Last Revised: 13th August 2008. kaheiyeh.web.officelive.com
Page 3: The Nature of Accounting Page 5: The Balance Sheet & Transaction Analysis Page 8: The Income Statement & Transaction Analysis Page 13: Financial Reporting Principles Page 18: Adjustment to Accounting Entries Page 23: Completing the Accounting Cycle Page 26: Accounting for Cash Holdings & Receivables Page 30: Accounting for Inventory Page 37: Accounting for Non-Current Assets I Page 42: Accounting for Non-Current Assets II Page 45: Accounting for Liabilities
Week 1 – The Nature of Accounting
What is Accounting? Accounting is the main way in which organisations present the financial performance and financial position of that organisation. Essentially, it is a "language". It is also used to convey economic information to the decision-makers (users). The Rise of Economic Consequences Economic consequences have a very acute relationship with accounting. Take, for example, the collapse of Enron in 2001. This was due to: Misleading accounting Accounting scandals Accounting along took the business down and also the auditing firm and demonstrates this relationship. There is a focus on economic consequence in equity markets. This means that the decision maker is usually the investor/owner and they decide the value and the amount of shares they are willing the buy or sell. Users of Accounting Some users of accounting include: Management: To Monitor and Control Creditors: To decide lending amounts and terms Customers: To buy the product or not? (This generally applies to large buyers, not the end consumer) Tax Office: To see the assessable income Regulators: To check for compliance with legislation and laws Analysts: To provide recommendations to potential and current shareholders Competitors: To gain insight into the business's strategies Managers: To decide on performance incentives (Pay rises, bonuses etc.) Employees: To check their work, pay and conditions Accounting is a dynamic field. It can adapt and is responsive to current events. Double Entry Book-Keeping Double Entry Book-Keeping states that for every transaction, there is a source and a resource. That is: RESOURCES = SOURCES Which turns into: ASSETS = LIABILITIES + OWNER'S EQUITY This is known as the Accounting Equation and always balances.
Assumptions in Accounting There are a few assumptions in accounting: Reporting Entity The enterprise which is being reported should be the same entity (Either the legal entity or the economic entity or both) The Legal Entity is the enterprise itself, such as Woolworths Ltd. The Economic Entity is the consolidated business, such as Woolworths Ltd and all it's subsidiaries. Monetary Assumption The universally accepted medium of exchange, such as cash, and in common denominators, such as the Australian Dollar, is assumed. Going Concern The report is prepared under the presumption that the business will continue to trade for the indefinite future. Period Assumption This assumes that reports are generated at set intervals (per month, year etc.) Historical Cost This assumes that transactions are initially recorded at the price they were bought for. Cash Accounting and Accrual Accounting Cash Accounting is when the transaction is recorded when the actual cash is received. Accrual Accounting records a transaction when it happens, not when the cash is received.
Week 2 – The Balance Sheet & Transaction Analysis
The Statement of Financial Position The Statement of Financial Position (aka. The Balance Sheet), shows an organisation's resources and claims on those resources at a particular point in time. The sheet shows an enterprises' assets, liabilities and owner's equity. Owner's Equity can be described in different ways: A Company: Shareholder's equity A Sole Trader: Proprietor's equity A Partnership: Partners'...