Are you in the right room?
•You should be here if▫You think accounting is fun▫You can see how accounting will be
relevant to your future career▫You think you may want to be an
accountant▫You have successfully passed ADA or have
been granted credit for this course because of your prior studies.
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WELCOME TO FINANCIAL ACCOUNTING 1
Time to lift the curtain on the second act in your accounting education
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ADMINISTRATIVE MATTERS•Assumed Knowledge•Materials Required
▫Course Information/Study Guide▫Text and Practice Set▫Course Website
•Course Expectations▫Course Structure▫Tutorial Preparation▫Items of Assessment
•Course Coordinator
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ASSUMED KNOWLEDGE•Accounting, Decisions And Accountability
is presumed knowledge for this course •The condensed nature of the delivery of
this course places a lot of responsibility on you. I am here to plant the seed, you must make it grow.
•FA 1 is designed to build on your ADA knowledge and will require more effort from you.
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Resources and Expectations
•Course Information/Study Guide▫Text Books
Hoggett, John, Edwards, Lew and Medlin, John 2006, Accounting in Australia, 6th edition, Brisbane: John Wiley and Sons. http://
www.johnwiley.com.au/highered/accounting/aia6e/home/aia_home.html
Sportzone QuickBooks Practice Set 2006/7 -Value Pack, shrink-wrapped with CD for QuickBooks. http://www.pearsoned.com.au/Catalogue/TitleDetails.aspx?isbn=9780733990939
Accounting Handbook www.aasb.com.au
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Resources and Expectations
•Course Website http://www.unisanet.unisa.edu.au/subjectinfo/subject.asp?SUBJECT=12262
▫Topic Folders Lecture Notes Case Studies Solutions
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Course Expectations:Teaching arrangements
•Lectures/Seminars – 2.5 hours for 8 nights (2 visits)▫Time to go over the theory▫Demonstration of problems▫Lectures add to learning, they do not drive it
•Tutorials 2.5 hours per fortnight▫Your chance to seek assistance▫Small portion allocated to Practice Set▫You benefit more if you come prepared
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Resources and Expectations
• Assessment▫ Assignment
Major Focus on Topic 2 Research should go “beyond the text
book” Designed to give you early feedback on
the practice set
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Resources and Expectations•Practice Set
▫Not designed as training in QuickBooks▫Gives exposure to manual and
computerised systems to allow comparison▫Do a little bit each week
•Exam▫Must achieve 50% ▫Details provided closer to the date▫Past papers or specific guidance supplied
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Working as a team
•Your assignments are due individually, however,▫ I expect that you will work closely with your tutor▫And may compare your work with other students.▫This is OK.
•BUT▫ It is your responsibility to ensure your work is
easily distinguishable from everyone else's and is properly referenced.
▫Plagiarism will not be tolerated and will be pursued.
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Visits• These are designed to give you the key
information about the course.• We will cover a lot of information
quickly, but we will go through it clearly.• Visit 1 will cover the following topics
Specialised Journal and Ledgers Assets, Acquisition, Depreciation and
Disposal The key elements of inventories,
receivables and bank reconciliations
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Visits Continued
•Visit 2 will cover ▫Liabilities and Completing the Accounting
Cycle ▫Preparation for the exam.
•Remember▫Lectures add to learning, they do not drive
it
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Tutorials•You must make the most of these sessions
▫Do not let the tutor do the work for you▫They are not the one who will be doing the
exam•Accounting is a subject where practice
will help•It does not rely on rote learning equations•Your tutor is part of your team, make use
of them.
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Tonight in FA 1
•Establish a new accounting system▫Review the role of a chart of accounts▫Using the general journal
•Review the role of adjusting entries•Identify the need for reversing entries•Highlight the resources and expectations
in this course
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Where does it all begin?
•FA 1 is designed to pick up the threads exposed in ADA.
•These will be woven into a new and more comprehensive accounting system.
•To do this we must go back and review.•Our first port of call … the general
journal.
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Using the General Journal
•Later in this course we will see the GJ used in a new way.
•The old rules still apply▫All debits listed first▫Followed by credits slightly indented▫A date must be entered for each
transaction▫A narration is required
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The Opening Entry
•This is the first “transaction” you will complete in FA 1
•Entering data from a “chart of accounts” into the new system
•An example of a chart of accounts is on the next slide
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Chart of Accounts
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AssetsAssets (100-199) (100-199) Cash at BankCash at Bank 100100 Accounts ReceivableAccounts Receivable 104104 Prepaid InsurancePrepaid Insurance 110110 Office Supplies InventoryOffice Supplies Inventory 111111 LandLand 150150 BuildingBuilding 160160
LiabilitiesLiabilities (200-299) (200-299) Accounts PayableAccounts Payable 200200 Salaries PayableSalaries Payable 210210 Commissions PayableCommissions Payable 211211 Bills PayableBills Payable 214214 Interest PayableInterest Payable 215215
Owner’s EquityOwner’s Equity (300-399) (300-399) H. Cartwright, Capital H. Cartwright, Capital
300300 H. Cartwright, DrawingsH. Cartwright, Drawings 310310
RevenueRevenue (400-499) (400-499) Sales RevenueSales Revenue
400400 Appraisal Fee RevenueAppraisal Fee Revenue
401401
Expenses Expenses (500-599)(500-599) Salary ExpensesSalary Expenses 500500 Insurance ExpenseInsurance Expense 505505 Maintenance ExpenseMaintenance Expense
510510 Materials expenseMaterials expense 515515 etc.etc.
Cartwrights Crockery
Opening Balances
# Details $
100 Cash at Bank 12,000104 Accounts Receivable 7,000105 Allow for Doubtful Debts 900110 Prepaid Insurance 1,500111 Office Supplies 175120 Accrued Revenue 150140 Factory Equipment 56,000
141 Accum. Depreciation 22,833200 Accounts Payable 5,100211 Accrued Expenses 1,300220 Unearned Sales Rev 200300 H. Cartwright, Capital 46,492
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## DetailsDetails $$400400 Sales RevenueSales Revenue --500500 Salary ExpenseSalary Expense --505505 Advertising ExpenseAdvertising Expense --510510 Dep Exp - Factory EquipDep Exp - Factory Equip
--515515 Insurance ExpenseInsurance Expense --520520 Maintenance ExpenseMaintenance Expense --525525 Materials expenseMaterials expense
--530530 Office Supplies ExpenseOffice Supplies Expense
--535535 Rent ExpenseRent Expense --
Additional Information
•Accounts Receivable Consist of▫Not the Good China $900▫Fine Dining on Us $3,700▫Plates Ltd $2,400
•Accounts Payable Consist of▫Inks and Dyes $1,500▫Promotions Plus $3,600
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Prepared by Scott Copeland, UniSA 2005
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46,49246,492
Opening EntryOpening Entry
CapitalCapital
200200Unearned Sales RevenueUnearned Sales Revenue
1,3001,300Accrued ExpenseAccrued Expense
Promotions Plus - Promotions Plus - $3,600$3,600
Inks and Dyes - $1,500Inks and Dyes - $1,500
5,1005,100Accounts PayableAccounts Payable
22,83322,833 Acc. Dep'n Acc. Dep'n –– Factory Equipment Factory Equipment
900900Allowance for Doubtful DebtsAllowance for Doubtful Debts
CREDITDEBITP/RPARTICULARSDATE
12,00012,000Cash at BankCash at BankJuly 1July 1
7,0007,000Accounts Receivable Accounts Receivable
56,00056,000Factory EquipmentFactory Equipment
150150Accrued RevenueAccrued Revenue
175175Office SuppliesOffice Supplies
1,5001,500Prepaid InsurancePrepaid Insurance
Plates Ltd - $2,400Plates Ltd - $2,400
Fine Dining on UsFine Dining on Us - $3,700- $3,700
Not the Good China - $900Not the Good China - $900
Cartwright Crockery’s General JournalCartwright Crockery’s General Journal
Important Points
•All debits listed first•Subsidiary accounts
▫information still required▫cannot be included in the main columns
this would lead to double counting•A narration is required•Posting references only entered after
posting has been done.
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What to do next?
•Post all entries to the relevant general and subsidiary ledgers
•Enter relevant posting notations into the General Journal
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46,49246,492
Opening EntryOpening Entry
CapitalCapital
200200Unearned Sales RevenueUnearned Sales Revenue
1,3001,300Accrued ExpenseAccrued Expense
Promotions Plus - Promotions Plus - $3,600$3,600
Inks and Dyes - $1,500Inks and Dyes - $1,500
5,1005,100Accounts PayableAccounts Payable
22,83322,833Acc. Dep'n Acc. Dep'n –– Factory Equipment Factory Equipment
900900Allowance for Doubtful DebtsAllowance for Doubtful Debts
56,00056,000Factory EquipmentFactory Equipment
150150Accrued RevenueAccrued Revenue
175175Office SuppliesOffice Supplies
1,5001,500Prepaid InsurancePrepaid Insurance
Plates Ltd - $2,400Plates Ltd - $2,400
Fine Dining on UsFine Dining on Us - $3,700- $3,700
Not the Good China - $900Not the Good China - $900
7,0007,000Accounts Receivable Accounts Receivable
CREDITDEBITP/RPARTICULARSDATE
12,00012,000
300300
220220
211211
200200
141141
105105
140140
120120
111111
110110
104104
100100Cash at BankCash at BankJuly 1July 1
Cartwright Crockery’s General JournalCartwright Crockery’s General Journal
Ready to Go ?
•Not quite yet – lets review the opening balances
•Most are straight forward•What is the impact of accrual accounting
▫Prepaid insurance, accrued revenue, accrued expenses and unearned sales revenue
•All have been subject to adjusting entries
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Why Adjust?
•To accurately reflect the performance and position of an entity in an accrual accounting system
•Adjustments are necessary to deal with deferrals and accruals▫Deferrals include items which have been
prepaid. Accruals include expenses incurred but not yet paid & revenue earned not received
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What is the impact?
•On the business operations▫No affect
•On the accounting system▫See the following slides
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Insurance Expense
Initial cost2 000
Prepaid Insurance
Adjusting entry1 500
Adjusting entry1 500
cost not used up,incurred or expired
June 30 Prepaid Insurance 1 500 Insurance Expense 1 500(2 000 x 18/24)
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Sales Revenue
Cash Receipt250
Unearned Sales Revenue
Adjusting entry200
Adjusting entry200
Revenue notearned
June 30 Sales Revenue 200 Unearned Sales Revenue 200(8 x $25)
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30 June 30 Maintenance Expense 1 300
Accrued Expenses 1 300
LIABILITY ACCOUNTAccrued Expenses Maintenance Expense
expenses incurred
Adjusting entry1 300
Adjusting entry1 300
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Accrued Revenue Sales Revenue
Adjusting entry150
Adjusting entry150
Revenue earnedbut not received
June 30 Accrued Revenue 150 Sales Revenue 150
Why do we need to know this?
•Adjusting entries are required for accounting reports
•But they are only book entries•An entity’s operations continue unaffected•Closing entries (to be covered in Topic
11) reset Revenue and Expense items•Reversing entries are required
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What are Reversing Entries?
•An entry to counteract the effects of an adjusting entry
•Can be done for almost any adjusting entry but is most beneficial for accruals
•Accruals must be reversed in this course, reversal of prepayments is optional
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34 June 30 Maintenance Expense 1 300
Accrued Expenses 1 300
LIABILITY ACCOUNTAccrued Expenses Maintenance Expense
Adjusting entry1 300
July 1 Accrued Expenses 1 300 Maintenance Expense 1 300
expense incurred last period
Reversing entry1 300
Reversing entry1 300
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Accrued Revenue Sales Revenue
Reversing entry150
Reversing entry150
Revenue earnedlast period
June 30 Accrued Revenue 150 Sales Revenue 150
July 1 Sales Revenue 150 Accrued Revenue 150
Adjusting entry150
Why are these entries necessary?•To return the accounting system to the
position prior to adjustments•So that subsequent entries can be
processed “normally”•Allows for separation of duties and
greater efficiency
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Accrued Revenue Sales Revenue
Reversing entry150
July 10 Cash at Bank 150 Sales Revenue 150
Cash at Bank
$150 Cash is received for work $150 Cash is received for work completed last period on July 10completed last period on July 10
Payment entry150
Payment entry150
Payment entry150
Adjusting entry150
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Accrued Revenue Sales Revenue
Reversing entry150
July 25 Cash at Bank 450 Sales Revenue 450
Cash at Bank
If Reversing entries are completed “normal” entries can be made.
$450 Cash is received for all work $450 Cash is received for all work completed since June 15 on July 25completed since June 15 on July 25
Payment entry450
Payment entry450
Reversing entry150
Adjusting entry150
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Accrued Revenue Sales Revenue
July 25 Cash at Bank 450 Sales Revenue 300 Accrued Revenue 150
Cash at Bank
If no reversing entry is made the data entry becomes more complex.
$450 Cash is received for all work $450 Cash is received for all work completed since June 15 on July 25completed since June 15 on July 25
Payment entry300
Payment entry450
Payment entry150
Adjusting entry150
Next
•What guides accountants in their work?
•The Conceptual Framework Revisited
•What has been the impact of International Standards?
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TOPIC 2THE CONCEPTUAL FRAMEWORK’S RELEVANCE AND IMPACT
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The Conceptual Framework
•The road map to accounting in Australia•The contents of the Conceptual
Framework are deemed to represent best practice
•It should be followed by accountants in the preparation and presentation of financial statements
•Non-mandatory
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The Conceptual Framework
•Where did it come from?•Developed jointly by AASB and AARF•GOAL: Define the nature, subject,
purpose and broad content of general-purpose financial reporting
•MEANS: Statements of Accounting Concepts (SACs)
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Why have a Conceptual Framework?•Benefits of conceptual framework:
▫accounting standards more consistent▫increased international comparability▫the Boards should be more accountable for
their decisions▫enhanced process of communication
between the Boards and constituents▫more economical Accounting Standard
development
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Statements of Accounting Concepts•SAC 1 — Definition of the Reporting
Entity•SAC 2 — Objective of General Purpose
Financial Reports•AASB Framework
▫Qualitative Characteristics of Financial Information
▫Definition and Recognition of the Elements
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Statements of Accounting Concepts•Initial plan was to develop more•Next SAC was to be on measurement•Agreement could not be reached so SAC
development stalled•Now replaced with IASB Framework•Remember from ADA, accounting only
exists because of general acceptance of the basic principles
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SAC 1 — Definition of the Reporting Entity•Defines general-purpose financial reports
(GPFRs)▫reports intended to meet the information
needs common to users who are unable to command the preparation of reports tailored to their specific needs
▫GPFRs to be produced by entities who have users who cannot command the preparation of specific information
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SAC 2 — Objective of GPFRs
•Objective of GPFRs is to provide relevant and reliable information to assist users to make and evaluate decisions about the allocation of scarce resources and to allow management and governing bodies to discharge their accountability
•Defines users of GPFRs
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AASB Framework — Qualitative Characteristics of Financial Information•Identifies the characteristics of financial
information necessary to allow users to make and evaluate decisions about the allocation of scarce resources
•Primary qualitative characteristics:▫relevance▫reliability
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AASB Framework — Qualitative Characteristics of Financial Information•Relevance
▫if information influences decisions about the allocation of scarce resources
•Reliability▫faithfully represents the entity’s
transactions and events▫free from bias▫free from undue error
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AASB Framework — Qualitative Characteristics of Financial Information•Other considerations include
▫Understandability▫Materiality▫Comparability▫Substance over form▫Constraints
Timeliness Cost and Benefit
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AASB Framework - Definition and Recognition of the Elements•Defines:
▫assets▫liabilities▫equity▫income▫expenses
•See your handout for full definitions
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Definition of Equity
•Equity is defined as:▫the residual interest in the assets of the
entity after deduction of its liabilities•Directly a function of the definition given
to assets and liabilities•This is also true of Expenses and Income
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Recognition of Elements•If an item fits one of the definitions above
it is not automatically recognised in the financial statements
•Recognition only occurs if▫it is probable that any future economic
benefit associated with the item will flow to or from the entity; and
▫it has a cost or other value that can be measured reliably
para 83 (a) and (b)
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Recognition of Elements
•Other considerations▫Materiality (paras 29 and 30)▫Interrelationship of elements
recognition of one element will require recognition of another “balancing” element
▫Measurement Basis Including - Historic cost, Current Cost,
Realisable (settlement) value, Present Value
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Accounting Standards
•If the Conceptual Framework is the road map
•The Standards are the specific directions•AASB standards can be found at
http://www.aasb.com.au/pronouncements/standards_index.htm
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The “old” External Financial Reporting Environment in Australia
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The External Financial Reporting Environment in Australia
Private Sector
Accounting Profession
Public Sector
Australian Stock
Exchange (ASX)
Stock Exchange Listing Rules
CPA
ICAA
AARF
LRB
AuSB
Auditing Standards
Australian Government
TREASURER
Financial Reporting Council (FRC)
Australian Accounting
Standards Board (AASB)
Urgent Issues Group (UIG)
Abstracts
Accounting Standards (AASB's)
Statements
of Accounting Concepts (SAC's)
ASIC
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Development of an Accounting Standard•Initiated from a variety of sources•Much greater government involvement
now through FRC.•Created by AASB backed by Corporations
Act, therefore legally enforceable•Outcomes is AASB Standards
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The Major Players•The Financial Reporting Council (FRC)•The Australian Securities and Investments
Commission (ASIC)•The Australian Accounting Standards
Board (AASB)•International Accounting Standards Board
(IASB)•International Financial Reporting
Interpretations Committee (IFRIC)•The Urgent Issues Group (UIG)•The Australian Accounting Research
Foundation (AARF)•The Australian Stock Exchange (ASX)
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International Harmonisation and Convergence•FRC’s decision to harmonise•Major reason was to maintain capital
inflow into Australia (political decision?)•This meant aligning Australia’s standards
with those produced by International Accounting Standards Committee (IASC)
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International Harmonisation and Convergence•January 2005 saw convergence•This means adopting international
standards to replace current AASBs•These are IASs and IFRSs•Have been rebadged as AASBs to comply
with Corporations Law•Applies to financial years beginning after
January 2005
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International Harmonisation and Convergence•The Impacts
▫Changes to conceptual framework Definition of Revenue – Income and Gains SACs 1 and 2 + AASB Framework
▫Designed for “for profit” entities▫More scope for management choice in
many international standards▫Some additional guidance has been
required for Australia specific issues Aus notes and extractive industries standard
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What do you have to find?
•More details and examples of what has changed
•How standards are developed •Who is involved in the development of
standards•Whether standards really help or if the
conceptual framework is enough
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