Lecture week 1

The Accounting Environment

Financial Accounting Applications

Coordinators: Connie Vitale & Kerrie Mezzina Email for unit: 200111@uws.edu.au
Campbelltown lecturer: Connie Vitale

Room Building 11.12 Phone (02) 46 203465 c.vitale@uws.edu.au Email (preferred)

Bankstown lecturer: Kerrie Mezzina -Room Building 20.1.17 -Phone (02) 9772 6710 -Email (preferred) k.mezzina@uws.edu.au

Parramatta lecturer: Jean Mccartney

-Room

Building ED.G.38 -Phone (02) 9685 9219 -Email (preferred)j.mccartney@uws.edu.

Learning Objectives
1. Identify the common types of business entities 2. Understand and identify the functions carried out by managers 3. Identify the basic financial statements used in business to report to users for decision-making purposes

Learning Objective Continued

4. Explain the main assumptions made in the preparation of financial statements 5. Analyse the effects of business transactions on the accounting equation and on financial statements

What is Accounting ?
Accounting is a service activity It is the process of identifying, measuring, recording, analysing & communicating quantitative (economic) information to permit informed judgements and economic decisions by users of the information

ASSUMPTIONS MADE AND CHARACTERISTICS OF INFORMATION

Assumptions
Accounting entity assumption
Need to identify boundaries

Accrual basis assumption

Transactions and events recorded when they occur

Going concern assumption

Entity will continue indefinitely

Period assumption
Profit determined for a period of time
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Accounting Assumptions and Characteristics of Information

Accounting Information should have the following characteristics:

Relevance Reliability Comparability and consistency Understandability Materiality

It should also be judged on Benefits vs costs to produce

Information on Income is costly to produce

Types of Business Entities

Q. What are the main types of business structures?

Single proprietorship/Sole trader

owner
Partnership

partner
Company/Corporation

shareholder

Users of accounting information

Who are the users of the information provided by accountants ?
Internal users (decision makers within the firm)
Management

External users (decision makers outside the firm)

Owners / shareholders / investors Creditors / suppliers Government and regulatory agencies Customers / consumers Competitors Special interest groups (greenies, grey brigade) Employees (Trade Unions) and Others ?

Financial Accountants use these Basic Financial Statements Income statement (Statement of Comprehensive Income)
Operating efficiency over a period of time

Balance Sheet (Financial Position)

Economic condition at a point in time (freeze frame it now!)

Cash flows
(inflows and outflows of cash over a period of time) Operating activities Investing activities Financing activities

What are Accounts ?

An account is the basic summary device of accounting. Each account provides a record of increases and decreases in that specific item. Accounts are grouped into five categories: Assets Liabilities Owners Equity Reported on the Balance Sheet (Statement of Fin Revenues Position) Expenses Reported on the Income Statement (Statement of Comprehensive Income)

The statement of cash flows

Statement of cash flows reports
Cash in Cash out By activity type

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Accounts
Assets are the economic resources controlled by an entity that will provide a future economic benefit. Assets are recorded at their historical (original) purchase cost. Assets may be current (economic benefit is used within 12 months) or non-current (provide economic benefits for more than 12 months). Liabilities represent the debts of an entity. They reflect a current obligation to sacrifice economic benefits at some given time in the future. Liabilities are also classified as either current (payable within 12 months) or non-current (due over 12 months). Owners Equity is the net assets of a firm (ie Assets liabilities)

Account types
Revenue: inflows of economic benefits, ie income earned
from performing services or selling goods Expenses: outflows of economic benefits, ie the costs incurred in operating a business

Revenue and Expense recognition

Accrual basis Revenues Recognises credit transactions Recognises credit transactions Cash basis Only recognised when cash received Only recognised when cash paid

Expenses

Under the current accounting standards we must report using accrual accounting principles

Examples of Accounts
Account Type Account Name (some examples only)
Current Assets: Cash, A/c receivable, Inventory, Supplies Non-current Assets: Furniture, Motor vehicles, Building Current Liabilities: A/c payable, Rent payable Non-current Liabilities: Bank Loan, Mortgage Share capital, Retained earnings, Dividends (for a company) ORCapital and Drawings (for a sole trader or partnership) Sales revenue, Service revenue, Interest revenue, Rental revenue, Advertising revenue etc Wages expense, Electricity expense, Supplies expense, Rent expense, Bank charges, Fuel expense, Telephone expense etc

Assets Liabilities Owners equity Revenue Expense

This is not a complete list but provides some examples of accounts that may be affected by business transactions

Types of transactions

 Business transactions
 External transactions: exchange of economic resources and/or obligations involving an external party  Internal transactions: exchange of economic resources and/or obligations that do not involve an external party eg WIP in a manufacturing environment.

 Non-Business transactions
 Private (personal) transactions  Transactions which result in no exchange of economic resources / economic value. Eg legal contracts

Worked Example
Example will be completed in the Lecture.

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The balance sheet- T format

DONS AUTO REPAIRS Balance Sheet As at 30 June 2010 ASSETS Cash at Bank Accounts receivable Repair supplies Repair equipment Land Building LIABILITIES $ 50 340 Accounts payable $ 20 760 17 790 Mortgage payable 201 000 14 610 221 760 110 700 60 000 EQUITY 255 000 Don Brady, Capital 286 680 $508 440 $508 440
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ASSETS = LIABILITIES + EQUITY

The balance sheet - narrative format

continued
ASSETS Cash at Bank Accounts receivable Repair supplies Repair equipment Land Building Less LIABILITIES Accounts payable Mortgage payable NET ASSETS EQUITY Don Brady, Capital $ 50 340 17 790 14 610 110 700 60 000 255 000 $508 440 $ 20 760 201 000 221 760 $286 680 286 680 $286 680

ASSETS LIABILITIES = EQUITY

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The balance sheet continued

Equity
The residual interest of the owner/s in the assets (less liabilities) of the entity
ASSETS = LIABILITIES + EQUITY or ASSETS LIABILITIES = EQUITY

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The statement of changes in equity

DONS AUTO REPAIRS Statement of Changes in Equity For the year ended 30 June 2010 Don Brady, Capital - 1 July 2009 Net profit for the year Less: Drawings Don Brady, Capital - 30 June 2010 $ 237 330 94 350 331 680 45 000 $ 286 680

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The income statement

DONS AUTO REPAIRS Income Statement For the year ended 30 June 2010 INCOME Repair revenue EXPENSES Advertising expense $ 20 250 Repair supplies expense 91 710 Salaries and wages expense 127 800 Rent expense 40 260 Telephone expense 20 190 Light and Power expense 47 940 PROFIT $442 500

348 150 $ 94 350

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The statement of cash flows continued

DONS AUTO REPAIRS
Statement of cash flows

For the year ended 30 June 2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $424 710 Cash paid to suppliers and employees (342 000) Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of land and buildings (315 000) Purchase of repair equipment (110 700) Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Amount borrowed under mortgage 201 000 Investment by owner 237 330 Drawings by owner (45 000) Net cash from financing activities Net increase (decrease) in cash held Cash at beginning of year Cash at end of year

$ 82 710

(425 700)

393 330 50 340 0 $ 50 340

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