BUSS1030 Lecture Notes - Lecture 1: Cash Cash, Accounts Payable, Sole Proprietorship
19 Jul 2018
School
Department
Course
Professor
BUSS 1030
ACCOUNTING, BUSINESS AND SOCIETY NOTES
WEEK 1
Accounting – information system measuring business activity, processes data into reports and
communicates results to decision makers (ethics important – AASB)
• Financial Accounting – provides info. for ppl outside firm (lenders/outside investors)
• Management Accounting – info. for internal decision makers (e.g. admin, executives)
Financial Statements – report on business in monetary terms – used by individuals, businesses,
investors, creditors, government regulatory agencies, tax authorities, noon profit organisations
Public Accounting
• Audit – independent examination that assures reliability of accounting reports that
management prepares + submits to creditors, investors etc.
• Triple-bottom-line (TBL) = reports environmental + social measures of performance +
traditional financial measures
• Tax Accounting = aims of complying with tax laws + minimizing taxes to be paid
• Management Consulting = advice public accountants provide to help managers run business
(suggestions/management structure/accounting systems etc.)
• Insolvency = liquidators appointed to manage business of firm in financial distress
Private Accounting
• Cost Accounting – analyses business costs to help managers control expenses
• Budgeting – sets sale and profit goals + details plans
• Information Systems design – identifies organisation’s info. needs (both internal/external)
• Internal Auditing – evaluate firm’s own accounting/management systems + improve
efficiency
Types of Business Organisations
• Proprietorships (sole traders) - Single owner, often manager (small businesses)
• Partnerships – joins 2 or more individuals together as co-owners
• Company – business owned by shareholders (either private or public (ASX listing))
ADVANTAGES
Sole Proprietorship
Partnership
Company
Total undivided authority
Better credit standing
Separate legal existence (treated as an entity
not extension of a person)
No Restrictions on type of
business (must be legal)
More brain powers/expertise (but
consultation with partners required)
Limited liability to shareholders (company is
separate from shareholders)
Easy to setup
Simple to form
Easy transferability of ownership
DISADVANTAGES
Sole Proprietorship
Partnership
Company
Unlimited personal liability
(responsibility for all
liabilities/business expenses)
Unlimited personal liability for general partners
Separation of ownership and control
Limitation on
size/fundraising power
Need for written partnership agreement
Extensive governmental regulation
Accounting Concepts
Entity Concept = defines entity and sharp boundaries for which accounting data is collected (person
running business/his personal transactions are separate from the business itself – not incl. in
financial reports)
Accounting Time Period Concept = unit of time for which accounting data is collected/financial
statements prepared (usually 1 year from July 1 to June 30 the next year)
Cost Principle = assets and services acquired should be recorded at actual cost (price agreed at time
good/service is no longer in sellers’ hands (even if not actually paid or not))
Matching Principle = relates inputs and outputs of G+S to one another
Profit Recognition Principle = record revenue when it is earned (i.e. Good/service no longer in hand,
not when actually paid for) – on accrual basis
Conservatism Principle = if unsure whether transaction is profit or loss, record as loss
(conservative)
Going Concern Principle = business as a whole will continue indefinitely for the foreseeable future
WEEK 2
Assets = economic resources expected to be of benefit in future (e.g. cash, inventory, furniture,
land) – note: doesn’t have to be owned it can also be ‘controlled’
• Cash at bank
• Accounts receivable = exchange promise of future cash receipt; sales made on credit
• Bills receivable = G+S may be sold for bill of exchange – a written pledge that customer
will pay fixed amount of money by certain date
• Inventories = unsold items ‘in stock’ or ‘on hand’
• Prepaid expenses = expenses paid in advance – assets because business avoids paying cash
in future
• Land = record of cost/value of land business controls
• Buildings = cost/value of business buildings
• Plant and equipment
Liabilities = outsider claims (debts payable to outsiders called creditors) – what company ‘owes’
• Accounts payable = opposite of A/R; purchase made ‘on credit’
• Bills payable = opposite of B/R
• Accrued Liabilities = liability for expense not paid/revenue not received but not yet earned
Owners Equity = Insider claims – owner’s/investors’ earnings/share of profits
• OE = Capital + (Revenue – Expenses) – Drawings (dividends)
^Profit^
Accounting Equation: ASSETS = LIABILITIES + OWNERS’ EQUITY
*Always in balance
Income = refers to all increases in equity other than investments by owners
Revenue = part of income arising from ordinary activities (amount received or to be received from
customers for sale of products or services (via profit recognition principle) – incl. sales, feeds,
interest, dividends, royalties
• Sales revenue
• Service revenue
• Interest revenue = earned on investments in shares of corporations
• Owner withdrawals = decrease OE when owner takes assets out of business for personal use
• Expenses = decrease OE by using up assets/increasing liability in order to deliver G+S to
customers (e.g. rent, salary, advertising, water, gas)
Note: Inventories = assets you buy to sell; Supplies = assets you buy to use
Income = Revenue (in broad terms/similar definitions)
• INCOME = REVENUE (money earned in normal course of business – e.g. profit) +
GAINS (money earned as a random sale outside the normal course of business – e.g. selling
land)
Revenue = Inflow of economic benefit
Expense = Outflow of economic benefit
Asset = provides future economic benefit
Expenses – Occur only when an asset has been consumed (often expenses are recognized when an
asset is used up)
Drawings – Withdraw cash/other assets for personal use → decrease OE
Balance Sheet = reports assets, liabilities and owners’ equity of business
Note: Profit can be high (through accounts payable/accrual basis) but not necessarily cash flow
which is also important to recognize strength of company (cash needed for many transactions)
Tips
• If there is no exchange of eco. resources then no transaction (even if agreement is made)
• Give specific names for what areas of A/L/OE have changed
• Liabilities is money owed, once paid it is no longer a liability
• When asset stops being useful (ie. used up) it becomes expense (thus reducing OE)
• If A/R but no cash is received (dodgy business) write in transaction as normal (profit
recognition principle)
• Description of accounts/transactions are in the business’ perspective
• Note: Rent can be: 1. In advance (before use) (asset) or 2. In arrears (after use) (expense)
• Collection = term used to describe transaction where cash is finally paid for accounts
payable
• Sale = term to classify transaction of passing on of G/S whether cash is paid yet or not
• When something is prepaid (e.g. insurance) it is considered an assets
Common Account Names: Equipment, Capital, Cash at Bank, Sales revenue, Rent Expenses, Land
assets, Accounts Receivable, Accounts Payable etc.
Terminology associated with A/R and A/P – On account, on credit, received invoice
Document Summary
Financial statements report on business in monetary terms used by individuals, businesses, investors, creditors, government regulatory agencies, tax authorities, noon profit organisations. Insolvency = liquidators appointed to manage business of firm in financial distress. Private accounting: cost accounting analyses business costs to help managers control expenses, budgeting sets sale and profit goals + details plans. Information systems design identifies organisation"s info. needs (both internal/external) Internal auditing evaluate firm"s own accounting/management systems + improve efficiency. Types of business organisations: proprietorships (sole traders) - single owner, often manager (small businesses, partnerships joins 2 or more individuals together as co-owners, company business owned by shareholders (either private or public (asx listing)) No restrictions on type of business (must be legal) More brain powers/expertise (but consultation with partners required) Separate legal existence (treated as an entity not extension of a person) Limited liability to shareholders (company is separate from shareholders) Unlimited personal liability (responsibility for all liabilities/business expenses)
