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Accounting in society - Lecture notes 1-13

All accounting in society lectures 2018 year.
Course

Accounting in Society (ACCG100)

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Academic year: 2017/2018
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Accounting in society:

Lecture #1: Introduction to Accounting
1) Accounting : is a process of identifying, measuring, recording and communicating
economic transactions and events of a business operation.
2) Why is Accounting important for a business?
Accounting plays a key role in the provision of financial information for decision-
making.
a) Operational decisions
b) Financial decisions
c) Investment decisions
3) Role as an accountant :
Typical tasks: recording, reporting, budgeting, financial analysis
What is required of you: technical competency (financials, audit, regulations, etc.),
professional skills, communication, group work, ethics, accountability, leadership.
4) Where do accountants work?
Consultancy: tax, audit, advisory, strategy.
Corporates (large and small): Budgeting, forecasting, compliance, risk management,
business processes & systems.
5) Various types of business originations :
Sole trader (Sole proprietorship)- Owned by one person
Partnership- Owned by multiple people
Company- Owned by shareholders, separate legal entity
6) Difference between management and financial accounting :

Lecture #2: Ethics

What is ethics?
“Ethics in its broader sense, deals with human conduct in relation to what is morally good
and bad, right and wrong. It is the application of values to decision making. These values
include honesty, fairness, responsibility, respect and compassion”
Ethics vs morals:

Ethical theories:

 Prescriptive principles or rules for determining right from wrong:  Beliefs about how people ‘should’ behave  Principles and methods are used as a guide for avoiding and resolving ethical issues  Two classifications:  Teleological/consequential ethics

Management Accounting Financial Accounting
 Internal focus
 On managers and their decision
making- costing, planning &
controlling, performance
management.
 Purpose : Serve managers in their
decision making process
 Tend to be forward-looking
 Extensively used in strategy
making
 External focus
 On shareholders, regulators and
creditors and reporting-
Financial performance, financial
position, cash flow.
 Purpose : Disclose business
activities/ information to other
shareholders/ regulators
 Highly regulated
 Information reported reflects
the past

(c) Professional competence and due care - Must attain and maintain professional and technical knowledge for clients or employers • Requires diligence and appropriate training and supervision • Exercising due care in their work

(d) Confidentiality - Must not disclose outside of the firm, confidential information acquired as a result of professional and business relationships, unless the client or employer authorises it or there is a legal duty to disclose it.

(e) Professional behaviour- Members must comply with relevant laws and regulations • Must avoid any action or omission which may discredit the image of profession.

-Ethical requirements on independence (Section 290):  Independence of mind; o A state of mind which permits the expressions of conclusion without being affected by influences that compromise your professional judgement, o Don’t think about unethical behaviour.  Independence in appearance (how others view us); o Avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, would reasonably conclude.., objectivity or professional scepticism had been impaired o don’t place yourself in uncompromising positions

Case study options:  7 eleven ripping off workers,  VW false reading of emission levels,  dick smith racism or purchased inventory on the basis of rebate and they put the income so profits appear higher so the company ends up with insufficient amount of sales and encountered cash flow problems.  Target used suppliers rebate to boost their income (recognised rebates before sales were made, doesn’t meet accounting standards)

Lecture #3: Financial accounting for business: recording transactions

Types of transactions:

 External transactions: Involve an outside party. o Exchange of economic resources and/or obligations. o Examples include: Sale of Inventory and Purchase of Supplies  Internal transactions: o Transformation of economic resources. o An example is the use of office supplies  Non-Transactional Events: o Not usually recorded but may be in the future. o An example is receiving an order from a customer.

Five financial elements: ALORE

-Assets: Resources controlled by the entity as a result of past transactions or events from which future economic benefits are expected to flow to the entity.

-Liabilities: Present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow of resources from the entity.

-Equity: The residual interest of the owner/s in the assets (less liabilities) of the entity.

Relationship between A, L & O. Assets=liabilities + owner’s equity

-Assets are debit in nature

-Therefore, Liabilities and Equity must be credit in nature

-Income increases Equity; credit increases Equity

-Therefore, Income must be credit in nature Expenses decreases Equity; debit decreases Equity

-Therefore, Expenses must be debit in nature

  • Important: The accounting equation must always remain in balance

-Two or more accounts are affected by each transaction.

How do we record:

Transaction recording example:

Debit

Four things to remember in recording transactions:

  1. First, analyse the transaction

  2. Double-entry – two sides to every transaction

  3. Debit and credit MUST equal

  4. How to appropriately record a General Journal:

  • Date

  • Accounts impacted

  • Transaction narrative under accounts

  • Debit value(s) (top left)

  • Credit value(s) (bottom right)

  • Reference

Normal balance: the side of the account to increase the balance

Lecture #4: Financial accounting for business: Posting and trial balance

General ledger:

  • Collection of all the individual accounts(transactions) of an entity
  • Organised in the order they appear in the Balance Sheet and the Income Statement
  • Each account has a specific identification number

Account formats: -T-accounts (using this format in ACG100) •Convenient way to show individual accounts - Illustrate effects of transactions on an account - Still used in practice for quick calculations

-Running balance accounts: - Used in formal accounting systems - Standard presentation for computerised systems - Familiar to most – same format used in Bank Statements

Trial balance: -Lists all ledger accounts with their closing balances -Debits in one column and credits in another -The totals of both columns must be equal -If this is the case, the ledger ‘balances’

-Limitations of the trial balance: -if it doesn’t balance there is definitely an error -It doesn’t tell you what the error is.

-unearned revenue or revenue received in advance= non-current liability.

-debit wages expense, credit wages payable

Lecture #5: Financial accounting for business: Adjusting entries & adjusted trial balance

Accrual accounting:

Accounting is an “event “driven process. The effects of transactions are recognised when they occur, not when the cash is received/paid.

Accrual-based accounting: transactions and events are recorded in the periods in which they met the revenue, expense, asset and liability criteria – this can occur before, as, or after cash has been received or paid.

b. Payable (accrual)

  1. Accrued Revenue: i. Revenues that have been earned in the period, but payment has not yet been received ii. Revenue must be recognised with a receivable account (for a future receipt of cash) iii. Add to revenue account iv. Usually recorded when service is performed

Lecture #6: Financial accounting for business: Closing entries

Temporary and permanent accounts:

 Temporary accounts: relate to only a given accounting period, i. revenue, expenses o Must closed be closed to set the account balance to zero balance at the end of each accounting period

 Permanent(real) accounts: are carried forward to future accounting periods, i. assets, liabilities, equity

Closing entries: -Closing entries are journal entries that effectively ‘close’ all temporary accounts to the permanent equity account (capital) at the end of the accounting period.

-A special temporary account, Profit or Loss Summary account is created to facilitate the closing process.

-Income and expense accounts then begin the next accounting period with a zero balance

####### 1) STEP 1:

a. Close all income accounts (zero balance) to the P&L Summary account

####### 2) STEP 2:

a. Close all expense accounts (zero balance) to the P&L summary account:

  1. STEP 3 (Sole trader):

a. If the P&L summary account has a CR balance (i. net profit)

b. If the P&L summary account has a DR balance (i. net loss)

STEP 3: (COMPANY) Close P&L summary to the retained earnings account c. If the P&L summary account has CR balance (i. net profit)

d. If the P&L summary account has

  1. STEP 4: (For sole trader) a. Close drawings account (zero balance) to the capital account. DR- CAPITAL

CR-DRAWINGS

STEP 4: (For Company): a. Close dividends account to the retained earnings account

####### THE END RESULT:

i) All income accounts have nil balances ii) All expense accounts have nil balances iii) The drawings (dividends) account has a nil balance iv) The Capital(retained earnings) account has either been increased by the profit, or decreased by the loss and decreased by the drawings(dividends).

Lecture #7: Financial accounting for business: Preparing financial statements

-Non-current liabilities: All liabilities that are non-current (e. mortgage payable, bank loan)

-Net assets= Assets-liabilities (equal to owner’s equity)

Statement of changes in Equity:

 The statement of changes in equity: o Reports the changes that took place in equity during the priod o Shows the opening balance, the movement and the ending balance of equity o The opening balance should match with the ending balance of equity last period o Two places to show the ending because of equity (Balance sheet & the statement of changes in equity)

Accounting assumptions:

 Accounting entity Assumption o Identify clearly the boundaries of the entity being accounted for. Personal transactions of the owner must remain separate from the transactions of the entity  Accrual basis assumption o Accounting is an “event” driven process o The effects of transactions are recognised when they occur, not when the cash is paid/received.  Going concern assumption: o Unless we have evidence to the contrary, we assume an entity will continue to operate in the future  Period Assumption: o The life of an entity can be “broken up” into equal time intervals. o Profit is determined for particular periods of time in order to be comparable.

Qualitative Characteristics:

 Relevance: o Information is useful for decision making when it can influence economic decisions by users  Faithful representation: o Information presented faithfully, without bias or undue error. Economic substance over form  Comparability and consistency: o Users can identify similarities and differences between two sets of economic data  Understandable: o Users who have reasonable knowledge of business and accounting can comprehend its meaning  Materiality:

o Extent to which information can be omitted, misstated or grouped with other information without misleading the statement users when they are making their economic decisions

L ECTURE 8: FINANCIAL ACCOUNTING FOR BUSINESS: INTERPRETING FINANCIAL STATEMENTS

 Ratio analysis: o A ratio is the mathematical relationship between two different quantities o Can be used to show relationships among items of financial statement data o Expressed in terms of percentages, rates or proportions

 Three different types of ratios: o Profitability ratio  Return on assets  Profit margin o Liquidity ratio  Current ratio o Solvency ratio  Debt to total assets ratio

Profitability Ratio

 Measure operating success of an entity for a given period of time:

 Return on Assets: o Indicates amount of net profit generated by each dollar invested in assets

 Profit Margin: o Indicates amount of net profit generated by each dollar of sales

Liquidity Ratio

 Measures the short-term ability of entity to pay its maturing obligations and to meet unexpected needs for cash

Management vs Financial accounting
Management Functions:
  1. Planning: Looking ahead and establishing short-term and long-term objectives
  2. Directing and motivating: Implementation of plans by coordinating diverse activities and human resources
  3. Controlling: The process of keeping the entity’s activities on track
Costs

Cost information is crucial for the planning, control and evaluating functions performed by management. Having accurate and timely information relating to costs enables an assessment to be made of the efficiency and effectiveness with which the entity’s scarce economic resources have been managed.

 What are costs? o Resources given up to achieve a particular objective o Measured in monetary terms $$

Manufacturing costs

Manufacturing costs are associated with converting raw materials into finished goods.

Major manufacturing cost classifications are: 1)Direct materials 2)Direct labour 3)Manufacturing overheads

 Direct materials: o Costs of raw materials directly traceable to the finished products  Direct labour o Wages and salaries paid to employees whose time and costs can be traced directly to products  Manufacturing overheads o Indirect materials  Do not become physically become part of finished product o Indirect labour  Cannot be directly traced to specific goods o Depreciation on factory, buildings and machinery, insurance and maintenance on factory facilities.

Terminology for costs

All costs= Product costs + period costs

 Product costs: o Costs that are a necessary and integral part of producing the finished product o E. direct materials, direct labour, manufacturing overhead  Period costs: o Costs that are identified with a specific time period rather than with a saleable product -> non-manufacturing costs o E. selling expenses, administrative expenses, financial expenses

-Effective budgeting?:

 Clearly defined areas of authority and responsibility  Realistic goals  Acceptance by all levels of management  Participation by managers in setting budgets  Review of differences between actual and expected results

-Length of the budget period:

 A budget may be prepared for any period of time  Most common budget period is one year  This annual budget is often supplemented with quarterly and monthly budget

Lecture 10: Cost volume profit analysis

Variable and fixed costs

 Variable costs o Costs that vary in total directly and proportionately with changes in the activity level o Cost per unit is constant; total cost increases with volume increase o E. materials used to produce goods  Fixed costs o Costs which remain relatively constant regardless of the activity level o Fixed cost per unit = total cost divided by units of activity level o Total cost is constant; cost per unit decreases with volume increase o E. rent and insurance paid for factory

CVP analysis

 CVP= Cost-volume profit  CVP analysis can answer the following questions: o Entity’s breakeven point o Impact on sales volume and profit of increased costs o Sales level needed to make a profit o Impacts of changes in selling price o Most profitable sales mix

 Five basic assumptions of CVP: o Costs and revenues are linear within the relevant range o All costs are identifiable are fixed or variable o Costs are affected only by changes in activity level o All units produced are sold o Sales mix is constant if there is more than one product

Contribution Margin (CM)

 CM = the amount of revenue remaining after deducting variable costs o Revenue – variable costs  Can be expressed as a total amount, or on a per-unit basis o CM/UNIT= Unit selling price- unit variable cost

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Accounting in society - Lecture notes 1-13

Course: Accounting in Society (ACCG100)

647 Documents
Students shared 647 documents in this course

University: Macquarie University

Was this document helpful?
Accounting in society:
Lecture #1: Introduction to Accounting
1) Accounting : is a process of identifying, measuring, recording and communicating
economic transactions and events of a business operation.
2) Why is Accounting important for a business ?
Accounting plays a key role in the provision of financial information for decision-
making.
a) Operational decisions
b) Financial decisions
c) Investment decisions
3) Role as an accountant :
Typical tasks: recording, reporting, budgeting, financial analysis
What is required of you: technical competency (financials, audit, regulations, etc.),
professional skills, communication, group work, ethics, accountability, leadership.
4) Where do accountants work ?
Consultancy: tax, audit, advisory, strategy.
Corporates (large and small): Budgeting, forecasting, compliance, risk management,
business processes & systems.
5) Various types of business originations :
Sole trader (Sole proprietorship)- Owned by one person
Partnership- Owned by multiple people
Company- Owned by shareholders, separate legal entity

Students also viewed

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