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Accounting Fundamentals: Concepts and Principles

Understand accounting vocabulary, concepts, and principles for decision-making. Learn about financial statements, business transactions analysis, and business performance evaluation. Explore different types of business organizations and the application of GAAP.

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Accounting Fundamentals: Concepts and Principles

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  1. TO ACCOMPANY HORNGREN HARRISON BAMBER BEST FRASER WILLETT

  2. Accounting and theBusiness Environment Chapter 1 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

  3. Objectives 1. Use accounting vocabulary for decision making 2. Apply accounting concepts and principles to business situations 3. Use the accounting equation to describe an organisation’s financial position 4. Use the accounting equation to analyse business transactions 5. Prepare and use the financial statements 6. Evaluate the performance of a business

  4. Use accounting vocabulary for decision making. Objective 1

  5. Accounting... is an information system that... measures business activities, processes information, and... communicates financial information.

  6. Accounting... is called the language of business.

  7. Users of Accounting Information Internalusers make decisions for the entity. External users make decisions about the entity.

  8. Fields of Accounting Financial Accounting Management Accounting

  9. Standards of Professional Conduct ICAA and CPPA joint Code of Professional Conduct Standards of Ethical Conduct of individual companies

  10. Types of Business Organizations Proprietorships (sole traders) Partnerships Company

  11. 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 – fund raising power

  12. 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 partners • need for written partnership agreement

  13. Companies • What are some advantages? • separate legal existence • limited liability of shareholders (owners) • transferability of ownership relatively easy • What are some disadvantages? • separation of ownership and control • extensive governmental regulation

  14. Apply accounting concepts and principles to business situations. Objective 2

  15. Generally AcceptedAccounting Principles • What is the primary objective of financial reporting? To provide information useful for making investment and lending decisions

  16. The Entity Concept Example • Assume that Jan decides to open up a petrol station and coffee shop. • The petrol station made $250,000 in profits, while the coffee shop lost $50,000.

  17. The Entity Concept Example • How much money did Jan make? • At a first glance, we would assume that Jan made $200,000. • However, by applying the entity concept we realize that the petrol station made $250,000 while the coffee shop lost $50,000. • Jan’s business operations are also separate from her personal affairs.

  18. The Time 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.

  19. The Reliability (Objectivity) Principle Information must be free from bias. Information must be reasonably accurate. Information must report what actually happened. Individuals would arrive at similar conclusions using same data.

  20. The Cost Principle Assets and services acquired should be recorded at their actual cost.

  21. The Matching Principle Relates the inputs and outputs of goods and services to one another.

  22. The Profit Recognition Principle Recognise revenue when it is ‘earned’. GAAP recommends the accrual basis of accounting.

  23. Conservatism Constrains managements’ natural optimism.

  24. The Going Concern Concept The entity will continue to operate in the future.

  25. Australian Accounting Standards • Standards to govern measurement rules and level of disclosure. • Australian Accounting Standards Board is responsible for technical accounting standards. • Australia (like the rest of the world) is moving towards the adoption of International Accounting Standards.

  26. Use the accounting equation to describe an organisation’s financial position. Objective 3

  27. The Accounting Equation = Assets Liabilities + Owner’s Equity Claims to Economic Resources Economic Resources

  28. Assets • What is an asset? • It is something a company owns which has future economic value e.g. • cash • accounts receivable • land and building • equipment • goodwill

  29. Liability • What is a liability? • It is something a company owes. • money • service – legal retainers • product – magazines • E.g. • accounts payable

  30. Owner’s Equity • What is owner’s equity? • It is what’s left of the assets after liabilities have been deducted. • the same as net assets • the owner’s claim on the entity’s assets

  31. Transactions that AffectOwner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Withdrawals from the Business Owner Investments in the Business Owner’s Equity Revenues Expenses

  32. Revenues • What are revenues? • They are amounts received or to be received from customers for sales of products or services. • sales • performance of services • rent received • interest received

  33. Expenses • What are expenses? • They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. • salaries and wages • services • supplies used • advertising

  34. Use the accounting equation to analyse business transactions. Objective 4

  35. Accounting for Business Transactions • What is a transaction? • It is any event that both affects the financial position of the business and can be reliably recorded. • It is ‘money’ into or out of the business.

  36. Accounting for Business Transactions • Paula Lee invests $30,000 to begin Paula Lee eTravel. • Lee purchases land, paying $20,000 in cash. • She buys office supplies, agreeing to pay $500 in 30 days. • She earns and collects $5,500 revenues.

  37. Accounting for Business Transactions • Lee performs services, and the client agrees to pay $3,000 within one month. • During the month, she pays $3,100 for expenses incurred. • Lee pays $300 to the store from which she purchased $500 worth of supplies. • What is the effect of these transactions on the accounting equation?

  38. Accounting for Business Transactions Owner’s Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash – 20,000 Land + 20,000 3) Supplies + 500 + 500 4) Cash + 5,500 + 5,500 5) Receivable + 3,000 + 3,000 6) Cash – 3,100 – 3,100 7) Cash – 300 – 300 Totals + $35,600 + 200 + $35,400

  39. Accounting for Business Transactions • Notice that the equation always stays in balance. • Each transaction affects at least two accounts, sometimes more. • Some transactions affect only one side of the equation; some affect both sides.

  40. Accounting for Business Transactions • Other transactions that took place were as follows: • The business collected $1,000 from the client. • She sold some land at cost for $9,000. • She withdrew $2,100 from the business. • (See the final result, p21 of your textbook)

  41. Prepare and use financial statements. Objective 5

  42. Financial Statements... – are the final product of the accounting process. – tell how the business is performing and where it stands.

  43. Financial Statements • Statement of financial performance • (For the Year [or Month] Ended 30/6/2004) • Statement of owner’s equity • (For the Year Ended 30/6/04 • Statement of financial position • (As at 30/6/04) • Statement of cash flows • (For the Year Ended 30/6/04

  44. Evaluate the performance of business. Objective 6

  45. Relationships Among the Statements:Statement of Financial Performance Revenue: Fees earned $8,500 Expenses: Salary expense $1,200 Electricity and phone expense 400 Equipment rental expense 400 Office rent expense 1,100 3,100 Net profit $5,400

  46. Relationships Among the Statements:Statement of Owner’s Equity P. Lee, capital, April 1, 2004 $ 0 Plus Contribution of capital 30,000 Net profit $ 5,400 Less Drawings – 2,100 P. Lee, capital, April 30, 2004 $33,300

  47. Relationships Among the Statements:Statement of Financial Position Assets Cash $ 20,000 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets $ 33,500 Liabilities Accounts payable $ 200 Owner’s Equity P. Lee, capital 33,300 Total liabilities and owner’s equity $33,500

  48. Relationships Among the Statements:Statement Of Cash Flows Cash flows from operating activities: Cash receipts from services rendered $6,500 Cash payments: To suppliers $ 2,200 employees 1,200 3,400 Net cash flows from Operating activities $3,100 Cash flows from investing activities Purchase and sale of land ($11,000)

  49. Cash Flows from Financing Activities: Beginning Balance 0 Investment by Owner $30,000 Drawings 2,100 Net Cash Flows from Financing Activities $27,900 Net Increase in cash $20,000 Cash at Beginning of Year 0 Cash at End of the Year $20,000 Relationships Among the Statements:Statement Of Cash Flows

  50. End of Chapter 1

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