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What is Accounting?
Accounting is the process of identifying, measuring, recording
and communicating economic information to assist users to
make decisions
Its function is to provide and interpret financial information to
assist in decision making
Accounting is used in a range of organizations
Business
Government
Charities
Not-for-profits
ACCOUNTING DEFINED
Identification
Transactions (internal/external)
Measurement
Quantification in monetary terms ($)
Recording
Recording; classification; summarization
Communication
Accounting reports Analysis and interpretation
USERS OF ACCOUNTING INFORMATION
Tax Accounting
Management Financial
Accounting Accounting
Designed to meet the needs of the widest range of users
FINANCIAL ACCOUNTING
Definitions:
Financial performance: Generating new resources
from operations over a period of time
Financial position: Entity’s set of financial resources
and obligations at a point in time
Financial statements: Reports describing financial
performance and position of an entity
USERS OF FINANCIAL ACCOUNTING
To interested users
Financial statements
Are the outcome of the accounting process
Financial structure
MINH’S TV REPAIRS
Balance Sheet
As at 30 June 2016
ASSETS LIABILITIES
Cash at bank $ 25 Accounts payable $ 10
170 380
Accounts receivable 8 895 Mortgage payable 100
500
Repair Supplies 7 305 110 880
Repair Equipment 55 350
Land 30 000 EQUITY
Building 127 Minh Vu, Capital 143
500 340
A=L+E $254
220
$254
220
THE BALANCE SHEET (Narrative format)
MINH’S TV REPAIRS
Balance Sheet
As at 30 June 2016
ASSETS
Cash at bank $ 25 170
Accounts receivable 8 895
Repair Supplies 7 305
Repair Equipment 55 350
Land 30 000
Building 127 500
$254 220
A–L=E
LIABILITIES
Accounts payable $ 10 380
Mortgage payable 100 500
110 880
EQUITY
Minh Vu, Capital 143 340
$254 220
THE BALANCE SHEET: Definitions of elements
Assets
Resources controlled by the entity as a result of past
transactions or events from which future economic benefits are
expected to flow to the entity
Liabilities
Present obligations of an entity arising from past transactions
or events, the settlement of which is expected to result in an
outflow of resources from the entity
Liabilities are future sacrifices of economic benefits that an
organization is presently obliged to make to other
organizations or individuals as a result of past transactions or
events (Financial Accounting – Trotman 5e.)
THE BALANCE SHEET: Definitions of elements
Equity
The residual interest of the owner(s) in the assets (less
liabilities) of the entity
MINH’S TV REPAIR
Income Statement
For the year ended 30 June 2016
INCOME
Repair income $221 250
EXPENSES
Advertising expense $ 10 125
Repair supplies expense 45 855
Salaries and wages expense 63 900
Rent expense 20 130
Telephone expense 10 095
Light and power expense 23 970 174 075
PROFIT $47 175
THE INCOME STATEMENT: Definitions of elements
Income
Increases in economic benefits in the form of inflows or
enhancements of assets or decreases of liabilities that results
in increases in equity, other than those relating to equity
participants
Expenses
Decreases in economic benefits in the form of outflows or
incurrences of liabilities that result in decreases in equity,
other than those relating to equity participants
THE STATEMENT OF CASH FLOWS
573 680
Shown on
Less: Drawings 87 000 Balance Sheet
2
1
4
Statement of owner’s equity
For the period
E1 + Profit – Drawings = E2
3
RELATIONSHIP BETWEEN FINANCIAL STATEMENTS
Period Assumption
The life of the entity can be “broken up” into equal time intervals
Monetary Assumption
Universally accepted medium of exchange
Conservatism Principle
Recognizing expenses and liabilities as soon as possible when there is
uncertainty about the outcome, but to only recognize revenues and
assets when they are assured of being received
Matching Principle
Requires that revenues and any related expenses be recognized
together in the same reporting period
Cost Principle
Requires transactions are initially recorded at their original cost &
treating assets in terms of their use rather than for resale
Revenue Recognition Principle
One should only record revenue when it has been earned, not when the
related cash is collected
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
Relevance
Information is useful for decision making
Faithful Representation
Information presented complete, faithfully, without bias or undue
error
Economic substance over form
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
Constraints:
Materiality
The extent to which omission or misstatement would be
misleading to users
Cost accounting
Budgeting
Taxation accounting
Ethics in business
Important in all business dealings
Ethics in practice
Identify the ethical issue
Assess consequences