PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

CHAPTER 1 Introduction

Learning outcomeGain a grounding in accounting and

bookkeeping principles

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

KEY TERMS• Australian Accounting Standards• International Accounting Standards• A brief history• Definition of accounting• Types of businesses• Basic accounting principles

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

KEY TERMS cont.• Revenue and expenses• Assets, liabilities and equity• Five groups of accounts• Accounting equation• Accrual accounting• Financial statements• Chart of accounts• Internal controls

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING STANDARDSAccounting standards:• provide concepts for recording transactions• require specific disclosure of certain transactions in

reports• increase the value of information• standardise financial reports• are mandatory for reporting entities (Corporations Act

2001).

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

DEVELOPMENT OF ACCOUNTING STANDARDS

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING REPORTSInternal reports

– give assurance to managers to allow them to perform tasks to optimise the benefits of the business

External reports – allow a company to comply with legislation and regulations

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING SYSTEMSAccounting systems are designed to:• provide information to aid management decision

making• disclose to interested parties relevant and reliable

financial information on which to base their decision making

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

INTERNAL CONTROLS• Controls need to be built into the

accounting system to ensure that information meets the needs of users

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

INTERNAL CONTROLS cont.Some examples of internal controls• Clear allocation of staff responsibilities• Procedure and practice manuals• Segregation of duties• Physical controls to safeguard assets• Staff rotation• Independent checks, verifications and reconciliations

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING ETHICSVirtues considered essential to professionals:• Honesty and integrity• Trustworthiness• Reliability and dependability• Care for others• Confidentiality

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

DEFINITION OF ACCOUNTINGAccounting provides information about business organisations to interested parties.Accounting information could include:

– profits/losses for a given period– sales figures for the day– comparisons of actuals with budgets– statements of assets and liabilities

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

BUSINESS ORGANISATIONS• Sole traders• Partnerships• Limited liability companies• Co-operatives• Clubs and societies• Government and statutory authorities

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

INTERESTED PARTIES• Owners, managers and shareholders• Government authorities• Investors• Auditors• Creditors• Bankers

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

MAIN TYPES OF BUSINESSES

Trading—selling productsService industries—providing servicesManufacturing—producing products for sale

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

FIVE BASIC ACCOUNTING PRINCIPLES1. Principle of double entry 2. Principle of recording3. Principle of profit determination4. Principle of reporting5. Principle of control

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

OTHER ACCOUNTING PRINCIPLES AND CONCEPTS• Accounting entity—separation of business and owner• Legal entity—owner and business as same legal entity• Reporting entity—large businesses that legally must

report their financial activities

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

OTHER ACCOUNTING PRINCIPLES AND CONCEPTS cont.Reporting period and balance date (in Australia)

– Reporting period—12 months– Balance date—30 June

Accrual concept– The recognition of revenues when earned and expenses when

incurred

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

REVENUE AND EXPENSESRevenue

– Revenue items are earnings of the business

Expenses– Expenses are outflows of the business

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

PROCESS OF THE OPERATING CYCLEtable

GoodsGoods CustomersCustomers

SuppliersSuppliers CashCash

PURCHASES

SALES

PAYMENT

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNT TYPESAssets

– Items owned/controlled by a business

Expenses – Outflows from a business

Equity – Owner’s investment

Revenue – Inflows to a business

Liabilities – Amounts owed by a business

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

INVENTORIES/TRADING STOCK ACCOUNTSOpening inventories

– Start-of-year balance

Purchase of inventories– Expense

Sale of inventories– Income/Revenue

Closing inventories – End-of-year balances

Value of inventory – Asset

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

CHART OF ACCOUNTS• Assets• Liabilities• Equity• Revenue• Expenses

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

A = L + EQ

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PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis 2011 McGraw-Hill Australia Pty Ltd

EXTENDED EQUATION — EFFECT OF PROFIT

ASSET = LIABILITIES + EQUITY + PROFIT

A = L + EQ + PA = L + EQ + (R – E)A + E = L + EQ + R

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