ReWEEK 1: INTRO TO ACCOUNITNG &

CONCEPTUAL FRAMEWORK

Primary function of accounting is to provide financial information for decision

making. The information should be relevant and reliable.
- Financial accounting provides information to assist external users’ decision
making.
- Management accounting provides information for decision making within the
business.

ACCOUNTING PROCESS FORMS OF BUSINESS ORGANIZATION

1. Identifying  Sole proprietorship
2. Measuring Bookkeeping  Partnership
3. Recording  Company
4. Communicating  Other forms (trust, cooperative, public
sectors)

INTRODUCTIO
N TO
CONCEPTUAL
FRAMEWORK
SAC 1: THE REPORTING ENTITY

Definition – an entity in which it is reasonable to expect the existence of users who

depend on general-purpose financial reports (GPFR) to enable them to make economic
decisions.

Indicators that determine an entity is a reporting entity

o Managed by individuals who are not owners of the entity – management vs
owner
o Is politically or economically important
o Considered large in sales, assets, borrowings, customers, and employees
o Must prepare external GFPR that comply with accounting standards.
SAC 2: OBJECTIVES OF GENERAL PURPOSE FINANCIAL REPORTING
(GPFR)

 Foundation of conceptual framework

Objective of GPFR – provide financial information about the reporting entity to the
resource providers (equity, debts) in making their decisions.

USERS & USES OF FINANCIAL INFORMATION

1. PRIMARY USERS (EXTERNAL USERS) OF GPFR

- Equity investors e.g. shareholders, holders of partnership interests
- Lenders e.g. banks
- Other creditors who provide resources in the form of credit e.g. suppliers,
employees

2. OTHER EXTERNAL USERS

- Customers
- Parties performing a review / oversight function e.g. regulatory agencies, media,
governments, trade unions, special interest groups

3. INTERNAL USERS
- Managers e.g. production supervisors, directors
- Don’t rely on GPFR since they can obtain information internally

GENERAL PURPOSE OF FINANCIAL REPORTS

FINANCING INVESTING OPERATING

2 external sources of Acquisition / sale of Results from operational
funds: resources needed to activities undertaken to
o Borrowing from banks operate the business e.g. earn income.
o Sell shares to investors purchase / sale of Revenue – Expenses = P/L
property
SUSTAINABILITY REPORTING

Concerned with 3 areas Financial

- Economic Statements
- Environmental - Statement of
- Social Profit and Loss
- Statement of
Changes in
Equity
(reports total
comprehensive
income & other
changes in
equity)
(Retained
CONCEPTS & earnings is the
accumulated
PRINCIPLES profit
 MONETARY PRINCIPLE which has not
been in monetary
- Items included in accounting records must be able to be expressed
terms e.g. $ distributed to
SH)
 ACCOUNTING ENTITY CONCEPT - Statement of
- Owner’s transactions are separate from entity’s transactions Financial
Positions
 ACCOUNTING PERIOD CONCEPT (Assets =
- Financial year / Fiscal year (normally one year) Liabilities +
Equity)
- Statement of
 GOING CONCERN PRINCIPLE
Cash Flows
- Business will remain in operation for the foreseeable future

 COST PRINCIPLE
- Assets are initially recorded in the accounts at purchase price / cost
- However entities sometimes deviate from the cost principle e.g. revaluation of
NCA

 FULL DISCLOSURE PRINCIPLE

- All circumstances and events that could make a difference to decision-making
process should be disclosed in the financial statements
 QUALITATIVE
CHARACTERISTIC
S

DEFINITION CRITERIA RECOGNITION CRITERIA

ASSETS  A resource controlled by  Is probable that future

the entity as a result of economic benefits will flow to
past events and from which entity.
future economic benefits - Refers to the degree of
are expected to flow to the certainty/uncertainty.
entity. - Use all evidence available
 3 criteria: to assess probability.
- Controlled by entity - If it is improbable that
- Past event economic benefits will
- Future economic flow to the entity beyond
benefits current period, the
expenditure is recorded
as an expense.

 Has a cost value that can be

measured with reliability.
- e.g. purchase price
- Internally generated
brand names are not
recognised but purchased
brand names can be
measured by its cost.
LIABILITIES  A present obligation of the  Is probable that an outflow
entity arising from past of resources embodying
events, the settlement of result from the settlement
which is expected to result of a present obligation.
 in an outflow from the - Not dependent upon
entity of resources occurrence of certain
embodying economic events outside the
benefits. entity’s control
 3 criteria:
- Present obligation  The amount at which the
- Past event settlement will take place can
- Outflow of economic be measured reliably.
benefit
CONTINGENT LIABILITIES
(L that do not satisfy recognition
criteria)
o E.g. unresolved lawsuits,
potential liability from a tax
audit in progress
o Are not recognised in the
financial statements
o Must be disclosed in the
notes to the financial
statements if considered to
be material
INCOME  Increases in economic  Increase in future economic
benefits. benefits related to increase
 Inflows or enhancements in an asset or decrease of a
of assets or decreases of liability become probable
liabilities. that can be measured reliably
 Other than those relating  Common practice: recognise
to contributions from revenue when it is earned.
equity participants.
 Linked to the definition of
assets and liabilities.
 3 criteria:
- Increase in economic
benefit
- Inflow of assets /
decrease of liability
- Not contributed by
equity holder

REVENUE
o Increase in economic
 benefit from ordinary
activities
o E.g. sales revenue, rent,
dividends

GAINS
o Increase in economic
benefit that are not from
ordinary activities
o E.g. gains from sale of NCA
EXPENSES  Decreases in economic  Decrease in future economic
benefits benefits related to a
 Outflows or depletions of decrease in an asset or an
assets or incurrences of increase of a liability become
liabilities probable that can be
 Other than those relating measured reliably
to distributions to equity  Matching principle: when
participants resulting directly or jointly
 3 criteria: from the same transaction as
- Decreases in economic revenues, expenses should be
benefits recognised on the basis of a
- Outflow of assets / direct association with
increase of liabilities revenues.
- Not contributed by  Recognise expenses when it is
equity holder incurred
EQUITY  The residual interest in the
assets of the entity after
deducting all its liabilities
 Equity = Assets –
Liabilities
 Transactions/events that
affect equity:
- gains/losses
- owner’s activities
(capital investments,
drawings, dividends)

GENERAL RULE FRO RECOGNITION CRITERIA: 2 recognition criteria for all

elements, 1. Probable Occurrence 2. Reliable Measurement. MUST MEET BOTH