BUSS1030 Notes

Accounting is an information system that measures business activities, processes

information and communicates financial information
Framework of Accounting

Income and balance sheet are based on cash and credit

Cash flow is only cash (mainly small businesses)
Income statement shows profit
Balance sheet shows A = L + OE
You can have profit but 0 cash because profit is calculated by revenue and
expenses

Management and Financial Accounting

Financial Accounting
Financial accounting is the preparation
and presentation of financial
information to allow users to make
economic decisions about the entity
External User Focus
Includes:
Statement of Comprehensive
Income
(The Income Statement)
Statement of Financial Position
(The Balance Sheet)
Statement of Changes in Equity
Statement of Cash Flows (Cash
Flow Statement)
The Accounting Process

Management Accounting
Management accounting provides
economic information for internal
users
Core activities include
formulating plans and budgets
Information used in monitoring
and control within the entity

Ethics in Accounting

The Accounting profession in Australia

Conceptual Framework

CF is a set of concepts defining the nature, purpose and content of generapurpose financial reporting

It is used by both preparers and standard setters

A bit of history
o Prior to 1970s, no GAAP
o Resulted in inconsistencies between accounting standards and
practices
o As a result, US, UK, NZ, Australia started developing normative
theory of financial accounting
o Prior to 2005, CF in Australia was developed by AASB and AARF
o From 1 Jan 2005, Australian standards converged with international
accounting standards
o Following Sep 2010, the IASB issued CF but Australia continues to
use a mixture of this new CF and Australias own CF
o IASB issued an exposure draft on 28 May 2015 for revised CF

CF (Amendments and Statement of Accounting Concepts 1) consists of

Objective of General Purpose Financial Reports (GPFR)

o Includes cash flow statement, balance sheets
o Needs to communicate to users organise info in a way that people
can understand
Qualitative characteristics
Definition of elements in financial statements

Users of Accounting

Primary users (resource providers)

Equity investors (shareholders)
Lenders (banks)
Other creditors (employees, suppliers, customers)

Accounting measurement concepts and principles

Accounting Entity and Legal Entity

Sole trade
Two entities are separate
(accounting)
Legally are the same
entity therefore
unlimited liability
- Owner is
personally

Partnership
Accounting all partners
and businesses
Legally the same entity
unlimited liability

Company
Accounting
shareholders separate
from business
Legal also separate,
thats why limited
liability for shareholders

responsible for
the businesss
debts

Different costs

Historical cost what you first pay when you buy an item
Market value what is it worth now in the market
Replacement cost cost of replacing the item at this moment

** we focus on historical cost in accounting (most objective/accurate since there

are source documents
Fair Value buy a computer which is supposed to last 3 years for $300. 1 year
has past, fair value is $200

Qualitative characteristics of Accounting Information

The Accounting Equation

Assets = Liabilities + Owners Equity (=

capital + revenue expenses drawing
dividends)
Assets: a resource owned/controlled by the entity as a result of past events and
from which future economic benefits are expected

Cash, land, building, goodwill, accounts/bills receivable

Difference between accounts and bills receivable

-

Accounts people must pay within e.g. 50 days (Fixed)

Bills receivables - negotiate one on one to pay later e.g. if someone cant
pay, call up to pay later
Accounts receivable are amounts a company has a right to collect because
it sold goods or services on credit to a customer.
Supplies: physically usable (physically diminishes e.g. pen, paper)

Liability: debts that are payable to outsiders (creditors)

Money, service, accounts/bills payable, accrued liabilities

o Current liability must pay within 12 months
o Non-current over 12 months e.g. mortgage

Accounts payable: amounts a company owes because it purchased goods or

services on credit from a supplier
Bills payable: the amount a business must pay because it signed bills of
exchange to borrow money, G&S. obligation to pay cash + interest
Accrued liabilities: expenses incurred by not paid, revenue received
Owners Equity: what is left after liabilities have been deducted from assets

Also called net assets

Purpose of business is to increase OE (though investments or revenue)
Owners claim on the entitys assets
Equal to = capital + revenue expenses drawing dividends

Capital: the owners claim to the net assets of the business (total assets total
liabilities = capital)
Drawings: money taken out e.g. for personal use (decreases OE)
Revenue: the income from providing G&S, interest, dividends
Revenue either increases assets or decreases liabilities
-

This means owners share of business increases

Revenue can be from sales, service, dividend, interest

Expenses: Expenses decrease OE by using up assets/increasing liabilities

Something becomes an expense when you finish consuming/using it
Item goes from asset to owners equity

Buy a book
o Cash goes down 50
o Book goes up 50
o Finish using
o Book goes down 50
You buy a book for $50, sell for $30
o Cash goes down $50, Book goes up $50
o Sell, cash up $30, Revenue up $30, OE up $30
o Book down $50, Expense $50 (finished using)
o Revenue Expense = -$20
o A financial transaction that would have no effect on owners equity
and liabilities would be using the current asset of cash within a

business to purchase a non-current asset of land in the businesss

name. The level of current assets in the business would decrease
and the level of non-current assets within the business would
increase, not affecting liabilities or owners equity.
NOTE

Income refers to ALL increases in equity (other than investments by

owner)
Owners withdrawals decreases owners equity when the owner takes
assets out of the business (opposite of owners investments)
Transaction is an event that involves at least 2 parties exchanging
resources

Example
Smart Touch Learning Business
1. Sheena invests $30,000 into business

EQUAL
Assets
S
30,000

Liabilities
0
PLUS
Owners Equity
(owner
30,000 investment)

Total
Assets
30,000

Total Liabilities
and OE
30,000

2. Smart touch buys land ($20,00 in cash)

EQUAL
S

Assets

(1
(2

Cash
+
Land
30,000
-20,000
20,000

Liabilities
0
PLUS
Owners Equity
30,000

Total
Assets
30,000

Assets
Cash
Land

EQUAL
S
10,000
20,000

Total Liabilities
and OE
30,000

Liabilities
0
PLUS
Owners Equity

30,000 (owner investment)

Total
Assets
30,000

Total Liabilities
and OE
30,000

3. Purchase office supplies (agreed to pay $500 in 30 days)

(3

EQUAL
Assets
S
Cash
Office
+
supplies +
Land
10,000
500 20,000

Owners
Liabilities
+
Equity
Accts. Payable
Sheena,
+
Capital
500
30,000
Total Liabilities
and OE
30,500

Total Assets
30,500
4. Earn service revenue ($5,500 in cash)

(3
(4

EQUAL
Assets
S
Cash
Office
+
supplies +
Land
10,000
500 20,000
5,500
Total Assets
36,000

Owners
Liabilities
+
Equity
Accts. Payable
Sheena,
+
Capital
500
30,000
Service
revenue
5,500
Total Liabilities
and OE
36,000

5. Service revenue on credit ($3,000 in a month)

Cash

Assets
Office

EQUA
LS
Land

Accts

Liabilities
+
Accts. Payable

Owners
Equity
Sheena,

+
(3

10,000

(4

5,500

supplies +

+
Receive
20,0
500
00

(5

Capital
500

3,000

30,000
Service
revenue
5,500
3,000

Total Liabilities
and OE
39,000

Total Assets
39,000

6. $3,300 in cash expenses ($600 computer, $1100 rent, salary $1200,

gas/electricity $400)

Cash
+
(3
(4
(6

EQUA
LS

Assets
Office
supplies +

Land Accts
+
Receive
20,0
500
00
3,000

10,000
5,500
-3300

Liabilities
+
Accts. Payable
+
500

Total Liabilities
and OE
35,700

Income Statement

Expenses
Salary
Rent
Computer
Electricity
Total
expenses
Profit

38,500
Expenses
600
1100
1,200
400

Total Assets
35,700

Revenue
Service
revenue

Owners
Equity
Sheena,
Capital

(5500 + 3000)

8500

1200
1100
600
400
3300
5200

7. Payment of account (pays $300 of $500 office supplies)

o This is recorded on account
o Decrease asset/cash and on liabilities (accts payable)

EQUA
LS

Assets
Office
supplies +

Cash
+

Land Accts
+
Receive
20,0
500
00
3,000

12,200
-300

Total Assets
35,400

Liabilities
+
Accts. Payable
+

Owners
Equity
Sheena,
Capital

500
-300
Total Liabilities
and OE
35,400

38,500

8. Someone pays for service on credit $1000

o This is paid on account

8)

Cash
+
11,90
0
1,000

Assets
Office
supplies +

EQUA
LS

Land Accts
+
Receive
20,0
500
00
3,000
-1000

Liabilities
+
Accts. Payable
+
200

Total
Assets
35,700

Owners
Equity
Sheena,
Capital
38,500

Total Liabilities
and OE
35,400

9. Sells land for $9000

Cash
+
12,90
0
9)

9,000

Assets
Office
supplies +

Land Accts
+
Receive
20,0
500
00
3,000
9000
-1000

Total
Assets
35,400

EQUA
LS

Liabilities
+
Accts. Payable
+
200
Total Liabilities
and OE
35,400

10. Withdrawal of cash ($2000 for personal use)

o This is drawings and decreases the OE

Owners
Equity
Sheena,
Capital
38,500

9)
10
)

Assets
Cash
Office
Land Accts
+
supplies + +
Receive
12,90
20,0
0
500
00
3,000
9,000
9000
-1000

EQUA
LS

Liabilities
+
Accts. Payable
+
200

Owners
Equity
Sheena,
Capital
38,500
Drawings

-2000

2,000
Total
Assets
33,400

Total Liabilities
and OE
33,400