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1
Learning Objectives
• Define accounting and describe the accounting process
• Identify users of accounting information
• Explain the characteristics of the main forms of business organisations
• Identify the elements of the financial statements
• Describe the financial reporting environment in NZ
Learning Objectives
• Analyse transactions using the accounting equation
• Prepare a journal entry and ledger account
• Apply the rules of debit and credit
• Identify the basic steps in the accounting process
• Understand Goods and Services Tax (GST) as it applies to accounting in NZ
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Definition of ‘Accounting’
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
American Accounting Association
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The Accounting Process
• recording
• classifying
• reporting and interpreting
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Users of Accounting Information
• owners/shareholders
• creditors
• customers
• prospective investors
• taxing agencies
• regulatory agencies
• labour union
• employees
• general public
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Forms of Business Organisation
• Sole proprietorship (sole traders)
• Partnership
• Company
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The Accounting Equation
ASSETS = OWNERS’ EQUITY + LIABILITIES
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Assets
For an asset to exist there must be:
• service potential or future economic benefits
• control by the entity
• a past event or transaction
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Current Assets
An entity shall classify an asset as current when:
a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
b) It holds the asset primarily for the purpose of trading;
c) It expects to realise the asset within twelve months after the reporting period; or
d) The asset is cash or a cash equivalent ...
The entity shall classify all other assets as non-current.[NZ IAS 1 para 66]
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Liabilities
• a present obligation to pay the amount owed
• future sacrifice of cash or service for the entity
• a past transaction or event
For a liability to exist there must be :
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Current LiabilitiesAn entity shall classify a liability as current when:
a) It expects to settle the liability in its normal operating cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the reporting period; or
d) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
An entity shall classify all other liabilities as non-current.[NZ IAS 1 para 69]
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Owners’ Equity
• This represents the owners’ claim on assets of the firm.
• It is a residual claim (that is a claim to assets remaining after debts to creditors have been discharged)
• A - L = Owners Equity
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Components of Owners’ Equity
OE = C + P – DOE = Owners’ Equity
C = Capital P = Profit D = Drawings
P = R – ER= Revenue E = Expense
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Alternatively, the expanded accounting equation can also be written as:
A + E + D = L + C + R
A = Assets L = LiabilitiesE = Expense C = CapitalD = Drawings R = Revenue
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Revenue
• A business firm earns revenue by providing goods or services – owners’ equity increases
• It is measured by the assets received in exchange, e.g. cash, or by a reduction in liabilities
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Expenses
• Expenses are payments incurred by the business in an accounting period in producing income, the benefits of which accrues to one accounting period only
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The General Ledger Accounts
• Present the accounts in T-form
• A separate account for each item
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Double Entry System
• Debit (DR) always on the left side of any account
• Credit (CR) always refers to the right side
• Increases in assets and expenses are debit entries
• Increase in liabilities, owner’s equity and revenue are credit entries
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Golden Rules
• Whenever there is a debit(s), there must be a corresponding credit(s)
• Total debits must equal total credits.
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Normal balance of accounts
Debit balancesDebit balances Credit balancesCredit balances
Assets Liabilities
Expenses Revenue
Drawings Capital