of Historical
Cost and Replacement Cost
• Explain the Economic Value, Fair Value
and Net Realisable Value methods of
measurement
7

2
 THE BUSINESS ACTIVITIES OF AN ENTITY
RECORDED IN FINANCIAL REPORTS

Obtain Financing Statement of

financial position

Invest Statement of
Changes in
Equity
Statement of Operate the Business
Comprehensive
Income

Investment in
Assets

What the
entity
CONTROLS

Funding

What the
entity OWES

What the
entity is
WORTH 9

3
 What the
entity
CONTROLS

-
What the Measured at a point
entity OWES
in time or over a
= period?
What the
entity is
WORTH Can it change
over time? 10

11

4
 How do we value the
assets in our company?

5
 How do we value the
assets in our company?

Historical cost Replacement cost

How do we value the

assets in our company?

Historical cost Replacement cost

The cost incurred in acquiring an
item measured at the time of the
originating transaction
Property, Plant and equipment
(AASB 116)

6
 How do we value the
assets in our company?

Historical cost Replacement cost

The amount that would have to be
paid at today’s prices to purchase
an item similar to the existing item
Inventory (AASB 102) for not-for-
profit entities

How do we value the

assets in our company?

Net Realisable Economic Fair Value

Value Value

7
 How do we value the
assets in our company?

Net Realisable Economic Fair Value

Value Value
What could be received for an item if it
were sold (less the expected costs of sale)
Inventory for profit entities (AASB 102)

How do we value the

assets in our company?

Net Realisable Economic Fair Value

Value Value
The discounted value of all the future
earnings that could be expected to
be received from using an item
Leases (AASB117)

8
 How do we value the
assets in our company?

Net Realisable Economic Fair Value

Value Value
The price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Investment property (AASB140)
Financial instruments (AASB139)

CURRENT ACCOUNTING PRACTICE

• Historical cost commonly adopted

• AASB 116 allows entities to choose
between fair value and cost for
property, plant and equipment
• Financial instruments
– AASB 139 requires fair value
– AASB 9 (1 Jan 2019) provides for
amortised cost and fair value 21

9
 WHAT IS PROFIT?
The difference in wealth at the start and the end of the period

Worth Worth
Beginning F/Y End F/Y

Performance
over this period of time

22

Debit Credit

Sales - Shop 200,000

Sales - Trade 550,000

Ingredients purchased 300,000

Oven fuel 60,000 • Income less expenses

Salary - Bakery staff 112,500 • Represents activity
Wages - Casual staff 81,500 over a period of time
Bad debts 125
not a point in time
Rent 17,000

Electricity 1,500

Repairs 3,000

Phone and Internet 1,950

Stationary 4,200

Advertising 9,800

Motor vehicle costs 2,900

Insurance 1,125

Interest expense 1,900

Interest revenue 150

Depreciation 2,600

Income tax expense 44,190 23

10
 SUMMARY OF TOPIC 3 – WEALTH AND
THE MEASUREMENT OF WORTH
• To measure WEALTH, you need to
determine VALUE or COST
• The accounting standards stipulate that
certain types of transactions are to be
recorded using a particular method
–Methods include historical cost,
replacement cost, net realisable
value, economic value or fair value
24

PRESENTATION OF FINANCIAL
POSITION AND THE WORKSHEET

25

11
 OBJECTIVES OF TOPIC 3
THE SFP AND USE OF THE WORKSHEET

• Explain the format and purpose of

the worksheet.
• Explain the meaning and purpose of
the Statement of Financial Position
• Explain the distinction between
current and non-current assets.

26

OBJECTIVES OF TOPIC 3
THE SFP AND USE OF THE WORKSHEET

• Explain the distinction between

current and non-current
liabilities.
• Explain the meaning of equity.
• Explain the accounting equation.
• Identify the limitations of the balance
sheet.
27

12
GENERAL PURPOSE FINANCIAL REPORTS
Statement Statement Statement Statement
of compre- of financial of changes of cash
hensive position in equity flows
income at the end for the for the
for the of the period period
period period

Notes to the Financial Statements 28

THE STATEMENT OF FINANCIAL POSITION

• Contains information about the investing and

financing decisions of the entity
• “…a statement, at one point in time, which shows
all the resources controlled by the enterprise
and all the obligations due by the enterprise.”
(Key concept 5.1)

29

13
 PURPOSE

Resources
CONTROLLED

OBLIGATIONS
due

SOLVENCY
LIQUIDITY30

CURRENT
ASSETS

NON-CURRENT

31

14
 Repayments due < 1yr
CURRENT
LIABILITIES = CURRENT

Repayments due > 1yr

NON-CURRENT = NON-CURRENT

32

EQUITY

Resources
controlled
ASSETS

Obligations due
LIABILITIES

Shareholders’ Equity
Retained earnings /
Reserves EQUITY33

15
ACCOUNTING EQUATION

ASSETS

LIABILITIES

+
EQUITY

ACCOUNTING EQUATION

ASSETS

=-

LIABILITIES

EQUITY

16
 ACCOUNTING EQUATION

Assets = Liabilities + Equity

OR
Equity = Assets - Liabilities

36

Bakehouse (Pty) Ltd

THE PRINCIPLE Inventory

Accounts Receivable
Trial balance 30 June 20X9
Debit
19,400 
128,000 
Credit

OF DUALITY Allowance for doubtful debt
Bank
Bakery equipment
Accumulated depreciation ‐ Bakery equipment
110,500 
197,000 
3,125 

12,000 
Shop fittings 33,000 

• The concept of duality Accumulated depreciation ‐ Shop fittings

Delivery vans
Accumulated depreciation ‐ Delivery vans
53,000 
3,000 

10,000 

is the basis of the Office equipment

Accumulated depreciation ‐ Office equipment
Prepaid insurance
34,200 

900 
7,700 

“double entry Interest receivable

Accounts Payable
Wages payable
150 
61,750 
1,500 

bookkeeping system” Payroll Tax

GST
Current tax liability
21,600 
23,800 
31,240 

which is the system Interest payable

Deferred revenue
Bank overdraft
1,050 
625 
13,000 

that forms the basis of Loan (long term)

Share capital
Retained earnings (1 July 20X8)
42,000 
10,000 
227,900 
Sales ‐ Shop 200,000 
accounting Sales ‐ Trade
Ingredients purchased 300,000 
550,000 

Oven fuel 60,000 
Salary ‐ Bakery staff 112,500 
• The concept is simply Wages ‐ Casual staff
Bad debts
81,500 
125 
Rent 17,000 

that ALL transactions Electricity

Repairs
1,500 
3,000 
Phone and Internet 1,950 

in accounting have Stationary

Advertising
4,200 
9,800 
Motor vehicle costs 2,900 

two sides Insurance

Interest expense
1,125 
1,900 
Interest revenue 150 
Depreciation 2,600 
Income tax expense 44,190
1,220,440  1,220,440 

17
THE PRINCIPLE OF DUALITY - ASSETS

ASSETS
INCREASE DECREASE
Increase in Decrease in
Liabilities Liabilities
Decrease in Increase in
another Asset another Asset
Increase in Decrease in
Equity Equity

Assets = Liabilities + Equity

38

THE PRINCIPLE OF DUALITY - ASSETS

• Acquire a piece of equipment
For cash
Take out a loan
Contributed by owner
Assets = Liabilities + Equity
Equipment Cash Take out a loan Contribution by owner

Equipment
39

18
THE PRINCIPLE OF DUALITY - ASSETS
• Dispose of a piece of equipment
For cash
To reduce a loan
Given to owner
Assets = Liabilities + Equity
Equipment Cash Reduce a loan Given to owner

40

The Principle of Duality - Liabilities

Liabilities
INCREASE DECREASE
Decrease in Increase in
another Liability another Liability
Increase in Decrease in
Assets Assets
Decrease in Increase in
Equity Equity

Assets = Liabilities + Equity

41

19
THE PRINCIPLE OF DUALITY - LIABILITIES

Assets = Liabilities + Equity

• Enter into a loan agreement

• Reduce an overdraft

© Lydia Kilcullen
42

LIMITATIONS OF THE SFP

• “Snapshot in time” and therefore may

not be a true representation
• Measurement system adopted
• Contains many estimates
• Incomplete story

© Lydia Kilcullen
44

20
 THE WORKSHEET

Assets = Liabilities + Equity

OR
Assets - Liabilities = Equity

Application of the Principle of Duality

EXAMPLE - BEETLE

Beetle started up a small business and the first

transactions were as follows:
1. Opened a business bank account and deposited
$10 000 of Beetle’s own money
2. Bought a van for $4 000
3. Bought some goods for resale for $6 000 cash
4. Received a bank loan of $12 000
5. Bought some machinery for manufacturing for
$8 000 cash
© Lydia Kilcullen

21
 WORKED EXAMPLE - BEETLE

Assets Assets = Liabilities

Liabilities + Equity
Equity

Cash Asset 2 Asset 3 Asset 4 Loans Capital

WORKED EXAMPLE - BEETLE

Beetle started up a small business and the first transaction was as
follows:
1. Opened a business bank account and deposited $10 000 of
Beetle’s own money

Assets Assets = Liabilities

Liabilities + Equity
Equity

Cash Asset 2 Asset 3 Asset 4 Loans Capital

10 000 10 000

Beetle Balance Sheet

As at XXX
Assets $
Cash at Bank 10 000

Owners Equity
Beetle – Capital 10 000

22
 WORKED EXAMPLE - BEETLE
Beetle started up a small business and the first transactions were as
follows:
1. Opened a business bank account and deposited $10 000 of
Beetle’s own money
2. Bought a van for $4 000
3. Bought some inventory for resale for $6 000 cash

Assets Assets =Liabilities

Liabilities +Equity
Equity
Cash Van Inventory Asset 4 Loans Capital
10 000 10 000
- 4 000 4 000
- 6 000 6 000

Beetle Balance Sheet

As at XXX
Assets $
Cash at Bank 0
Inventory 6 000
Van 4 000
10 000

Equity
Beetle – Capital 10 000

23
 WORKED EXAMPLE - BEETLE
Beetle started up a small business and the first transactions were as
follows:
1. Opened a business bank account and deposited $10 000 of
Beetle’s own money
2. Bought a van for $4 000
3. Bought some inventory for resale for $6 000 cash
4. Received a bank loan of $12 000
5. Bought some equipment for $8 000 cash
Assets Assets =Liabilities
Liabilities +Equity
Equity

Cash Van Inventory Equipment Loans Capital

10 000 10 000
- 4 000 4 000
- 6 000 6 000
12 000 12 000
- 8 000 8 000

Example - Beetle
Assets Liabilities Equity

Cash Cars Raw Machine Loans Equity

materials
10 000 10 000

(4 000) 4 000

(6 000) 6 000

12 000 12 000

(8 000) 8 000

4 000 4 000 6 000 8 000 12 000 10 000

© Lydia Kilcullen

24
 Beetle Balance Sheet
As at XXX
Assets $
Cash at Bank 4 000
Inventory 6 000
Equipment 8 000
Van 4 000
TOTAL ASSETS 22 000

Liabilities
Bank loan 12 000
TOTAL LIABILITIES 12 000
Net Assets 10 000

Equity
Beetle – Capital 10 000

SUMMARY

• The accounting equation

• The principle of duality
• The purpose and limitations of the
SFP
• The worksheet and building a SFP

54

25
 NEXT WEEK
• Homework question – Statement of Financial
Position
• Topic 4 – Measurement of profit, the statement of
comprehensive income and statement of changes
in equity
• GRADED QUIZ 1 (MCQ Questions)
• PLEASE BRING YOUR OWN WEB ENABLED
DEVICE

55

26