Chapter 1. Use accounting vocabulary. Learning Objectives. Objective 1. Accounting and the business environment

Transcription

1 PowerPoint to accompany Chapter 1 Accounting and the business environment Learning Objectives 1. Use accounting vocabulary 2. Apply accounting concepts and principles 3. Use the accounting equation 4. Analyse business transactions 5. Prepare the financial statements 6. Evaluate business performance Objective 1 Use accounting vocabulary.

2 Accounting... is an information system that... measures business activities, processes information, and... communicates financial information. And is called the language of business. Accounting Information and Its Users External users make decisions about the entity. e.g. Investors This is Financial Accounting Internal users make decisions for the entity. e.g. Management This is Management Accounting Standards of Professional Conduct ICAA and CPAA s Joint Code of Professional Conduct 1. Integrity 2. Objectivity 3. Professional competence and due care 4. Confidentiality 5. Professional behaviour

3 The Authority Underlying Accounting Types of Business Organisations Proprietorships (sole traders) Partnerships Companies Proprietorships What are some advantages? total undivided authority no restrictions on type of business must be legal What are some disadvantages? unlimited liability limitation on size fundraising power

4 Partnerships What are some advantages? better credit standing - possibly more brain power, but consultation with partners required What are some disadvantages? unlimited personal liability for general partners need for written partnership agreement Companies What are some advantages? separate legal existence limited liability of shareholders transferability of ownership relatively easy What are some disadvantages? separation of ownership and control extensive governmental regulation Objective 2 Apply accounting concepts and principles. i

5 Generally Accepted Accounting Principles What is the primary objective of financial reporting? To provide information useful for making investment t and lending decisions. The Entity Concept Example Assume that you decide to open up a garage and coffee shop. The garage made $250,000 in profits, while the coffee shop lost $50, The Entity Concept Example How much money did you make? At a first glance, we would assume that you made $200,000. However, by applying ppy the entity concept we realise that the garage made $250,000 while the coffee shop lost $50,000. Importantly the business activities and the personal affairs of the owner are separate.

6 The Accounting Period Concept Or the accounting time period concept. Unit of time for which accounting data is collected and the financial statements prepared. In Australia many companies prepare their statements for the financial year from July 1 to June 30 the following year. The Cost Principle Assets and services acquired should be recorded at their actual cost. (Reliable and objective.) Example If the garage purchases petrol pumps for $25 000, it would record these at the same amount The Matching Principle Relates the inputs and outputs of goods and services to one another. What expenses do you incur to earn the revenue?

7 The Profit Recognition Principle Recognise revenue when it is earned. GAAP recommends the accrual basis of accounting. Example If the garage repairs someone s car on credit, they would still recognise the income. Conservatism (Prudence) Principle Constrains management s natural optimism. Prevents overstating of profits Anticipate no profits, Anticipate all losses The Going Concern Principle The entity will continue to operate in the future.

8 Australian Accounting Standards Standards to govern measurement rules and level of disclosure. Australian Accounting Standards Board is responsible for technical accounting standards. Australia, like much of the rest of the world has adopted International Accounting Standards. Objective 3 Using the accounting equation. The Accounting Equation Economic Resources Claims to Economic Resources

9 Assets What is an asset? It is something a company owns which has future economic value. land building equipment goodwill Liabilities What is a liability? It is something a company owes. money service legal retainers product magazines Owners Equity What is owners equity? It is what s left of the assets after liabilities have been deducted. the same as net assets the owner s claim on the entity s assets

10 Transactions that Affect Owners Equity Revenues What are revenues? They are amounts received or to be received from customers for sales of products or services. sales performance of services rent received interest received Expenses What are expenses? They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. en e salaries and wages electricity and gas supplies used advertising

11 Objective 4 Analyse business transactions. Accounting for Business Transactions What is a transaction? It is any event that both affects the financial position of the business and can be reliably recorded. Accounting for Business Transactions 1 Paula Lee invests $30,000 to begin Paula Lee etravel. 2 Lee purchases land, paying $20,000 in cash. 3 She buys office supplies, agreeing to pay $500 in 30 days. 4 She earns and collects $5,500 revenues.

12 Accounting for Business Transactions 5 Lee performs services, and the client agrees to pay $3,000 within one month. 6 During the month, she pays $3,300 for expenses incurred. 7 Lee pays $300 to the store from which she purchased $500 worth of supplies. What is the effect of these transactions on the accounting equation? Accounting for Business Transactions Owners Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash 20,000 Land + 20,000 3) Supplies ) Cash + 5,500 +,500 5) Receivable + 3, ,000 6) Cash 3,300 3,300 7) Cash Totals + $35,400 = $35,200 Accounting for Business Transactions Notice that the equation always stays in balance. Each transaction affects at least two accounts, sometimes more. Some transactions affect only one side of the equation; some affect both sides.

13 Accounting for Business Transactions Other transactions that took place were as follows: The business collected $1,000 from the client. She sold some land at cost for $9,000. She withdrew $2,000 from the business. (See the final result, p 23 of your textbook) Objective 5 Prepare the financial i statements. t t Financial Statements... are the final product of the accounting process. tell how the business is performing and where it stands.

14 Financial Statements Statement of Comprehensive Income Statement of Changes in Equity Statement of Financial Position Also called Balance Sheet Statement of cash flows Statement of Comprehensive Income Also called Income Statement Summary of an entity s income and expenses over a period of time Income part Also shows changes in equity not resulting from owners e.g. Changes in asset values Sometimes produced separately Statement of Changes in Equity Shows increases in owners equity from Owner investments Profits Other comprehensive income Shows decreases in owners equity from Owner drawings Losses, Other comprehensive losses

15 Statement of Financial Position Also called a Balance Sheet Lists the entity's assets, liabilities and owners equity Done at a point in time, such as the end of the month or year. Statement of cash flows Also called cash flow statement Reports the cash coming in and cash going out each period Financial Statement Headings Each statement should have a heading showing three things 1. Name of the business 2. Name of the financial statement 3. The date or time period shown by the statement

16 Objective 6 Evaluate business performance. Relationships Among the Statements: Income Statement Revenue: Fees earned $8,500 Expenses: Salary expense $1,200 Electricity and gas expense 400 Equipment rental expense 600 Office rent expense 1,100 3,300 Net profit $5,200 Relationships Among the Statements: Statement of Changes in Equity Paula Lee, capital, April 1, 2007 $ 0 Add Investments by owner 30,000 Net profit 5,200 Less Drawings by owner 2,000 Paula Lee, capital, April 30, 2007 $33,200

17 Relationships Among the Statements: Balance Sheet Assets Cash $19,900 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets $ 33,400 Liabilities Accounts payable $ 200 Owner s Equity, Paula Lee, capital 33,200 Total liabilities and owner s equity $33,400 Relations Among the Statements: Cash Flows Statement Cash flows from operating activities: Cash receipts from services rendered $6,500 Cash payments: To suppliers 2,400 To employees 3,300 (3,600) Net cash flows from operating activities 2,900 Cash flows from Investing activities: Acquisition of land (20,000) Sale of land 9,000 Net cash flow from investing activities (11,000) Relations Among the Statements: Cash Flows Statement Cash Flows from Financing activities: Investment by Owner $30,000 Drawings by the Owner (2,000) Net Cash Flows from Financing activities 28,000 Net increase in cash 19,900 Cash at Beginning of April 0 Cash at End of April $19,900

18 PowerPoint to accompany End of Chapter 1