Accounting Lecture1

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Objectives Accounting and the Business Environment 7111AFE Topic 1 1. Use accounting vocabulary. 2. Apply accounting concepts and principles to business situations. 3. Use the accounting equation to describe an organisation’s financial position. 4. Use the accounting equation to analyse business transactions. 5. Preparation of financial statements. 1-2

Objective 1

Accounting...
is an information system that...

Use accounting vocabulary
measures business activities, processes information, and... communicates financial information. 1-3 1-4

Accounting...

Users of Accounting Information

is called the language of business. External users make decisions about the entity. Internal users make decisions for the entity.

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Fields of Accounting

Types of Business Organizations
Proprietorships (sole traders)

Financial Accounting Partnerships Management Accounting
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Company
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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 – fund raising power 

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Partnerships
What are some advantages? – better credit standing – possibly – more brain power but consultation with power, partners required  What are some disadvantages? – unlimited personal liability for partners – need for written partnership agreement 

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Companies
What are some advantages? – separate legal existence – limited liability of shareholders (owners) – transferability of ownership relatively easy  What are some disadvantages? – separation of ownership and control – extensive governmental regulation 

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Objective 2 Apply accounting concepts and principles to business situations.

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Generally Accepted Accounting Principles


The Entity Concept Example
Assume that Jan decides to open up a petrol station and coffee shop.  The petrol station made $250,000 in $250 000 profits, while the coffee shop lost $50,000. 

What is the primary objective of financial reporting?

To provide information useful for making investment and lending decisions

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The Entity Concept Example
How much money did Jan make?  At a first glance, we would assume that Jan made $200,000.  However by applying the entity concept However, we realize that the petrol station made $250,000 while the coffee shop lost $50,000.  Jan’s business operations are also separate from her personal affairs. 

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The Time Period Concept
Or the ‘accounting time period concept’. Unit of time for which accounting data is collected and the financial statements prepared. d  In Australia many companies prepare their statements for the financial year – from July 1 to June 30 the following year.  

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The Cost Principle

The Cost Principle
(Reliability / Objectivity)

Assets and services acquired should be recorded at their actual cost.

Information must be reasonably accurate. t Information must report what actually happened. 1 - 17

Information must be free from bias. ee o b as.

Individuals would arrive at similar conclusions using same data. 1 - 18

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The Matching Principle

The Profit Recognition Principle

Relates the inputs and outputs of goods and services to one another.

Recognise revenue when it is ‘earned’. GAAP recommends the accrual basis of accounting.

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Conservatism (Prudence) Principle

The Going Concern Principle

Constrains managements’ natural optimism.

The entity will continue to operate in the future.

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Regulatory Framework
   

Objective 3 Use the accounting equation to desc be an organisation’s describe a o ga sat o s financial position.

International Accounting Standards Board (IASB) Australian Accounting Standards Board (AASB) Financial Reporting Council (FRC) Australian Securities and Investment Commission (ASIC) Australian...
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