BUS106 Accounting For Business

1. BUS106Accounting For Business Lecture #1 Decision Theory Trust Account Management Presented by Dr Greg Laing

3. Course Outline Review Quiz Homework Final Exam Assignments

4. Course Assessment • Quiz (online - Blackboard) Week 4 20% (Available all week 4 on Blackboard 12th to 16th August) 2. Business Report (T.B.A.) Week 9 40% (Case details to be placed on Blackboard) (Due week 9 Monday 21st September) 3. Final Examination 40%

5. Text book requirement • A New Text Book is being used this Semester. • Birt, J., Chalmers, K., Byrne, S., Brooks, A. & Oliver, J. 2014, Accounting: Business Reporting for Decision Making 5th Edn., John Wiley & Sons Australia Ltd: Brisbane • Note: Certain Lectures are not covered by the Text and therefore will be based upon the material covered and presented in the Lecture!

6. DECISIONS IN EVERYDAY LIFE Decisions involve choices because resources are limited Each decision has outcomes that will affect future decisions

7. THE NATURE OF ACCOUNTING Transactions Identification The accounting process Quantification in monetary terms Measurement Recording, classification, summarisation Recording Accounting reports Analysis and interpretation Communication

8. INTRODUCTION continued • Business transactions • External exchange of something of value between 2 or more entities • Affect assets, liabilities and equity • Can be reliably measured and recorded • Relevant information • Information that makes a difference in decision making

9. ACCOUNTING INFORMATION AND ITS ROLE IN DECISION MAKING • Accounting information is designed to meet the needs of both: • internal users (management) • external users (stakeholders) • External users include: • Investors – both current and prospective • Suppliers and banks • Employees • Government authorities (e.g., ATO, ASIC)

10. Corporate governance and ethics • Ethics: Moral principles or rules of behaviour that help decide what is good or bad, or right or wrong • Maintaining ethics means • complying with rules and policies of entity • having an awareness of different needs of stakeholders • Corporate governance: specifies rights and responsibilities of stakeholders

11. USING INFORMATION IN ECONOMIC DECISIONS Starting a small business Equipment purchases Repairs and maintenance Insurance Administrative costs Services to provide What to charge Potential customers

12. Forms of Business Organisation Sole Trader (Proprietorship) Partnership Company

13. Communication? • Accounting Language - the Language of Business! • DEBITS (DR) & CREDITS (CR) • Double entry accounting to record transactions! • Fra Luca Pacioli 1494 • “for every debit there must be an equal and opposite credit’ • Two sides to every transaction • a Debit side and a Credit side • The Pacioli Code!

14. Financial Reports • The building blocks of the Financial Reports are:

15. Accounting Equations • Assets = (Liabilities + Owners Equity) (A=L+O) • Net Asset method • (Assets-Liability) = Owners Equity (A-L=O)

16. Income Statement Revenue: Expenses: Profit $

17. INTRODUCTION • The basic forms of business structure are: • Sole trader • Partnership • Company • Trust • They differ in terms of owner liability, equity structure, funding opportunities, decision making responsibilities and taxation

18. DEFINITION & FEATURES OF A SOLE TRADER • A sole trader is an individual who controls and manages a business • The business is not a separate legal entity • The individual is fully liable for all debts • The general registration requirements involve applying for an ABN • Common examples are plumbers, electricians, hairdressers and carpenters

19. Advantages of a sole trader • Quick, inexpensive and easy to establish Inexpensive to wind down • Not subject to company regulation • Owner has total autonomy over business decisions • Owner claims all the profits of the business and all the after-tax gains if the business is sold

20. Disadvantages of a sole trader • Unlimited liability – bears full responsibility for business debts and legal actions such as negligence • Limited by skill, time and investment of owner • Restrictive structure due to non-legal status of the entity • Business will cease to exist if owner leaves, retires or dies

21. DEFINITION AND FEATURES OF A PARTNERSHIP • An association between two or more persons who • carry on a business as partners • share profits or losses according to partnership agreement • Enables sharing of ideas, skills and resources • Easy and cheap to establish • No separate taxation payable but does lodge income tax return with ATO

22. The partnership agreement • Includes details of the partnership • Name of partnership • Partner contributions of cash and other assets • Profit and loss sharing ratios • Entry and exit information

23. Advantages of a partnership • Relatively easy and simple to set up • Informal business structure – notbound by accounting standards • Ability to share capital, skills, talents, knowledge and workload between two or more people

24. Disadvantages of a partnership • Unlimited liability for business debts and obligations by all partners • Limited life – if one partner dies or withdraws from the business then the partnership must dissolve • Mutual agency – each partner is seen as being an agent for the business and so is bound by any partnership contract Many partnership disputes arise from profit sharing and decision making issues

25. DEFINITION AND FEATURES OF A COMPANY • Owners of a company are known as shareholders • Independent legal entity (i.e. separate from the people who own, control and manage it) • Shareholders have limited liability – for the purchase price of their shares only (not company debts) • A company has unlimited life – not dissolved when owners die or change

26. Forming a company • Formed under Corporations Act (2001) • Administered by Australian Securities and Investment Commission (ASIC) • Companies require an ACN and an ABN • Accounting standards must be followed and accounts audited

27. Types of companies • Company structure in Australia:

28. Advantages of a company • Limited liability for shareholders • Taxation rate (30%) lower than top personal tax rate • Business expansion networks made easier due to legal structure • Can raise additional equity (capital) through public share offerings

29. Disadvantages of a company • More time consuming and costly to set up • Must comply with complex company rules and other legal requirements • Taxed from the first dollar of profit • Limited liability aspect may causes problems • Banks often prefer to have director’s personal guarantees instead • Separation of ownership and control

30. DEFINITION AND FEATURES OF A TRUST • Common form of business structure in Australia • The trustee holds property for others who are intended to benefit from the property or income of that property • A trustee may be: • A person or several people • A proprietary limited company

31. Advantages of a trust • Minimises tax payments • Limited liability • Simple to form • Little government regulation (unless listed on ASX)

32. Disadvantages of a trust • Trust law is complex • Should be administered by qualified accountant • Business structure can be exploited for tax minimisation purposes

33. COMPARISON OF BUSINESS REPORTS • Sole trader reports • Partnership reports • Company reports • Private company • Public company

34. Sole trader reports • Income statement shows income less expenses • No taxation is shown • Balance sheet has only one capital account • Profit (or loss) added (or subtracted) to capital account (in balance sheet)

35. GG Coffee – G. Green Income statement for the period ended 31 December 2010 Income Sales $12 000 Cost of sales 5 000 Gross profit 7 000 Operating expenses Administration expenses $ 600 Rent 2 000 Finance expenses 200 Depreciation of store equipment 1 000 Wages and salaries 3 000 6 800 Profit $ 200 Sole trader reports continued

36. GG Coffee – G. Green Balance sheet as at 31 December 2010 Current assets Cash on hand $ 500 Cash in bank 2 900 $ 3 400 Non-current assets Store equipment 14 000 Less Accumulated depreciation 3 000 11 000 Total assets 14 400 Current liabilities Accounts payable 4 000 Non-current liabilities Bank loan 5 000 Total liabilities9 000 Net assets$ 5 400 Owner’s equity Capital – G Green 5 200 Profit (loss) 200 Total equity$ 5 400

37. Partnership reports • Profit and loss is split according to original capital contributions as shown in agreement • Balance sheet has a capital account (and often a current account) for each partner • No taxation is shown

38. Peter, Mukesh and Michaela - Accountants Income statement for the period ended 31 December 2010 Income Fees $20 000 Expenses Administration expenses $1 200 Rent 2 000 Finance expenses 200 Depreciation of office furniture 1 000 4 400 Profit$15 600 Distributions to partners Salary Peter 4 000 Mukesh 2 000 Michaela 3 000 9 000 Distribution of remaining profit to current a/c Peter (50 000/280 000 x 6600) 1 179 Mukesh (200 000/280 000 x 6600) 4 714 Michaela (30 000/280000 x 6600) 707 6 600 $15 600

39. Peter, Mukesh and Michaela - Accountants Balance sheet as at 31 December 2010 Current assets Cash on hand $ 2 600 Cash in bank 80 000 $ 82 600 Non-current assets Office building 200 000 Office furniture 14 000 Less Accumulated depreciation 1 000 13 000 Total assets 295 600 Current liabilities Accounts payable 4 000 Non-current liabilities Bank loan 5 000 Total liabilities9 000 Net assets$286 600 Partners’ equity Capital Peter 50 000 Mukesh 200 000 Michaela 30 000 280 000 Current Peter 1 179 Mukesh 4 714 Michaela 707 6 600 $286 600

40. Company reports – private company • The income statement shows • Income tax being deducted directly from company profit • a reconciliation of retained profits (after dividends have been deducted) • The balance sheet shows • share capital as opposed to owner’s or partner’s capital account • retained earnings

41. Pascqual Recruitment Pty Ltd Income statement for the period ended 31 December 2010 Income Consulting fees $120 000 Operating expenses Administration expenses $15 000 Rent 2 000 Finance expenses 3 500 Depreciation of office furniture 5 000 Insurance 15 000 Advertising 3 000 43 500 Profit before tax 76 500 Taxation expense (30%) 22 950 Profit after tax $ 53 550 Company reports – private company continued

42. Pascqual Recruitment Pty Ltd Balance sheet as at 31 December 2010 Current assets Cash on hand $15 550 Accounts receivable 30 000 $ 45 550 Non-current assets Building 100 000 Office equipment 20 000 Less Accumulated depreciation 5 000 15 000 Total assets 160 550 Current liabilities Accounts payable 2 000 Non-current liabilities Bank loan – due 2015 10 000 Total liabilities12 000 Net assets$148 550 Shareholders’ equity Share capital 100 000 Retained earnings 48 550 $148 550

43. Company reports – public company • The income statement and balance sheet are prepared in accordance with pronouncements of the Australian Accounting Standards Board (AASBs) • These AASBs include the Australian equivalents of IFRSs

44. Non-Profit Organisations • Does not have as its principal objective the generation of profit • The operating purpose is other than providing goods or services at a profit! • Note – it still has Revenues & Expenses! • Therefore it still produces financial reports !

45. SUMMARY • Each of the financial statements reflects the business entity’s financial performance and financial position separately from those of the owner(s) • The main differences occur in the distribution of profits to respective owners • This in turn has tax implications

46. Trust Accounting • Trust Accounts are required by Law for a number of Businesses: • Real Estate &/or Property Agents • Travel Agents • Insurance Brokers & Agents • Solicitors

47. Legal Requirements • A Separate Bank Account • Keep all client money separate! • Transfer from Trust Account to General Account only when Transaction is Legally completed! • Separate Records to be kept • Specific receipt book • Accounting Records • Specific Audit of Trust Account records

48. Trust Accounting Issues • Must Establish Trust Account Record keeping System • Separate set of books from general business • Must follow the law with regards to disbursements from Trust Account • Authorisation & confirmation of payments • Must supervise staff & monitor Trust Account transactions • Privacy legislation • Bank reconciliations • Must have external Audit of Trust Account

49. Property Agents • Trust accounts for the Management Rights Industry in Queensland is governed by the following Legislation: • Property Occupations Act 2014 (as amended) • Property Occupations Regulation 2014 (as amended)

50. Part 4 Keeping documents Property Occupations Regulation Act 2014 (as amended) • 15 Keeping documents • (1) This section applies subject to the Evidence Act 1977, section 111. • (2) A principal licensee must keep each document the licensee is required to keep under the Act— • (a) in a secure, orderly and accessible way; and • (b) for at least 5 years. • Maximum penalty—10 penalty units.