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LECTURE 1: INTRODUCTION
History and development of accounting record
Ancient accounting record:
Using system called “stewardship”. The document facilitate the owner to control and identify their asset, which is under the custody of the steward
Renaissance in Italy:
Accounting technique using double entry book-keeping was introduced. A system to ensure that financial information was recorded efficiently and accurately.
Industrial Age:
In 19th century the emergence of large corporations, separation of the owners from the managers, makes the businesses reports became more complex. Needs to prepare financial statements to the shareholders.
Post Industrial Age:
Accounting is a need for decision making – information element.
What is accounting?
Accounting is an information system that provides quantitative, financial
information to stakeholders about the economic activities and condition of a
business so that they can make business/economic
decisions.
The different between accounting and bookkeeping:
Accounting:
“a process of identifying, recording, classifying and summarizing in a significant manner and in terms
of money, transactions and events which are, in part at least, of a financial character, and interpreting
the result thereof” (AICPA, 1961)
Bookkeeping:
“ only involves activities of collecting and recording financial data”
Accounting: Definition
The process of identifying, measuring, recording and communicating economic information to permit informed judgment and decisions by users of the information.
Identifying Recording Communicating
INTERNALUSERS
EXTERNALUSERS
Measuring
Identifying: Identify those events that are considered as an evidence of economic activity relevant to the business
Recording: Keeping of a chronological diary of measured events in an orderly and systematic manner
Communicating: Communicate through the preparation and distribution of accounting reports to the interested parties.
USERS OF FINANCIAL INFORMATION
Internal Users Managers who plan, organise and run the business
e.g. production supervisors, marketing managers, and directors
Owners of the business
USERS OF FINANCIAL INFORMATION continued
External Users Resource providers
e.g. investors, employees, creditors
Recipients of goods and servicese.g. customers, beneficiaries
Reviewers e.g. regulatory agencies, media, governments, trade unions, special interest groups
FINANCIAL STATEMENTS
Income StatementReports revenues less expenses for a particular period of time
Balance SheetReports assets and claims to those assets at a particular point in time
FINANCIAL STATEMENTS continued
Statement of Changes in EquityReports amount of profit for the period and the changes in equity
Cash Flow StatementReports information regarding cash receipts and cash payments for a particular period of time
Definition: FRS 101 (MASB 1)
• Financial statement is a structured financial representation of the financial position of an enterprise and the transaction undertaken by an enterprise
Introduction to Financial Statements
Objectives and purposes of Financial Statement
1. Provide information about the financial position, performance and cash flow of an enterprise
2. Show the results of management’s stewardship of the resources entrusted to it
3. Assists users in predicting the enterprise’s future cash flow and the timing and certainty of the generation of cash and cash equivalents.
Components of FS
1. Balance Sheet
2. Income Statement
3. A statement showing:
• All changes in equity
• Changes in equity other than those arising from capital transaction with owners and distribution with owners
4. Cash Flow Statement, and
5. Accounting policies and explanatory notes
Accounting policies and explanatory notes
Important additional notes to define statement prepared e.g accounting policies
Any additional information that is not shown in the financial statement will effect the fairly presentation
Income StatementWong PTY LTD
Income Statementfor the year ended 31 October 2008
Service revenues $10 600Expenses
Salaries expense $3 200Supplies expense 1 500Rent expense 900Insurance expense 50Interest expense 50Depreciation expense 40 5 740
Profit before tax 4 860Tax expense 2 000
Profit after tax $ 2 860
Statement of Changes in Equity
WONG PTY LTDStatement of Changes in Equity (extract)
as at 31 October 2008
Profit $ 2 860Retained earnings 1/10/08 0Dividends (500)
Retained earnings 31/10/08 $ 2 360
WONG PTY LTDBalance Sheet
as at 31 October 2008
AssetsCash $15 200Accounts receivable 200Advertising supplies 1 000Prepaid insurance 550Office equipment 4 960
Total assets $21 910
Liabilities and equityLiabilities
Accounts payable $ 2 500Interest payable 50Revenue received in advance 800Salaries payable 1 200Bank loan 5 000
Total liabilities $ 9 550Equity
Share capital 10 000Retained earnings 31/10/08 2 360
Total equity 12 360$21 910
Cash Flow StatementWONG PTY LTDCash Flow Statement
for the month ended 31 October 2008
Cash flows from operating activitiesCash receipts from operating activities $11 200Cash payments from operating activities (5 500)
Net cash provided by operating activities $ 5 700
Cash flows from investing activitiesPurchased office equipment (5 000)
Net cash used by investing activities (5 000)
Cash flows from financing activitiesIssue of shares 10 000Proceeds from bank loan 5 000Payment of dividend (5 000)
Net cash provided by financing activities 14 500
Net increase in cash 15 200Cash at beginning of period --
Cash at end of period $15 200
Accounting Roles:
Language of Business
Decision making tool
Create accountability and control
As an Information system
DECISION TOOLKIT
Are the business operations profitable?
Does the business rely mainly on debt or equity to finance its assets?
Does the business generate sufficient cash from operations to fund its investing activities?
Is the company using its assets effectively?
DECISION TOOLKIT continued
Is the company maintaining an adequate margin between sales and expenses?
Can the company meet its short-term obligations?
Can the company meet its long-term obligations?
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