WEEK 1 BUSS 1030 ACCOUNTING, BUSINESS AND SOCIETY NOTES Accounting information system measuring business activity, processes data into reports and communicates results to decision makers (ethics important AASB) Financial Accounting provides info. for ppl outside firm (lenders/outside investors) Management Accounting info. for internal decision makers (e.g. admin, executives) Financial Statements report on business in monetary terms used by individuals, businesses, investors, creditors, government regulatory agencies, tax authorities, noon profit organisations Public Accounting Audit independent examination that assures reliability of accounting reports that management prepares + submits to creditors, investors etc. Triple-bottom-line (TBL) = reports environmental + social measures of performance + traditional financial measures Tax Accounting = aims of complying with tax laws + minimizing taxes to be paid Management Consulting = advice public accountants provide to help managers run business (suggestions/management structure/accounting systems etc.) Insolvency = liquidators appointed to manage business of firm in financial distress Private Accounting Cost Accounting analyses business costs to help managers control expenses Budgeting sets sale and profit goals + details plans Information Systems design identifies organisation s info. needs (both internal/external) Internal Auditing evaluate firm s own accounting/management systems + improve efficiency Types of Business Organisations Proprietorships (sole traders) - Single owner, often manager (small businesses) Partnerships joins 2 or more individuals together as co-owners Company business owned by shareholders (either private or public (ASX listing)) ADVANTAGES Sole Proprietorship Partnership Company Total undivided authority Better credit standing Separate legal existence (treated as an entity not extension of a person) Limited liability to shareholders (company is separate from shareholders) No Restrictions on type of business (must be legal) More brain powers/expertise (but consultation with partners required) Easy to setup Simple to form Easy transferability of ownership DISADVANTAGES Sole Proprietorship Partnership Company Unlimited personal liability (responsibility for all liabilities/business expenses) Limitation on size/fundraising power Unlimited personal liability for general partners Need for written partnership agreement Separation of ownership and control Extensive governmental regulation
Accounting Concepts Entity Concept = defines entity and sharp boundaries for which accounting data is collected (person running business/his personal transactions are separate from the business itself not incl. in financial reports) Accounting Time Period Concept = unit of time for which accounting data is collected/financial statements prepared (usually 1 year from July 1 to June 30 the next year) Cost Principle = assets and services acquired should be recorded at actual cost (price agreed at time good/service is no longer in sellers hands (even if not actually paid or not)) Matching Principle = relates inputs and outputs of G+S to one another Profit Recognition Principle = record revenue when it is earned (i.e. Good/service no longer in hand, not when actually paid for) on accrual basis Conservatism Principle = if unsure whether transaction is profit or loss, record as loss (conservative) Going Concern Principle = business as a whole will continue indefinitely for the foreseeable future WEEK 2 Assets = economic resources expected to be of benefit in future (e.g. cash, inventory, furniture, land) note: doesn t have to be owned it can also be controlled Cash at bank Accounts receivable = exchange promise of future cash receipt; sales made on credit Bills receivable = G+S may be sold for bill of exchange a written pledge that customer will pay fixed amount of money by certain date Inventories = unsold items in stock or on hand Prepaid expenses = expenses paid in advance assets because business avoids paying cash in future Land = record of cost/value of land business controls Buildings = cost/value of business buildings Plant and equipment Liabilities = outsider claims (debts payable to outsiders called creditors) what company owes Accounts payable = opposite of A/R; purchase made on credit Bills payable = opposite of B/R Accrued Liabilities = liability for expense not paid/revenue not received but not yet earned Owners Equity = Insider claims owner s/investors earnings/share of profits OE = Capital + (Revenue Expenses) Drawings (dividends) ^Profit^ Accounting Equation: ASSETS = LIABILITIES + OWNERS EQUITY Income = refers to all increases in equity other than investments by owners *Always in balance
Revenue = part of income arising from ordinary activities (amount received or to be received from customers for sale of products or services (via profit recognition principle) incl. sales, feeds, interest, dividends, royalties Sales revenue Service revenue Interest revenue = earned on investments in shares of corporations Owner withdrawals = decrease OE when owner takes assets out of business for personal use Expenses = decrease OE by using up assets/increasing liability in order to deliver G+S to customers (e.g. rent, salary, advertising, water, gas) Note: Inventories = assets you buy to sell; Supplies = assets you buy to use Income = Revenue (in broad terms/similar definitions) INCOME = REVENUE (money earned in normal course of business e.g. profit) + GAINS (money earned as a random sale outside the normal course of business e.g. selling land) Revenue = Inflow of economic benefit Expense = Outflow of economic benefit Asset = provides future economic benefit Expenses Occur only when an asset has been consumed (often expenses are recognized when an asset is used up) Drawings Withdraw cash/other assets for personal use! decrease OE Balance Sheet = reports assets, liabilities and owners equity of business Note: Profit can be high (through accounts payable/accrual basis) but not necessarily cash flow which is also important to recognize strength of company (cash needed for many transactions) Tips If there is no exchange of eco. resources then no transaction (even if agreement is made) Give specific names for what areas of A/L/OE have changed Liabilities is money owed, once paid it is no longer a liability When asset stops being useful (ie. used up) it becomes expense (thus reducing OE) If A/R but no cash is received (dodgy business) write in transaction as normal (profit recognition principle) Description of accounts/transactions are in the business perspective Note: Rent can be: 1. In advance (before use) (asset) or 2. In arrears (after use) (expense) Collection = term used to describe transaction where cash is finally paid for accounts payable Sale = term to classify transaction of passing on of G/S whether cash is paid yet or not When something is prepaid (e.g. insurance) it is considered an assets Common Account Names: Equipment, Capital, Cash at Bank, Sales revenue, Rent Expenses, Land assets, Accounts Receivable, Accounts Payable etc. Terminology associated with A/R and A/P On account, on credit, received invoice
WEEK 3 Double Entry Accounting = recording dual effects of each business transaction (each transaction affects at least 2 accounts) When A increases called DEBIT (DR), when L or OE increases called CREDIT (CR) When A decreases called CREDIT (CR), when L or OE decreases called DEBIT (DR) Each transaction must record at least one debit and one credit (Total debits = Total credits) T-Accounts (Ledger Account) T Formation with heading; each item in account has its own T-Account o Vertical line splits Left side = Debit; Right side = Credit DEBITS = CREDITS o A = L + OE (Capital + Revenue Expenses Drawings) o (+/-) = (-/+) + (-/+) + (-/+) + (+/-) + (+/-) Note: The amount remaining in an account (after debits + credits accounted for)! balance Accounts are created as they are needed (called opening the account) Recording Transactions in a Journal (chronological record of the entity s transactions) o Shows effect of business transactions on A/L/Equities/revenues/expenses 1. Identify transaction from source documents 2. Specify each account affected by transaction and classify it by type (A/L/OE) 3. Determine whether each account is increased or decreased by transaction. Determine DR/CR as necessary 4. Enter transaction in journal (incl. brief explanation (narrative)) for journal entry. DR side entered first, CR side entered last Journal Entry includes: Date of transaction, Title of account debited, title of account credited (indented), dollar amounts of DR/CR, short narration For Journal Entries when writing the date of transaction; after the first transaction the date of any following transactions only the day has to be recorded (if its same month and year) and the month date and only have to be recorded (if its same year) Write all DRs first before writing all CRs Source Documents Documentary evidence that a transaction occurred and internal control over the firm s resources o E.g. cash receipts, invoices, credit card receipts, deposit slips, bank statements etc. Nature of Business Transactions External Business Transactions = between different people/companies Internal Business Transactions = between segments of a company Fair Value = current market value for an item (a.k.a. mark to market/market value) Historical Cost = how much was paid for an item
Note: If Historical Cost > Fair Value (record as (Fair Value minus Historical Cost) as a loss in an income statement Income Statement Considers revenue (+ and on right column) and expenses (- and on left column) only (and reasons that affected both) Chart of Accounts: Name of all accounts Accounts identified with Account numbers: 1 (Assets) 2 (Liabilities) 3 (Owner s Equity) 4 (Revenues) 5 (Expenses) o The 2 nd, 3 rd and higher digits in account number = indicate position of individual account within a category (E.g. Cash at Bank = 101 etc.) o Every account has its own ledger + account number Posting: Copying amounts from the journal to the accounts in the ledger Posting from the Journal to the Ledger 1. Copy transaction date from journal to ledger 2. Copy journal page number from journal to ledger (abbreviations e.g. Jrnl.Ref. (Journal reference) or J.1. (Journal page 1) to indicate where information in ledger came from 3. Copy dollar amount of debit from journal as a DR to same account and similarly for credit as CR 4. Copy Account Number from ledger back to journal Elements of a Ledger (i.e. Running Balance Ledger) Date, Item column (for any special notation), Journal reference, debit column, credit column Explanation column (like narrative column in journals) explain why a DR or CR occurred (e.g. Cash or Share capital etc.) Tips: o Note: A/C numbers are normally found in an organization s Chart of Accounts " After posting, tick appropriate transaction from journal (to know that it has been posted already) o No need to make a separate account for the CR column (this change has already been accounted for in the explanation column) o For a transaction: " Post Ref. is often GJ1 " For Account Name: Often explanation in journal associated with account for DR " For Explanation: Account name associated with CR Explanation is WHY the account went up or down so it will be the corollary (i.e. opposite CR/DR) e.g. Cash at Bank going up because of Share Capital " Fill in $ value for DR o Repeat steps separately for the accounts to be debited and those to be credited (write whatever is associated with the account) Posting to 4 Column Ledger Account o 2 columns for DR and CR, next 2 columns for DR/CR Balance " Balance is in DR if + ve, Balance is in CR if ve for account