Accounting U1AOS1

what is accounting?

an information system for collecting and recording financial data to produce relevant information to assist business owners in decision-making

what is the purpose of accounting?

Provide business owners with financial information

Assist business owners in decision-making

who are the users of accounting information (stakeholders)?

accounts receivable - wish to know about the firm’s ability to provide them with inventory

accounts payable - Wish to know about the firm’s ability to repay what it owes them

banks - Wish to know about the firm’s current levels of debt and its ability to repay it (before providing them with further services)

employees - Wish to know about the firm’s long-term viability and employee prospects

Prospective owners - Wish to know about the firm’s financial structure and performance to determine its worth

Australian Taxation Office (ATO) - Requires financial information for taxation purposes

what is financial data?

the raw facts and figures on which financial information will be based, including source documents i.e. receipts, bank statements

what is financial information?

financial data that has been sorted and processes into a more useable form and is used as the basis for business decisions

what is non-financial information?

information that is not necessarily financial (is not expressed in dollars anc cents and not in financial statements) but provides a more rounded and overall picture of how the business is performing. Examples include employee absence rates, website hits, high staff turnover, wastage in production

what are the ethical considerations in accounting?

Social and environmental implications of a decision

Effects on people, communities

The local and wider environment

The way a business looks after its employees

Choices regarding suppliers and products (are they sustainable?)

Whether a business is representing itself fairly and accurately

why must a business be aware of its ethical considerations?

they relate directly to its reputation and are a corporate responsibility

what are accounting assumptions?

Generally accepted rules of how a business should record its accounting information

what are the accounting assumptions?

PAGE/AGAP

Accounting entity

going concern

accural basis

period

what is the definition of the accounting entity assumption?

Under the accounting entity assumption, the records of assets, liabilities and business activities of an entity are kept completely separate from those of the owner of the entity, as well as from those of other entities. A separate set of accounting records is maintained for each entity, with each financial statement prepared providing information on the relevant individual entity only.

what is the definition of the going concern assumption?

Under the going concern assumption, financial reports are prepared on the assumption that an existing entity will continue to operate into the future. It is assumed that the entity will not be wound up in the near future but will continue its activities.

what is the definition of the accrual basis assumption?

Under the accrual basis assumption, revenue is recognised in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner; that is, revenue is recognised when it is earned. Expenses are recognised when the consumption of goods and services can be measured; that is, expenses are recognised when they are incurred. The accrual basis profit for an accounting period is determined by subtracting expenses incurred for a period from revenue earned in the same period.

what is the definition of the period assumption?

According to the period assumption, reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results. Profit determination involves a process of recognising the revenue for a period and deducting the expenses incurred for the same period. A distinction can be made between assets, that will provide benefit to future reporting periods, and expenses which are totally consumed within one reporting period.

what are qualitative characteristics?

Standards that must be met when preparing financial reports, ensuring that financial information is useful

what are the qualitative characteristics?

C RUF TV

timeliness

understandability

faithful representation

verifiability

comparability

relevance

what is the definition of the timeliness qualitative characteristic?

Timeliness means that information is available to decision-makers in time to be capable of influence on decisions. Information being available sooner, rather than later, can enhance its capacity to influence decisions, while a lack of timeliness can rob information of its potential usefulness. Generally, the older the information, the less useful it is.

what is the definition of the understandability qualitative characteristic?

Understandability requires financial information to be comprehensible to users with reasonable knowledge of business and economic activities. To be understandable, information should be presented clearly and concisely

what is the definition of the faithful representation qualitative characteristic?

The information reported must be a faithful representation of the real-world economic event it represents. This means that user is assured that the information presented is complete, free from material error, and neutral (without bias).

what is the definition of the verifiability qualitative characteristic?

Verifiability refers to the ability to ensure that different knowledgeable and independent observers can reach a consensus that a particular depiction of an event is faithfully represented. Verifiability is maintained by retaining the source documents used to record the transaction, and is checked through auditing. The purpose of verifiability is to hold the accounting professional accountable for their work.

what is the definition of the comparability qualitative characteristic?

Comparability is the qualitative characteristic that enables the user to identify and understand similarities and differences between items. Information about an entity is more useful if it can be compared with similar information about other entities, and with similar information about the same entity for another date or period.

what is the definition of the relevance qualitative characteristic?

Relevant information is that which directly assists the user in making decisions. Relevant financial information is related to making an economic decision and directly assists the user in forming predictions about outcomes of past, present or future events. It may also confirm or change previous evaluations through provision of suitable feedback.

what are the accounting elements?

assets, liabilities and owner’s equity

what is the definition of assets?

An asset is a present economic resource controlled by an entity as a result of past events. An economic resource is a right that has the potential to produce future economic benefits.

what is the definition of liabilities?

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

what is the definition of owner’s equity?

The residual interest in the assets of the entity after the liabilities are deducted.

what is the accounting equation?

assets = liabilities + owner’s equity

what is the difference between current and non-current assets?

If an asset is expected to churn benefit for 12 months or less after the end of the reporting period, then it should be classified as a current asset. If an asset is expected to provide economic benefits for more than 12 months after the end of the reporting period, then it should be classified as non-current assets (expected to be used by the business for a number of years)

what are examples of current and non-current assets?

Common current assets include:

Cash in the bank account

Inventory and supplies it is holding for completing a job

Amounts owed by accounts receivable

Common non-current assets include:

premises

vehicles

technology and tools

what is the difference between current and non-current liabilities?

If a liability is expected to be paid in the next 12 months, they are current liability.

If a liability is expected to be paid after the next 12 months at the end of the reporting period, it is a non-current liability.

what are examples of current and non-current liabilities?

current liabilities:

accounts payable

wages/salaries

short term loans

non-current liabilities:

long-term property loans

deferred tax liabilities

how do you classify loans in the balance sheet/accounting elements?

When classifying loans, it should be recognised that some of the amount owing may be current and some non-current, as a bank may expect regular instalments

The amount that is due in the next 12 months is a current liability, and the remainder is non-current

what is the difference between capital and owner’s equity?

Capital is the money or assets owners put into a business, while owner's equity is the owner's total claim on the business's assets after all liabilities are paid, encompassing both the initial capital and accumulated profits (retained earnings).