Topic 1 intro to role of accting in bus PDF

the dollar RECORDING • Classification into categories & summarizing the transactions COMMUNICATION • Preparing the financial reports from the accounts for analysis & interpretation The p

TOPIC 1 - AN INTRODUCTION TO THE ROLE OF ACCOUNTING IN BUSINESS

IS THE LANGUAGE OF BUSINESS

TOPIC 1 Part 1 LEARNING

OBJECTIVES

1 Define accounting, describe the accounting process, and

define the diverse roles of accountants.

2 Identify the users of accounting information and

describe the users’ information needs.

3 Explain the characteristics of the main forms of business

organisation.

THE ACCOUNTING

PROFESSION

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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IDENTIFICATION

• Observing economic events to determine which need to

be recorded as transactions

MEASUREMENT

• Quantifying the transactions in monetary terms e.g the dollar

RECORDING

• Classification into categories & summarizing the

transactions

COMMUNICATION

• Preparing the financial reports from the accounts for analysis & interpretation

The primary function of accounting

for decision making

that …………

for any entity carrying on a business

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USERS OF ACCOUNTING

INFORMATION

EXTERNAL USERS – make decisions ABOUT the business entity

• Should I invest? Will they make a profit? Can the business pay? Can they repay? Are they acting ethically? Is the business socially and environmentally friendly?

• FINANCIAL ACCOUNTING

INTERNAL USERS – make decisions FOR the business entity

• How much profit? What should be produced? What resources are available? How much does it cost? How much do we owe? What would happen if…? Do we have enough cash?

• MANAGEMENT ACCOUNTING

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TYPES OF BUSINESS ENTITIES

• Single

owner

• Sole

authority

• Limited

fundraising

power

• Proprietor

personally

liable

IP • Owned by

two or more partners

• More brain

power

• Need an

agreement

• Partners are

personally liable

NY • Owned by shareholders

• Separate

legal entity

• Ownership

transfer easy

• Shareholder

s are not personally liable

• Agency

issues

• Extensive

regulation

Introducing…….

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TYPES OF BUSINESS

ENTITIES

Kelly Cook’s long lost great aunt has left her a substantial inheritance and she has decided to go into the eTravel business She has available cash to invest to begin the business, as well as

enough for a deposit on a block where she plans to build commercial premises in the next few years.

At the moment she will be renting office space where she and her 1 employee will be working.

Kelly asks your advice on the best type of business entity for her new business Kelly Cook eTravel.

Additional information: Kelly owns her own apartment with a small mortgage She has other

investments in shares and is also part owner of an Adventure Tours business.

TOPIC 1 - AN INTRODUCTION TO THE ROLE OF ACCOUNTING IN BUSINESS

REPORTING

ENVIRONMENT

TOPIC 1 Part 2 LEARNING

OBJECTIVES

1 Explain the function of accounting as an information system and

the need for decision making.

2 Explain the accounting concepts, principles, qualitative

characteristics and constraints underlying financial statements.

3 Describe the financial reporting environment

4 Identify the elements of each of the four main financial statements.

5 Recognise the basic accounting equation.

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Accounting is an

INFORMATION SYSTEM

that identifies, measures,

records & communicates

information to both internal

and external decision

makers.

The primary function of

accounting is to provide

relevant & reliable (faithfully

decision making

how

do we accountants achieve

this??????

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The primary function of accounting is to provide RELEVANT & RELIABLE (FAITHFULLY REPRESENTED) information about the business entity for decision making:

RELEVANCE

Information is relevant if required for decision making.

FAITHFUL REPRESENTATION (RELIABLE)

Information is reliable when it is complete, neutral and free from error :

 Complete: accounts contain ALL required information to represent the economic entity, there are NO omissions

 Neutral: the accounts are not biased in any way

 Free from material error: information is material if its omission or misstatement could

change a user’s decision

Useful information should also have the additional qualitative characteristics of

comparability, verifiability, timeliness & understandability

The AASB Conceptual Framework (2014)

states the fundamental qualitative

characteristics are relevance and faithful

representation

QUALITATIVE CHARACTERISTICS ,

CONCEPTS & PRINCIPLES

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QUALITATIVE CHARACTERISTICS,

CONCEPTS & PRINCIPLES

For accounting information to be relevant &

reliable (faithfully represented) it is prepared

based on some underlying assumptions

encapsulated in:

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ACCOUNTING

STANDARDS

These concepts and principles underlie the

Accounting Standards that govern how

accountants measure, process and

communicate financial information about the

reporting entity.

 Australian Accounting Standards Board (AASB) is responsible

for technical accounting standards for all types of (reporting)

business entities (for profit, not-for-profit, government).

 Australia, like much of the rest of the world adopted the

international accounting standards (IFRS issued by the IASB)

from 1 January 2005.

CORPORATIONS ACT 2001

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FINANCIAL REPORTS

The accounting information used to make decisions is contained in 4 key reports:

1 Statement of Profit or Loss (Income Statement or just P&L)

2 Statement of Financial Position (Balance Sheet) &

3 Statement of Changes in Equity

and Equity at a specific point in time e.g 30 June 2017

business’s assets and claims to those assets (liabilities & equity) and this relationship is referred

equation

Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Revenue

Expenses

Kelly Cook eTravel Pty Ltd Statement of Financial Position

as at 31 May 2017

Cash 20,900 Accounts Payable 200

Property, Plant &

Equipment

10,000

Total Equity 32,700

Total Assets 32,900 Total Liabilties &

Kelly Cook eTravel Pty Ltd Statement of Changes in Equity for the month of May 2017

Retained Earnings as at 31 May 2017 2,700

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FINANCIAL REPORTS

4 Statement of Cash Flows or Cash Flow

Statement

Provides information about the ability of the

business entity to generate cash flow, from

key business activity areas:

• Operating Activities – undertaken to

earn income for the business (revenue

and associated expenses)

• Investing Activities - The acquisition

and disposal of the resources (e.g

property, equipment) needed over the

long term to operate the business

• Financing Activities - The raising of

funds for an entity to carry out its

operating and investing activities comes

from two primary sources, borrowing

(debt) and selling shares to investors

(equity)

Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities:

Receipts from customers 6,500 Payments to suppliers -2,400

Payments to employees -1,200

Net cashflow from operating activites 2,900

Cash flows from investing activities:

Purchase of Property, Plant & Equipment -10,000

Net cashflow from investing activites -10,000

Cash Flows from financing activities:

Issue of shares 30,000 Dividends -2,000

Net cashflow from financing activites 28,000

Net increase in cash 20,900 Cash at beginning of period 1 May 2017 0 Cash at end of period 31 May 2017 20,900

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FINANCIAL REPORTS

4 Statement of Cash Flows or Cash Flow

Statement

Provides information about the ability of the

business entity to generate cash flow, from

key business activity areas:

• Operating Activities – undertaken to

earn income for the business (revenue

and associated expenses)

• Investing Activities - The acquisition

and disposal of the resources (e.g

property, equipment) needed over the

long term to operate the business

• Financing Activities - The raising of

funds for an entity to carry out its

operating and investing activities comes

from two primary sources, borrowing

(debt) and selling shares to investors

(equity)

Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities:

Receipts from customers 6,500 Payments to suppliers -2,400

Payments to employees -1,200

Net cashflow from operating activites 2,900

Cash flows from investing activities:

Purchase of Property, Plant & Equipment -10,000

Net cashflow from investing activites -10,000

Cash Flows from financing activities:

Issue of shares 30,000 Dividends -2,000

Net cashflow from financing activites 28,000

Net increase in cash 20,900 Cash at beginning of period 1 May 2017 0 Cash at end of period 31 May 2017 20,900

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THE ACCOUNTING

SYSTEM

 All transactions impact the entity’s financial position and result in changes to the Balance Sheet (Statement of Financial Position) which reports the business’s

assets and claims to those assets (liabilities & equity) (assets, liabilities and equity)

 The accounting equation always balances - Assets must balance to the claims on assets

 Double entry accounting is an effective system that records a business’s

transactions in such a way that an entity’s financial position and performance can

be calculated very efficiently

 The best way to illustrate this is by going through an example

Use the accounting equation to record transactions