ACCT1101 Lecture 1: ACCT1101 NOTES S1
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FINANCIAL ACCOUNTING
Chapter 1: Decision making and the role of accounting
ACCOUNTING
Accounting: is a service activity, its function is to interpret and provide financial information to assist in
decision making (steps 2,3,4 in decision making process)
Accounting is used in business, government, charities, and not for profit organisations.
ACCOUNTING ENVIRONMENT
•accounting evolves as a society and business changes
•some changes include: rapid developments in information and communication technologies, increasing
demand for a range of information about organisational impact, development of international regulations
and standards
THE DECISION MAKING PROCESS
•decision making choices include: how we spend our time, how we spend our resources, competing
options available
•steps in decision making:
1. goals
2. Information
3. Consequences
4. Choose
•Economic resources have a cost as they are scarce. We must consider personal taste, social factors,
environmental factors, religious and/or moral factors, government policy
ACCOUNTING DEFINED
Identification: transactions (internal and external)
Measurement: quantification in monetary terms ($)
Recording: classification, summarisation
Communication: accounting reports, analysis and interpretation
•the uses of accounting information is external and internal users
FINANCIAL ACCOUNTING
•External focus
•reports information (performance and position)
•financing and investing
•legal compliance
•highly regulated
TYPES OF ACCOUNTING
PUBLIC ACCOUNTING: Accountants who offer their
services to the public for free
•can vary in size depending on international
organisations
•have four main areas in which they specialise:
auditing and assurance services, taxation services,
advisory services, insolvency and administration
ETHICS IN ACCOUNTING
Ethics in business: important in all business transactions
Ethics and professional accounting:
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Ethics in practice: identify the ethical issue, analyse key issues and stakeholders, assess consequences,
select appropriate course of action.
Chapter 2: Financial Statements for Decision Making
TYPES OF BUSINESS ENTITIES
Single Proprietorship or sole trader
•owned by one person
•simple to set up
•common form of business structure
•seperate accounting entity, not seperate legal entity
Partnership:
•owned by two or more individuals (more capital and
resources)
•simple to set up
•seperate accounting entity not seperate legal entity
•jointly and separately liable (legal)
•each partner pays tax seperate so that they can
receive seperate income from the company
Company or Corporate
•owned by shareholders
•seperate accounting entity
•seperate legal entity
•Private Company:
•Public Company:
Limited Liability
•protection for owners
Main differences between a sole trader, partnership and a company make a table and insert here
1. profit/ loss sharing
2. capital contributed at the start of the company/ formation
3. dissolution/winding up of the entity
4. Legal liability
5. Tax Liability
BASIC FINANCIAL STATEMENTS
•accounting is and information system designed to communicate financial information to interested users
for making economic decisions
•financial statements are the outcome of the accounting process,are a primary information source for
users, and are useful for many decisions
3 PRIMARY INFORMATION TYPES
•Financial performance: (income statement) the ability of the entity to utilise its assets effectively and
efficiently
•tells if management was able to affectively use resources to generate profits
•Financial position: (balance sheet)the financial resources controlled by the entity, financial structure and
the measure of liquidity and solvency
•tells what financial assets you own
•Cash Flow Statement:
BUSINESS ACTIVITIES
Cash Movements: the ability of the entity to generate cash flow in the there areas:
1. operating activities: the provision and payment for goods and services
2. Investing activities: the acquisition and disposal of long term assets
3. financing activities: The raising of funds for an entity to carry out its operating and investing activities
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THE BALANCE SHEET
•reports financial position of an entity at a specific point in time
•shows assets, liabilities and equity of an entity
•represents the accounting equation —> Assets=Liabilities + Equity
The accounting formula rearranged:
Account Format: Assets= Liabilities + Equity Narrative Format: Assets - Liabilities = Equity
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 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 equity
Assets - Liabilities = Net Assets
Net Assets = Equity
Sometimes called Capital or Accumulated Surplus/ Funds
THE INCOME STATEMENT
•reports financial performance over a specific period of the
•shows income and expenses (e.g. income>expenses=profit OR
income<expenses=loss)
•sometimes called profit or loss statement or Operating Statement
Income: increases in economic benefits in the form of inflows or
enhancements of assets or decreases of liabilities that results in
equity, other than those relating to equity participants
it is activity involved with other entities, not the owner contributing
capital ($)
-interest recieved, dividends, commission,
Expenses: decreases in economic benefits in the form of outflows or
incurrences of liabilities that rest;t in decreases in equity, other than
this relating to equity participants.
Drawings are not an expense!
-electricity, don't have to be paid in cash to
qualify as an expense
THE STATEMENT OF CHANGES IN EQUITY
The initial capital of $437 330 has the profit for
the first year added to it ($437 330+136 350).
this equals $573 680. The drawings must be
taken away ($573 680-87 000=$486 680). This
means that the profit for that year is $49 350.
Document Summary
Chapter 1: decision making and the role of accounting. Accounting: is a service activity, its function is to interpret and provide nancial information to assist in decision making (steps 2,3,4 in decision making process) Accounting is used in business, government, charities, and not for pro t organisations. Accounting environment: accounting evolves as a society and business changes, some changes include: rapid developments in information and communication technologies, increasing demand for a range of information about organisational impact, development of international regulations and standards options available. The decision making process: decision making choices include: how we spend our time, how we spend our resources, competing, steps in decision making, goals. 2: consequences, choose, economic resources have a cost as they are scarce. Information environmental factors, religious and/or moral factors, government policy. Communication: accounting reports, analysis and interpretation: the uses of accounting information is external and internal users.
