Topic 1 intro to role of accting in bus PDF

TOPIC - AN INTRODUCTION TO THE ROLE OF ACCOUNTING IN BUSINESS PART – ACCOUNTING IS THE LANGUAGE OF BUSINESS TOPIC Part LEARNING OBJECTIVES Define accounting, describe the accounting process, and define the diverse roles of accountants Identify the users of accounting information and describe the users’ information needs Explain the characteristics of the main forms of business organisation THE ACCOUNTING PROFESSION Commercial accountants: Work in industry and commerce Undertake roles such as management accounting and financial accounting Public accountants: Provide their professional services to the public and work in a range of offices from small to multi-national Auditing is a primary service Also taxation and advisory services Government accountants: Employed by local councils, state government and federal government Variety of roles such as financial accounting and auditing Not-for-profit accountants: Work in the not-for-profit sector Engage in planning, decision making, preparing financial and management reports for both internal and external users The primary function of accounting is to provide reliable & relevant (faithfully represented) information for decision making Accounting is an INFORMATION SYSTEM that ………… IDENTIFICATION • Observing economic events to determine which need to be recorded as transactions MEASUREMENT • Quantifying the transactions in monetary terms e.g the dollar RECORDING COMMUNICATION • Classification into categories & summarizing the transactions • Preparing the financial reports from the accounts for analysis & interpretation for any entity carrying on a business | USERS OF ACCOUNTING INFORMATION EXTERNAL USERS – make decisions ABOUT the business entity • Should I invest? Will they make a profit? Can the business pay? Can they repay? Are they acting ethically? Is the business socially and environmentally friendly? • FINANCIAL ACCOUNTING INTERNAL USERS – make decisions FOR the business entity • How much profit? What should be produced? What resources are available? How much does it cost? How much we owe? What would happen if…? Do we have enough cash? • MANAGEMENT ACCOUNTING | • Owned by two or more partners • More brain power • Need an agreement • Partners are personally liable COMPANY • Single owner • Sole authority • Limited fundraising power • Proprietor personally liable PARTNERSHIP SOLE TRADER TYPES OF BUSINESS ENTITIES • Owned by shareholders • Separate legal entity • Ownership transfer easy • Shareholder s are not personally liable • Agency issues • Extensive regulation Introducing…… | TYPES OF BUSINESS ENTITIES Kelly Cook’s long lost great aunt has left her a substantial inheritance and she has decided to go into the eTravel business She has available cash to invest to begin the business, as well as enough for a deposit on a block where she plans to build commercial premises in the next few years At the moment she will be renting office space where she and her employee will be working Kelly asks your advice on the best type of business entity for her new business Kelly Cook eTravel Additional information: Kelly owns her own apartment with a small mortgage She has other investments in shares and is also part owner of an Adventure Tours business | TOPIC - AN INTRODUCTION TO THE ROLE OF ACCOUNTING IN BUSINESS PART – ACCOUNTING REPORTING ENVIRONMENT TOPIC Part LEARNING OBJECTIVES Explain the function of accounting as an information system and the need for decision making Explain the accounting concepts, principles, qualitative characteristics and constraints underlying financial statements Describe the financial reporting environment Identify the elements of each of the four main financial statements Recognise the basic accounting equation Accounting is an INFORMATION SYSTEM that identifies, measures, records & communicates information to both internal and external decision makers The primary function of accounting is to provide relevant & reliable (faithfully represented) information for decision making how we accountants achieve this?????? | 10 QUALITATIVE CHARACTERISTICS, CONCEPTS & PRINCIPLES The AASB Conceptual Framework (2014) states the fundamental qualitative characteristics are relevance and faithful representation The primary function of accounting is to provide RELEVANT & RELIABLE (FAITHFULLY REPRESENTED) information about the business entity for decision making: RELEVANCE Information is relevant if required for decision making FAITHFUL REPRESENTATION (RELIABLE) Information is reliable when it is complete, neutral and free from error :  Complete: accounts contain ALL required information to represent the economic entity, there are NO omissions  Neutral: the accounts are not biased in any way  Free from material error: information is material if its omission or misstatement could change a user’s decision Useful information should also have the additional qualitative characteristics of comparability, verifiability, timeliness & understandability | 11 QUALITATIVE CHARACTERISTICS, CONCEPTS & PRINCIPLES For accounting information to be relevant & reliable (faithfully represented) it is prepared based on some underlying assumptions encapsulated in: | 12 ACCOUNTING STANDARDS These concepts and principles underlie the Accounting Standards that govern how accountants measure, process and communicate financial information about the reporting entity  Australian Accounting Standards Board (AASB) is responsible for technical accounting standards for all types of (reporting) business entities (for profit, not-for-profit, government) CORPORATIONS ACT 2001  Australia, like much of the rest of the world adopted the international accounting standards (IFRS issued by the IASB) from January 2005 | 13 FINANCIAL REPORTS Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Revenue Service Revenue Expenses Advertising Electricity Printing & Stationery Rent Wages & Salaries Total Expenses Profit Current Assets Cash Accounts Receivable 8,500 -500 -400 -600 -1,100 -1,200 -3,800 4,700 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 The accounting information used to make decisions is contained in key reports: Statement of Profit or Loss (Income Statement or just P&L) 200 • Reports the entity's income (+) e.g sales or service revenues and expenses (-) e.g wages, rent and the resulting profit or loss for an operating period Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity Statement of Financial Position (Balance Sheet) & Statement of Changes in Equity 32,900 • Reports the three key elements, Assets, Liabilities and Equity at a specific point in time e.g 30 June 2017 • The Statements of Financial Position reports the business’s assets and claims to those assets (liabilities & equity) and this relationship is referred to as the ‘accounting equation’ or balance sheet | 14 equation Kelly Cook eTravel Pty Ltd Statement of Changes in Equity for the month of May 2017 Equity as at May 2017 Share Capital invested Add Profit for month Less Dividends Retained Earnings as at 31 May 2017 30,000 4,700 -2,000 2,700 Total Equity 31 May 2017 32,700 FINANCIAL REPORTS Statement of Cash Flows or Cash Flow Statement Provides information about the ability of the business entity to generate cash flow, from cash receipts and cash payments in the three key business activity areas: • • • Operating Activities – undertaken to earn income for the business (revenue and associated expenses) Investing Activities - The acquisition and disposal of the resources (e.g property, equipment) needed over the long term to operate the business Financing Activities - The raising of funds for an entity to carry out its operating and investing activities comes from two primary sources, borrowing (debt) and selling shares to investors (equity) Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 6,500 -2,400 -1,200 2,900 -10,000 -10,000 30,000 -2,000 28,000 20,900 20,900 | 15 FINANCIAL REPORTS Statement of Cash Flows or Cash Flow Statement Provides information about the ability of the business entity to generate cash flow, from cash receipts and cash payments in the three key business activity areas: • • • Operating Activities – undertaken to earn income for the business (revenue and associated expenses) Investing Activities - The acquisition and disposal of the resources (e.g property, equipment) needed over the long term to operate the business Financing Activities - The raising of funds for an entity to carry out its operating and investing activities comes from two primary sources, borrowing (debt) and selling shares to investors (equity) Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 6,500 -2,400 -1,200 2,900 -10,000 -10,000 30,000 -2,000 28,000 20,900 20,900 | 16 THE ACCOUNTING SYSTEM Use the accounting equation to record transactions Assets = Liabilities + Equity  All transactions impact the entity’s financial position and result in changes to the Balance Sheet (Statement of Financial Position) which reports the business’s assets and claims to those assets (liabilities & equity) (assets, liabilities and equity)  The accounting equation always balances - Assets must balance to the claims on assets  Double entry accounting is an effective system that records a business’s transactions in such a way that an entity’s financial position and performance can be calculated very efficiently  The best way to illustrate this is by going through an example | 17 ... other investments in shares and is also part owner of an Adventure Tours business | TOPIC - AN INTRODUCTION TO THE ROLE OF ACCOUNTING IN BUSINESS PART – ACCOUNTING REPORTING ENVIRONMENT TOPIC. .. Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2 017 Cash at end of period 31 May 2 017 6,500 -2,400 -1, 200 2,900 -10 ,000 -10 ,000... activites Net increase in cash Cash at beginning of period May 2 017 Cash at end of period 31 May 2 017 6,500 -2,400 -1, 200 2,900 -10 ,000 -10 ,000 30,000 -2,000 28,000 20,900 20,900 | 15 FINANCIAL REPORTS