accounting and business environment

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 18 (1605 words) Published: April 20, 2014
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Chapter 1
Accounting and
the business
environment

Learning Objectives
1. Use accounting vocabulary
2. Apply accounting concepts
and principles
3. Use the accounting equation
4. Analyse business transactions
5. Prepare the financial statements
6. Evaluate business performance

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Objective 1

Use accounting vocabulary.

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Accounting...
is an information system that...
measures business activities,
processes information, and...
communicates financial information.
And is called the language of business.
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Accounting Information and
Its Users
External users
make decisions
about the entity.

Internal users
make decisions
for the entity.

e.g. Investors

e.g. Management

This is
Financial
Accounting

This is
Management
Accounting

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Types of Business
Organisations
Proprietorships
(sole traders)
Partnerships
Companies

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

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 – fundraising power

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

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

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Companies








What are some advantages?
separate legal existence
limited liability of shareholders
transferability of ownership relatively easy
What are some disadvantages?
separation of ownership and control
extensive governmental regulation

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Objective 2

Apply accounting
concepts and principles.

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

Generally Accepted
Accounting Principles
 What is the primary objective of
financial reporting?
 To provide information useful for
making investment and lending
decisions.

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

The Entity Concept Example
 Assume that you decide to open up a
garage and coffee shop.
 The garage made $250,000 in profits,
while the coffee shop lost $50,000.

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

The Entity Concept Example
 How much money did you make?
 At a first glance, we would assume that
you made $200,000.
 However, by applying the entity concept
we realise that the garage made
$250,000 while the coffee shop lost
$50,000.
 Importantly the business activities and
the personal affairs of the owner are
separate.
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

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

Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

The Cost Principle
Assets and services
acquired
should be recorded
at their actual cost.
(Reliable and objective.)
 Example
– If the garage purchases petrol pumps for
$25 000, it would record these at the
same amount
Horngren, Best, Fraser, Willett: Accounting 6e © 2010...
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