Accounting for Business: A Comprehensive Introduction, Summaries of Accounting

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Chapter 1

The role of accounting in business

Learning objectives

• Define the main types of accounting
• Describe how decision makers use accounting information
• Describe professional career opportunities in accounting
• Describe how accounting is regulated in Australia
• Explain the role of ethics and sustainability in accounting
• Identify the three main types of business organisations

1.1. Defining accounting

Accounting encompasses the information system that

• measures business activity
• processes the data into reports
• communicates the results to decision makers

It is divided into two main types:

1. Financial accounting : provide information for ________

decision makers, such as outside investors and lenders.

2. Managerial accounting : focuses on information for

________ decision markers, such as business

____________

1.2. Decision makers: The users of

accounting information

• Business owners
• Investors
• Creditors
• Government regulatory agencies
• Tax authorities
• Non-profit organizations
• Other users, e.g. employees and labour unions

1.5. Accounting measurements:

Concepts and principles

• The primary objective of external financial reporting is to provide useful information for making investment and lending decisions
• Useful information must be relevant, valid and reliable

1.7. Accounting measurements:

Concepts and principles

• Basic measurement concepts and principles include
  • Entity concept
  • Accounting period concept
  • Cost principle (revalue => fair value (~ market value))
  • Matching principle
  • Profit recognition principle
  • Conservatism principle
  • Going concern assumption

1.7. Accounting measurements:

Concepts and principles

• The profit recognition principle states that profit should be recognized when the sales and any other revenues or gains relating to the relevant activity are earned and can be reliably measured
• The conservatism (or prudence) principle constrains management’s natural optimists.
• The going concern assumption assumes that the business as a whole will continue operating for the foreseeable future

Quick Check

1. Accounting standards in Australia are formulated by the: a. Australian Accounting Standards Board (AASB) b. CPA Australia (CPAA) c. The Institute of Chartered Accountants in Australia (ICAA) d. Australian Securities and Investments Commission (ASIC)

Quick Check

3. The accounting principle that states recording expenses and revenues in the same period in which they occur: a/ Historical cost b/ Matching c/ Revenue recognition d/ Going-concern

Quick Check

4. Accounting is the information system that: a measures business activity b communicates the results to decision makers c processes data into reports d all of the above

Quick Check

6. Which of the following accounting principles allows for an organization’s activities to be divided into specific time periods such as a month, a quarter or a year? a/ Revenue Recognition Principle b/ Matching Principle c/ Accounting Period Principle d/ Business Entity Principle

Quick Check

7. T&T Corporation completed a project for a client. The $ 8 , 000 fee for this project was billed to the client in 2014 , but will be collected in 2015. Is this revenue recorded in 2014? Which principle could have been applied? a/ Historical cost b/ Matching c/ Profit recognition d/ Going-concern

Assets An asset is a resource controlled by an entity as a result of past events that is expected to provide future economic benefits to the entity in the future

2.1. The account, the ledger and the

journal

• Cash
• Accounts receivable
• Inventories
  • Land
  • Buildings
  • Plant and equipment

Liabilities A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

• Accounts payable
• Loan payable/ borrowing
• Accrued liabilities (salary payable, interest payable, tax payable, etc.)

2.1. The account, the ledger and the

journal