Accounting Foundations

Introduction to
Accounting
Dr Sabine Schuhrer
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What will we
○ The nature and purpose of accounting,
cover in this
including the decision making process
topic?
○ Users of financial information and their
information needs
○ Presentation of accounting information
 3

What will we
○ Types of business entities and their
cover in this
advantages and disadvantages.
topic?
○ Regulatory and institutional environment
for accounting information
The role and
nature of
accounting
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What is
accounting?
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Accounting is
Accounting
defined “the process of identifying,
measuring, recording and
communicating economic
information to permit informed
judgements and decisions by
users of the information”
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The Nature of Accounting

What is
accounting?
Identification Measurement Recording Communication

Transactions Quantification in Recording, Accounting

monetary terms classification, reports
summarising
Analysis and
Interpretation
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What do we need
accounting for?
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What do we
need
accounting for?

Economic decision-making!
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Decision- • What is involved with decision-making?

making process
• What is the role of information in the
decision-making process?
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Decision- Decision-making can be defined as

making defined
“the process of choosing from among
alternative courses of action in order to
achieve an objective”
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The Decision-Making Process

Evaluation of
Problem definition
alternatives Choice and Review
• Objectives
• Solution method implmentation • Feedback
• Contraints
• Prediction

Information
• Accounting information
• Other information
 Case study:
Kay the amateur
photographer
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Kay is an amateur photographer who has $60 000
available for investment. She is considering two options:

Case study: Kay Option 1 Option 2

the amateur Resign present job and
Retain secure job
photographer (current salary $75 000) open photographic
and invest the funds in business.
government bonds at
2%.
$

Objective: Maximise return!

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Case study: Kay Some factors to consider

the amateur
• Government bonds are guaranteed
photographer
• 80% probability that photographic business
will be successful – return $100 000 per year
• Business unsuccessful – return $40 000 per
year

Using the decision-making process – discuss which

option Kay should select
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Problem definition:

Problem Should Kay keep her Job and invest her savings in
definition government bonds or should she open a
photography business?

• Objective: maximise return

• Constraint: $60 000 of funds

Using the decision making process, discuss which

option Kay should select.
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Kay is an amateur photographer who has $60 000
available for investment. She is considering two options:

Option 1 $ Option 2 80% chance of

Evaluation of a successful
business
Expected return: Expected return
alternatives
Salary $75 000 $100 000 x 0.8
20% chance of
+ interest on bonds $ 1 200 + $40 000 x 0.2 a successful
business
= $80 000 + $8 00
= $76 200 = $ 88 000

Outcome is certain Outcome

is uncertain
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Objective: Maximise return!

Choice and
implementation Based on criteria of expected return:

Choose photographic business!

However, Kay might also want to consider other

factors, for example qualitative factors, such as risk
versus return
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After implementation, choice should be reviewed

Review and
feedback Criteria: Returns

Timeframe: ?
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Review and Use of relevant information, e.g.,

feedback
• Monthly financial statements
• Control – costs and cash flow
• Actual versus budget – corrective action
• Accounting information – prediction and
feedback
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Review and Other potential criteria (depending on objectives

feedback set or discovered)

e.g., risk versus return

 Users of
accounting
information
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Tax
Department Customers
Regulators
Suppliers
Executive
Users of Financial
Information
Employees

Management
General Public
Investors

Creditors Other lenders Unions

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Who uses
accounting • Internal users - employees of an entity
information? who use accounting information to make
decisions about the allocation of
resources by the entity
• External users - parties who use
accounting information about an entity
in their decisions
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Internal users External users
Investors, creditor
What is the ◦ Should I invest money in this
information ◦ Stewardship of business?

used for?
resources ◦ Will the business be able to
◦ Planning repay money lent to it?

◦ Control ◦ What are the business’s

earning prospects?
◦ Is the business financially
sound?
◦ Return on investment
◦ Risk of investment
◦ Management performance
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Other external stakeholders

What is the ◦ Will this company be able to pay me in the future? (suppliers,
employees)
information
◦ Can I trust that the company will provide this product/service in the
used for? long term? (business or private customers)
◦ Will this company provide long-term employment for our society?
(governments, general public, employees)
◦ Does this company pay fair wages? (unions, employees)
◦ Does this company report in accordance with accounting standards?
(regulators, auditors)
◦ Does this company pay appropriate taxes (ATO, government
regulator)
◦ Etc.
Presentation of
accounting
information
 How is
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accounting
information
presented to
external users?
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Balance Sheet
How does the
information
look like? Assets x Assets x Liabilities y
- Liabilities y Equity z
Equity z = x = x

The balance sheet is also referred to as the

Statement of Financial Position
Statement of Financial Position 30
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Income Statement
How does the
information
look like? Revenue x
- Expenses y
Profit/(Loss) z

The balance sheet is also referred to as the

• Statement of Financial Performance, or
• Statement of profit or loss and other comprehensive income
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Statement of
profit or loss
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Statement of Changes in Equity

How does the
information
Equity at beginning of period s
look like?
+ Shares t
- Dividends (u)
+ Retained earnings v
Equity at end of period w
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Statement of
Changes in
Equity
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Statement of Cash Flows

How does the
information Cash flows from operating activities a
look like? Cash flows from operating activities b
Cash flows from operating activities c
Net increase/(decrease) in cash/cash equivalents d
+ Cash/cash equivalents at beginning of period e
= Cash/cash equivalents ash at end of period f
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Statement of
Cash Flows
 Types of
business entities
in Australia
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Sole trader Partnership Company

• Single owner • Relationship between • Legal entity
Types of • Not separate legal
persons carrying on a
• Separate from owners
business entity – separate
business with view to
profit
(shareholders)
accounting entity
entities • Unlimited liability
• Agreement between 2
• Purchase equity via
shares
or more parties
• Different types of
• Co-owners of business
companies
• Not separate legal
• Majority: limited
entity – separate
liability companies
accounting entity
• Different level of tax
• Unlimited liability
• Equity - funds supplied
by partners +
retained profits
 Incorporation
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Advantages Disadvantages
Advantages and
disadvantages ○ Limited liability ○ Regulation
of incorporation ○ Broad source of capital ○ Separation of ownership
and management
○ Continuity of existence

○ Transferability of ownership

○ Professional management

○ Different tax rate

Regulatory and
institutional
environment of
Accounting in
Australia
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○ Financial Reporting Council (FRC)
○ Australian Accounting Standards Board (AASB)
Regulatory and ○ Corporations Law (CORPS Act 2001)
Institutional ○ Australian Securities and Investment Commission
Environment (ASIC)
○ Australian Securities Exchange (ASX)
○ International Accounting Standards Board (IASB)
○ IFRS Interpretation Committee
○ Financial Accounting Standards Board (FASB)
○ Asian Oceanian Standard Setters Group (AOSSG)
 A brief history of regulation
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in Australia
Brief history ○ Businesses became more complex, including
distinction between ownership and management
○ Shares became risky investments
○ Chartered Accountants developed guidance for
contents of financial statements in 1940s to protect
shareholders,
○ Company failures in 1950s and 1960s
 A brief history of regulation
43

in Australia
Brief history ○ Foundation of Australian Accounting Research
Foundation in 1966 (operated by professional
bodies)
○ Encompassed both Accounting Standards Board
and Public Sector Accounting Standards Board
○ However, standards were not mandatory and
largely ignored by entities
 A brief history of regulation
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in Australia
Brief history ○ In 1984, government stepped in to approve
accounting standards and compliance
○ Accounting Standards Review Board was
established, which is now the Australian Accounting
Standards Board
○ Accounting Standards were given the force of
company law
○ Several restructures followed
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Organisational
Structure AASB
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Financial
Reporting ○ Oversight body of AASB and Australian Auditing
Council and Assurance Standards Board
(FRC) ○ Appoints members of AASB
○ Provides broad strategic directives to AASB,
including directive to adopt international
accounting standards
○ Encourages AASB to issue and adopt best practice
accounting standards
○ Monitors operations of AASB to ensure relevance
and effectiveness
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Australian Established under the ASIC Act 2001.

Accounting
Statutory functions of the AASB are:
Standards
Board ○ to develop a conceptual framework for the purpose of
evaluating proposed standards;
(AASB)
○ to make accounting standards;
○ to participate in and contribute to the development of a
single set of accounting standards for worldwide use;
○ and to advance and promote reduction of the cost of
capital, enabling Australian entities to compete
effectively overseas and maintaining investor
confidence in the Australian economy.
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AASB Standard
Setting Process

https://www.aasb.gov.au/About
-the-AASB/The-standard-
setting-process.aspx; retrieved:
17/11/2020
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○ Underpins general
Accounting purpose financial
Concepts reports
○ Does not have the force
of law
○ Refer to next topic
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○ How to account for and

Accounting report particular items of
Standards the financial statements
○ Example - how to account
for inventories and the
information that has to be
disclosed in relation to
inventories
○ Force of law under
Corporations Act 2001
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Role under the ASIC Act is to:

Australian ○ maintain, facilitate and
Securities and improve the performance of the financial system and entities in it
Investments ○ promote confident and informed participation by investors and
Commission consumers in the financial system
○ administer the law effectively and with minimal procedural requirements
○ receive, process and store, efficiently and quickly, information we receive
○ make information about companies and other bodies available to the
public as soon as practicable
○ take whatever action we can, and which is necessary, to enforce and give
effect to the law.
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Australian
Securities and
Investments o Regulates financial services, consumer credit and
Commission authorized financial markets
o ASIC administers a variety or relevant laws,
including the Corporations Act 2001
○ Including: Corporations have to comply with
accounting standards
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Australian
Securities ○ Integrated exchange offering listings, trading,
Exchange clearing, settlement, technical and information
services, technology, data and other post-trade
services
○ Concerned with improving disclosures of financial
reports of stock listed companies, as outlined in
Listing Rules
○ Provided significant resources to AASB to adopt
international accounting standards
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○ Founded in 1973 by professional accounting bodies of Australia,

IFRS Canada, France, Germany, Japan, Mexico, Netherlands, United
Kingdom/Ireland and the United States
Foundation -
○ Purpose: to develop and adopt International Accounting
Standards for cross-border listings
○ In 2000: changed to International Financial Reporting
Foundation (IFRS Foundation)
○ Purpose: to develop a single set of high quality, understandable,
enforceable and globally accepted accounting Standards (IFRS
Standards) that bring transparency, accountability and efficiency
○ Comprises of International Accounting Standards Board (IASB)
and IFRS Interpretations Committee
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○ Independent standard setting body of the IFRS

○ Members from across the globe
International
Accounting
Standards (as at 2018)

Board (IASB)
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IFRS ○ Interpretive body of the IASB

Foundation -
IFRS ○ Comprises groups of experts from around the
Interpretations world, including companies, auditors, investors,
Committee regulators
○ Helps in identifying new issues or issues in need to
review
○ Helps users understand and apply IASB standards
in diverse environments
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Financial
Accounting ○ US Accounting Standard Setting Body
Standards
○ Signed convergence agreement in 2002 (Norwalk
Board (FASB)
Agreement)
○ Hold joint meetings and have joint projects
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The Asian- ○ Established in 2009

Oceanian Four objectives:
Standard-
○ To promote adoption and consistent application of
Setters Group
IFRS in region
○ Coordinate input from region to IASB
○ Coordinate with government, regulators and other
organisations to improve quality of financial
reporting in the region
○ Promote AOSSG’s vision
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(Source: https://www.aossg.org/about-us/member-organisation, as at 11/2020)
Revision
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What we have
○ The nature and purpose of accounting,
covered in this
including the decision making process
topic
○ Users of financial information and their
information needs
○ Presentation of accounting information
 62

What we have
○ Types of business entities and their
covered in this
advantages and disadvantages.
topic
○ Regulatory and institutional environment
for accounting information