Accounting Exam

Accounting

Identifying, measuring, and communicating financial information to help people make decisions

Stakeholders and their information needs: Shareholders

Will the business make money? Will I receive dividends?

Stakeholders and their information needs: Banks

Can the business repay its loans?

Stakeholders and their information needs: Suppliers

Can the business pay for supplies?

Stakeholders and their information needs: Employees

Is my job secure? Can I receive bonuses or promotions?

Stakeholders and their information needs: Consumers

Will the business continue providing products/services?

Stakeholders and their information needs: Government

How much tax does the business owe?

Stakeholders and their information needs: Regulatory bodies

Is the business following the law?

Stakeholders and their information needs: Community

Is the business benefiting the community?

Stakeholders and their information needs: Special interest groups

Is the business considering environmental + social issues?

Two types of accounting

Financial accounting + management accounting

Financial accounting

Provides financial information to people OUTSIDE the business (External users)

Management accounting

Provides financial information to people INSIDE the business (Internal users)

Business transaction

An exchange between a business and another party that affects its assets, liabilities, or owner’s equity

Financial statements

Statement of comprehensive income, Statement of financial position, Statement of changes in equity, Statement of cash flows

Statement of comprehensive income

Income and expenses over a period

Statement of financial position

Assets, liabilities, and equity at a specific date

Statement of changes in equity

Changes in owner’s equity over a period

Statement of cash flows

Money coming into and going out of the business

Automation of accounting tasks

RPA (Robotic process automation) + AI (Artificial Intelligence)

RPA (Robotic process automation)

Uses software to automate repetitive accounting tasks

AI (Artificial Intelligence)

Uses technology to analyse information, recognise patterns, and assist with decisions

Types of accountants

Company accountant, Public accountant, Forensic accountant, Financial accountant

Company accountant

Manages a company’s finances and prepares reports and tax returns

Public accountant

Provides accounting, auditing and tax advice to clients

Forensic accountant

Investigates financial crimes, fraud, and theft

Financial accountant

Records and reports a company's financial transactions

Forms of business entities

Sole trader, Partnership, Company

For-profit business

A business that sells goods or services to earn profit

Sole trader

A business owned and controlled by one person who is personally responsible for all business debts

Sole trader: Advantages

Quick, cheap and easy to set up; owner has complete control; owner keeps all profits; few regulations

Sole trader: Disadvantages

Unlimited liability (personal assets can be used to pay business debts); limited money, time and skills; business may end if the owner leaves or dies

True or False: Sole trader requires an Australian Business Number (ABN)

True

Partnership

A business owned by two or more people who share profits and losses

Partnership: Advantages

Easy and relatively inexpensive to establish, partners share responsibilities and skills, more people can contribute money

Partnership: Disadvantages

Unlimited liability (partners can be personally responsible for debts); disagreements between partners; limited life; mutual agency (one partner can legally make decisions that affect the other partners)

Company

A business that is a separate legal entity from its owners (shareholders)

Company: Advantages

Limited liability (shareholders generally only risk their investment); easier to raise money through additional shares; can expand and continue existing if ownership changes; separate legal identity

Company: Disadvantages

More expensive and time-consuming to establish; more rules and regulations; separation of ownership and control (shareholders own it, directors manage it)l; company tax obligations

True or False: ASIC provides an Australian Company Number (ACN); Must register for an ABN if required

True

SME (Small and medium enterprises

Small and medium-sized businesses

Proprietary companies

Private companies commonly used by Australian SMEs

Things to consider when choosing a business structure

Owners' liability, Equity structure, Funding, Decision making, Taxation

Owners' liability

Who is responsible for debts?

Equity structure

Who owns the business?

Funding

How can the business raise money?

Decision-making

Who makes decisions?

Taxation

How is the business taxed?

Accounting entity concept

A business's financial records must be kept separate from the owner's personal finances

Accounting equation

Assets = liabilities + equity

Assets

What the business owns or controls

Liabilities

What the business owes

Equity

Owners’ remaining interest

Objective of financial reporting

To provide financial information that helps investors, lenders, and creditors make decisions about providing money or resources to a business

Two fundamental qualities

Relevance + faithful representation

Relevance

information helps users make decisions

Faithful representation

Information is accurate, complete, and unbiased

Four enhancing qualities

Comparability, Verifiability, Understandability, Timeliness

Comparability

Can compare businesses or years

Verifiability

Others can check the information

Understandability

Information is clear and easy to understand

Timeliness

Information is available when needed

Conceptual framework

A guide that helps accountants prepare financial statements and helps standard setters develop accounting rules

Conceptual framework: Purpose

Guides preparation of financial statements; helps develop accounting standards; helps users understand financial reports.

Elements of financial statements

Assets, Liabilities, Equity, Income, Expenses

Assets

Resources the business controls that can provide future economic benefits

Assets: Examples

Cash, equipment, inventory

Liabilities

Amounts the business is obligated to pay or transfer

Liabilities: Examples

Loans, accounts payable

Equity

What remains for owners after liabilities are deducted from assets

Equity: Examples

Owner’s investment

Income

Increases in assets or decreases in liabilities that increase equity

Income: Examples

Sales revenue

Expenses

Decreases in assets or increases in liabilities that decrease equity

Expenses: Examples

Rent, wages, electricity

True or false: Owner contributions increase equity, but they are NOT income; owner distributions decrease equity, but they are NOT expenses.

True

Limitations of accounting information

Time lag, Historical information, Subjectivity, Incomplete picture, Incomplete costs, Competitive information

Time lag

Financial reports take time to prepare, so information may be outdated

Historical information

Reports show past transactions, but not necessarily what will happen in the future

Subjectivity

Accountants make judgments and choices when preparing reports

Incomplete picture

Not everything valuable can be recorded as an asset

Incomplete costs

Producing financial information can be expensive

Competitive information

Competitors may use disclosed financial information to their advantage

Business sustainability

Using resources today without compromising the ability of future generations to meet their needs

Businesses should consider the environmental and social impacts of their activities

Resources used, Outputs produced, The UN developed 10 principles covering four main areas

Resources used

Employees and labor, electricity and water, raw materials, packaging

Outputs produced

Products and services, waste, emissions, recyclable materials

The UN developed 10 principles covering four main areas

Human rights, labor, environment, and anti-corruption

Sustainability reporting and disclosure

Businesses report their environmental, social, and sustainability impacts

Important organisations and standards: Sustainability

GRI (Global Reporting Initiative), ISSB ( International Sustainability Standards Board), standards, AASB S1, AASB S2

GRI (Global Reporting Initiative)

Provides widely used sustainability reporting guidelines

ISSB ( International Sustainability Standards Board)

Develops global sustainability reporting standards

AASB S1

General sustainability-related financial disclosures; voluntary in Australia

AASB S2

Climate-related financial disclosures; mandatory for entities required to apply it under Australian law

Roles of accountants in sustainability

Reporting, Cost analysis, Auditing and assurance

Reporting

Prepare sustainability reports

Cost analysis

Identify the costs of sustainable activities

Auditing and assurance

Check whether sustainability information is reliable

Business regulations in Australia: Purpose

Protect stakeholders, ensure businesses follow laws, and support a strong economy

Business regulations in Australia

Parliament, ASIC, ASX, ACCC, APRA, ATO, RBA