Chapter 1 Accounting In Action PDF

Chapter 1 Accounting in action PowerPoint presentation by Dr Anne Abraham University of Western Sydney ©2009 John Wiley & Sons Australia, Ltd  WHAT IS ACCOUNTING? LO1 Accounting is an information system that Identifies Records Com...

Chapter 1 Accounting in action PowerPoint presentation by Dr Anne Abraham University of Western Sydney ©2009 John Wiley & Sons Australia, Ltd  WHAT IS ACCOUNTING? LO1 Accounting is an information system that Identifies Records Communicates the economic events of an organisation to interested users PowerPoint presentation by Dr Anne 2 Abraham, University of Western Sydney  WHAT IS ACCOUNTING? continued The Accounting Process PowerPoint presentation by Dr Anne 3 3 Abraham, University of Western Sydney LO1 Question 1 The accounting process is correctly sequenced as A. identification, communication, recording B. recording, communication, identification C. identification, recording, communication D. communication, recording, identification PowerPoint presentation by Dr Anne 4 Abraham, University of Western Sydney  Why is accounting important? LO2 It assists people to make decisions about the allocation of scarce resources It provides information to assist users to understand the past, present and future position of an entity It is a means of measuring business activity and communicating this information to decision makers PowerPoint presentation by Dr Anne 5 Abraham, University of Western Sydney The role of corporate governance in enhancing LO3 the quality of financial reporting Corporate governance is the system in which entities are directed, managed and administered It concerns – the decision-making processes of an entity – ensuring alignment between the goals of managers and shareholders ASX Corporate Governance Principles and Recommendations – specifies 8 core principles Better quality accounting information expected to be provided to shareholders if these are adopted PowerPoint presentation by Dr Anne 6 Abraham, University of Western Sydney  Who uses accounting data? LO4 Internal users External users Managers who plan, Investors to make decisions organise and run the to buy, hold or sell shares business Creditors to evaluate risks e.g., marketing managers, of giving credit and lending production supervisors, money chief financial officers, – e.g., suppliers, bankers other employees Government and regulatory bodies – e.g., ATO, ASIC PowerPoint presentation by Dr Anne 7 Abraham, University of Western Sydney  Question 2 LO4 Which of the following groups would use accounting information to determine whether an advertising proposal will be cost effective? A. Investors in shares B. Marketing managers C. Creditors D. Chief financial officer PowerPoint presentation by Dr Anne 8 Abraham, University of Western Sydney  Brief history of accounting Origins attributed to 1494 work of Luca Pacioli Separation of owners and managers led to the need to report on financial status – Industrial revolution of 19th century – Emergence of large entities More complex transactions necessitated for reporting improvements Computers are the drivers of the present information age PowerPoint presentation by Dr Anne 9 Abraham, University of Western Sydney Distinguishing between bookkeeping and accounting Bookkeeping – Involves only recording of economic events – Only one part of accounting Accounting – Entire process of identifying, recording and communicating economic events – Can be divided into Financial accounting Managerial accounting PowerPoint presentation by Dr Anne 10 Abraham, University of Western Sydney  THE BUILDING BLOCKS OF ACCOUNTING Ethics LO5 – The standards of conduct by which actions are judged as right or wrong Sustainability reporting LO6 – Meeting the needs of the present without compromising the ability of future generations to meet their own needs – Variously called Corporate social responsibility reporting Triple bottom line reporting PowerPoint presentation by Dr Anne 11 Abraham, University of Western Sydney LO5 Question 3 The standards of conduct by which actions are judged to be right or wrong, honest or dishonest, fair or not fair are called A. Accounting standards B. Generally acceptable accounting principles C. Ethics D. Assumptions PowerPoint presentation by Dr Anne 12 Abraham, University of Western Sydney  Generally accepted accounting LO7 principles (GAAP) Australian Accounting Standards Board (AASB) Financial Reporting Council (FRC) Australian Securities & Investment Commission (ASIC) Cost principle states assets should be recorded at their historical cost PowerPoint presentation by Dr Anne 13 Abraham, University of Western Sydney LO7 Question 4 The accounting standards issues by the Australian Accounting Standards Board are consistent with those issued by the A. Financial Reporting Council B. Australian Taxation Office C. Australian Securities and Investment Commission D. International Accounting Standards Board PowerPoint presentation by Dr Anne 14 Abraham, University of Western Sydney LO8 Assumptions Monetary unit assumption – Only data that can be expressed in terms of money is included in the accounting records Economic entity assumption – Can be any organisation or unit in society – Activities of the entity must be kept separate and distinct from activities of the owner and all other economic entities PowerPoint presentation by Dr Anne 15 Abraham, University of Western Sydney  Assumptions continued Types of business entities – Proprietorships Owned by one person e.g. beauty salons, book stores, dentists – Partnerships Owned by more than one person e.g. accountants, solicitors, doctors – Companies Organised as a separate legal entity and owned by shareholders Qantas, BP, BHP Billiton PowerPoint presentation by Dr Anne 16 Abraham, University of Western Sydney LO8 Question 5 The accounting entity assumption states that an accounting entity A. can be separately identified and accounted for B. cannot reasonably report all of its activities in financial statements C. has a separate legal entity from its owners D. must record all events at their historical cost PowerPoint presentation by Dr Anne 17 Abraham, University of Western Sydney  Basic accounting equation LO9 The basic accounting equation provides the underlying framework for recording and summarising the economic events of an entity OWNER’S ASSETS = LIABILITIES + EQUITY PowerPoint presentation by Dr Anne 18 Abraham, University of Western Sydney Basic accounting equation continued Assets – Resources owned by a business – Used in carrying out such activities as production, consumption and exchange Liabilities – Claims against assets – Consist of existing debts and obligations PowerPoint presentation by Dr Anne 19 Abraham, University of Western Sydney Basic accounting equation continued Owner’s equity – Represents the ownership claim to total assets OWNER’S ASSETS – LIABILITIES = EQUITY – Owner’s equity is increased by investments by the owner and by revenue – Owner’s equity is decreased by drawings and expenses PowerPoint presentation by Dr Anne 20 Abraham, University of Western Sydney LO9 Question 6 Which of the following equations properly represents a derivation of the basic accounting equation? A. Assets + Liabilities = Owner's Equity B. Assets = Owner's Equity C. Cash = Assets D. Assets – Liabilities = Owner’s Equity PowerPoint presentation by Dr Anne 21 Abraham, University of Western Sydney  USING THE BUILDING BLOCKS LO10 A transaction – is a record of an economic event of an entity – may be internal or external – affects two or more components of the basic accounting equation Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equation NB All activities do not represent transactions. PowerPoint presentation by Dr Anne 22 Abraham, University of Western Sydney Transaction identification process PowerPoint presentation by Dr Anne 23 23 Abraham, University of Western Sydney  Transaction analysis Example Loc Nguyen decides to open a computer programming service which he names Softbyte (1) On 1 September, he invests $15 000 cash in the business = Liabilities Assets + Owner’s Equity L. Nguyen, Cash = Capital (1) +$15 000 = +$15 000 Investment PowerPoint presentation by Dr Anne 24 Abraham, University of Western Sydney  Transaction analysis continued (2) Softbyte purchases computer equipment for $7000 cash Assets = Liabilities + Owner’s Equity L. Nguyen, Cash + Equipment = Capital Old balance $15 000 $15 000 (2) -7 000 +$7 000 New balance $ 8 000 + $7 000 = $15 000 $15 000 $15 000 PowerPoint presentation by Dr Anne 25 Abraham, University of Western Sydney  Transaction analysis continued (3) Softbyte purchases $1600 supplies on credit from Acme Supply Company Assets = Liabilities + Owner’s Equity Accounts L. Nguyen, Cash + Supplies + Equipment = Payable + Capital Old bal. $8 000 $7 000 $15 000 (3) +$1 600 +$1 600 New bal. $8 000 + $1 600 + $7 000 = $1 600 + $15 000 $16 600 $16 600 PowerPoint presentation by Dr Anne 26 Abraham, University of Western Sydney  Transaction analysis continued (4) Softbyte receives $1200 cash from customers for services provided Assets = Liabilities + Owner’s Equity Accounts L. Nguyen, Cash + Supplies + Equipment = Payable + Capital Old bal. $8 000 $1 600 $7 000 $1 600 $15 000 (4) +1 200 +1 200 Service Revenue New bal. $9 200 + $1 600 + $7 000 = $1 600 + $16 200 $17 800 $17 800 PowerPoint presentation by Dr Anne 27 Abraham, University of Western Sydney  Transaction analysis continued (5) Softbyte receives a bill for $250 for advertising and decides to pay later Assets = Liabilities + Owner’s Equity Accounts L. Nguyen, Cash + Supplies + Equipment = Payable + Capital Old bal. $9 200 $1 600 $7 000 $1 600 $16 200 (5) + 250 - 250 Advertising Exp New bal. $9 200 + $1 600 + $7 000 = $1 850 + $15 950 $17 800 $17 800 PowerPoint presentation by Dr Anne 28 Abraham, University of Western Sydney  Transaction analysis continued (6) Softbyte provides $3500 of services for customers of which $1500 is for cash and the rest is on account Assets = Liabilities + Owner’s Equity Accounts Accounts L. Nguyen, Cash + Receivable + Supplies + Equipment = Payable + Capital Old bal. $ 9 200 $1 600 $7 000 $1 850 $15 950 (6) +1 500 +2 000 +3 500 Service Rev New bal. $10 700 + $2 000 + $1 600 + $7 000 = $1 850 + $19 450 $21 300 $21 300 PowerPoint presentation by Dr Anne 29 Abraham, University of Western Sydney  Transaction analysis continued (7) Paid cash for monthly expenses: Store rent $600, Salaries $900, Utilities $200 Assets = Liabilities + Owner’s Equity Accounts Accounts L. Nguyen, Cash + Receivable + Supplies + Equipment = Payable + Capital Old bal. $10 700 $2 000 $1 600 $7 000 $1 850 $19 450 (7) -1 700 - 600 Rent Exp - 900 Salaries Exp - 200 Utilities Exp New bal. $ 9 000 + $2 000 + $1 600 + $7 000 = $1 850 + $17 750 $19 600 $19 600 PowerPoint presentation by Dr Anne 30 Abraham, University of Western Sydney  Transaction analysis continued (8) Softbyte pays its $250 advertising bill in cash This was previously recorded as an Accounts Payable in (5) Assets = Liabilities + Owner’s Equity Accounts Accounts L. Nguyen, Cash + Receivable + Supplies + Equipment = Payable + Capital Old bal. $ 9 000 $2 000 $1 600 $7 000 $1 850 $17 750 (8) - 250 - 250 New bal. $ 8 750 + $2 000 + $1 600 + $7 000 = $1 600 + $17 750 $19 350 $19 350 PowerPoint presentation by Dr Anne 31 Abraham, University of Western Sydney  Transaction analysis continued (9) Softbyte receives $600 in cash from customers who had been billed for services in (6) Assets = Liabilities + Owner’s Equity Accounts Accounts L. Nguyen, Cash + Receivable + Supplies + Equipment = Payable + Capital Old bal. $ 8 750 $2 000 $1 600 $7 000 $1 600 $17 750 (8) + 600 - 600 New bal. $ 9 350 + $1 400 + $1 600 + $7 000 = $1 600 + $17 750 $19 350 $19 350 PowerPoint presentation by Dr Anne 32 Abraham, University of Western Sydney  Transaction analysis continued (10) Loc Nguyen withdraws $1300 cash from Softbyte for his personal use Assets = Liabilities + Owner’s Equity Accounts Accounts L. Nguyen, Cash + Receivable + Supplies + Equipment = Payable + Capital Old bal. $ 9 350 $2 000 $1 600 $7 000 $1 600 $17 750 (9) -1 300 -1 300 Drawings New bal. $ 8 050 + $1 400 + $1 600 + $7 000 = $1 600 + $16 450 $18 050 $18 050 PowerPoint presentation by Dr Anne 33 Abraham, University of Western Sydney LO10 Question 7 If total liabilities decreased by $14 000 during a period of time and owner’s equity increased by $6000 during the same period, then the change in total assets is A. an increase of $14 000 B. an increase of $20 000 C. a decrease of $8000 D. an increase of $8000 PowerPoint presentation by Dr Anne 34 Abraham, University of Western Sydney  FINANCIAL STATEMENTS LO11 Four financial statements are prepared from the summarised accounting data Each statement provides management, owners and other interested parties with relevant financial information Each set of financial statements is accompanied by explanatory notes and supporting schedules that are an integral part of the statements PowerPoint presentation by Dr Anne 35 Abraham, University of Western Sydney FINANCIAL STATEMENTS continued 1. Statement of comprehensive income – Presents income and expenses – Reports profit (or loss) for a specific period of time 2. Statement of changes in equity – Summarises the changes in owner’s equity for a specific period of time PowerPoint presentation by Dr Anne 36 Abraham, University of Western Sydney FINANCIAL STATEMENTS continued 3. Statement of financial position – Reports the assets, liabilities and owners equity at a specific date 4. Statement of cash flows – Summarises information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time PowerPoint presentation by Dr Anne 37 Abraham, University of Western Sydney  Income Statement SOFTBYTE Income Statement for the month ended 30 September 2010 Income Service revenues $ 4 700 Expenses Salaries expense $900 Rent expense 600 Advertising expense 250 Utilities expense 200 Total expenses 1 950 Profit $ 2 750 PowerPoint presentation by Dr Anne 38 Abraham, University of Western Sydney Statement of Changes in Equity SOFTBYTE Statement of Changes in Equity for the month ended 30 September 2010 L. Nguyen, Capital 1/09/09 $ 0 Add: Investments $15 000 Net profit 2 750 17 750 Less: Drawings 1 300 L. Nguyen, Capital 30/09/10 $16 450 PowerPoint presentation by Dr Anne 39 Abraham, University of Western Sydney Statement of Financial Position SOFTBYTE Statement of Financial Position as at 30 September 2010 Assets Cash $ 8 050 Accounts receivable 1 400 Supplies 1 600 Equipment 7 000 Total assets $18 050 Liabilities and owner’s equity Liabilities Accounts payable $ 1 600 Owner’s Equity L. Nguyen, Capital 16 450 Total liabilities and PowerPoint owner’s presentation equity by Dr Anne Abraham, University of Western Sydney $18 050 40  Statement of Cash Flows SOFTBYTE Statement of Cash Flows for the month ended 30 September 2010 Cash flows from operating activities Cash receipts from customers $ 3 300 Cash payments for expenses (1 950) Net cash provided by operating activities $ 1 350 Cash flows from investing activities Purchase of equipment (7 000) Cash flows from financing activities Investments by owner 15 000 Drawings by owner (1 300) 13 700 Net increase in cash 8 050 Cash at beginning of period 0 Cash at end of period PowerPoint presentation by Dr Anne $ 8 05041 Abraham, University of Western Sydney  Interrelationship of financial statements Profit must be computed first, so the income statement is prepared first The statement of changes in financial position depends on results of income statement and statement of changes in equity The ending cash figure in the statement of cash flows is reported in the statement of financial position PowerPoint presentation by Dr Anne 42 Abraham, University of Western Sydney Interrelationships for Softbyte Profit of $2750 shown on income statement is added to the beginning balance of owner’s capital in statement of changes in equity Ending owner’s capital of $16 450 is reported on the statement of financial position Ending cash of $8050 on the statement of cash flows matches cash figure on the statement of financial position PowerPoint presentation by Dr Anne 43 Abraham, University of Western Sydney LO11 Question 8 Which of the following financial statements is concerned with an enterprise at a particular point in time? A. The statement of financial position B. The income statement C. The statement of changes in equity D. The statement of cash flows PowerPoint presentation by Dr Anne 44 Abraham, University of Western Sydney LO12 APPENDIX THE ACCOUNTING PROFESSION Public Accounting – Main areas are auditing, taxation, management consultation Private Accounting – Main areas are general accounting, cost accounting, budgeting, accounting information systems, tax accounting, internal auditing Not-for-profit Accounting – e.g., Red Cross, World Vision, Oxfam PowerPoint presentation by Dr Anne 45 Abraham, University of Western Sydney 46