a Unit 3 Area of Study 1b

The Accounting Process

  1. Source documents

    • The main document a business receives that provides data on what Accounting information is needed

    • such as receipt, eft payment documents, invoices, memos

  2. Recording

    • Sorting, classifying and summarising data contained in source documents

    • Journals, ledgers, inventory cards

  3. Reporting

    • Preparation of financial statements that communicate financial information to owner

    • Cash flow statement, income statement, balance sheet

  4. Advice

    • Accountant gives owner advice based on information presented in reports

Accounting assumptions - how accounting information is generated

  • Period is the assumption that reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results.

  • Entity is the assumption that the records of 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.

  • Going concern is the assumption that financial reports are prepared on the assumption that an existing entity will continue to operate into the future.

  • Accrual basis is the assumption that revenue is recognised in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner.

Qualitative characteristics - what the information in reports should be like

  • Timeliness - information is available to decision-makers in time to be capable of influence on decisions.

  • 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.

  • Relevance - 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.

  • Faithful representation - 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).

  • Comparability - 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.

  • Verifiability - 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.

Elements of accounting reports

  • Current/non current asset

    • resource controlled by entity

    • Result of a past event

    • Results in an inflow of economic benefit

  • Current/non current liability

    • Results in an outflow of future economic benefit

    • Result of a past event

    • A present obligation of the entity

  • Owner’s equity

    • The residual interest

    • Liabilities are subtracted from assets

  • Revenue

    • Increase in an asset (decrease in a liability)

    • Increases owner’s equity

    • Not a capital contribution

  • Expense

    • Liabilities are subtracted from assets

    • Decreases owner’s equity

    • Decrease in an asset (increase in liability)