CHAPTER 1 Introduction to Accounting

Differentiating between accounting and bookkeeping Accounting = the process of identifying, measuring & communicating eco information about an entity to a variety of users for decision-making purposes. 1. Identifying Identifying business transactions e.g. withdrawals of cash by the owner(s), payment of wages & salaries, earning of fees revenue, payment of quarterly GST etc 2. Measuring refers to the analysis, recording & classifying of business transactions. How transactions will affect the entitys position. E.g. the contribution of capital by the owners will have the effect of the cash at bank (asset) & the capital (equity). 3. Communicating through reports e.g. income statements, balance sheets & statements of cash flows. Information has to be relevant i.e. makes a difference in decision-making. Bookkeeping = recording & summarising of financial transactions & the preparation of basic financial statements. Role of accounting in decision making Designed to meet the needs of internal users & external users o Internal users managers of the entity who use the info to assist in various management functions Helps managers make decisions concerning the operations of the business entity e.g. determining the appropriate sales mix & price of goods, forecasting profits & capacity of assets e.g. plant Weigh up various alternatives when investing o External users (stakeholders) Parties outside of the entity e.g. employees, investors, banks, tax authorities, consumers who use info to make decisions about the entity. Evaluate how effectively management has invested the assets of the business entity & if it has made appropriate business decisions on behalf of the investors AKA stewardship function of management. Whether it has the ability to repay a loan Job security, potential to pay awards & bonuses & promotional opportunities

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Difference between financial accounting & management accounting Financial accounting = preparation & presentation of financial information for all types of users to enable them to make eco decisions regarding the entity. 1. General Purpose FS prepared to meet the info needs common to users who are unable to command reports to suit their own needs 2. Special Purpose FS prepared to suit a specific purpose & dont cater for the generalized needs common to most users. Financial statements consists of : o o o Statement of cash flows: cash inflows & outflows Income statement: profit for the entity for a specified time period & resulting profit/loss Balance sheet: reports on assets, liabilities & equity of an entity @ a particular point in time

Management accounting = provides eco information for internal users for internal planning & decision making. Financial Accounting Regulations Bound by GAAP, the corporations Act & relaevant rules of the accounting association including the ASX Timeliness Info often outdated by the time they are distributed. It presents a historical picture of the past operations. Based on historical figures (original amount paid/expected to be received for an item) Level of detail Mostly quantitative nature, representing entity as a whole, consolidating income & expenses from different segments of the business Main users All users More detailed & can be tailored to suit the needs of management Quantitative + Qualitative Mainly managers Can be both a historical record & projection e.g. budget Management Accounting Less formal, w/o any prescribed rules/ Reports constructed to be used by managers.

Interaction between financial & management accounting: Illustrated in the area of operating segment reporting by disclosing entities (those with users who depend on GPFSs for decision making purpoes). These entities must disclose operating segment info as part of the FS helps understand its relative risks & returns. Globalization of financial reporting

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As entities become more diversified & multinational require more complicated accountancy & auditing services. Accountants have to be updated by latest GAAP & IFRSs (International Financial Reporting Standards)

CHAPTER 1 Introduction to Accounting

Sources of company regulation in Australia Background: Company regulation protect different stakeholders & promote a strong + vibrant economy Main source = the Corporations Act enforced through ASIC

1. Australian Securities & Investments Commission (ASIC) enforces company & financial services laws e.g. Corporations Act, ASX listing rules o o Make info about companies available to the public Improve the performance of the financial system

2. Australian Securities Exchange (ASX) o o Provides in depth market data Contributes to company regulation through its Market rules (operations & behaviour) & Listing Rules (ensure that companies provide adequate disclosures to various stakeholdersAdmi) 3. Australian Competition & Consumer Commission (ACCC) o Administers the Competition & Consumer Act covers anti competitive behaviour & unfair market practices, mergers and acquisitions of companies. o Main aim: protection of the consumer

4. RBA stability of the financial system & setting monetary policy 5. Australian Prudential Regulation Authority (APRA) o Overseas financial institutions & ensures that they honour their commitments

Current standard-setting framework & the role of the professional accounting associations in the standard-setting process Australia adopted A-IFRSs (Australian-International Financial Reporting Standards) from 1 Jan 05. This helps ensure compliance with internationally agreed principles, standards & codes of best practices The AASB (Australian Accounting Standards Board) remains the Australian accounting standard setter under the law & will continue to issue Australian Accounting Standards. The financial Reporting Council (FRC) is responsible for overseeing the standard-setting process. The AASB is responsible for developing accounting standards for application to reporting entities under the Corporations Act.) The procedure for due process involves the following steps: identify a technical issue; develop a project proposal, research the issue, consult with stakeholders & prepare an exposure draft; send the exposure draft for comment to interested parties; issue an exposure draft for further comment & finalize the accounting standard, interpretation/ conceptual framework doc.

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The professional bodies (CPA, ICAA) provide feedback on exposure drafts & forward any comments to AASB. They also inform their members of any developments in accounting standards, through newsletters & by conducting continuing professional education (CPE) sessions.

CHAPTER 1 Introduction to Accounting

Conceptual Framework Applies to entities that are required to prepare GPFSs. It is designed to assist in the preparation & presentation of FS, to guide the standard setters in developing future accounting standards, to help users interpret info in the FS. It specifies the objectives of FS, their desirable qualitative characteristics & elements. Qualitative characteristics of financial reports: o Relevance info should have predictive & confirmatory value for users in making & evaluating eco decisions Relevance is affected by nature & materiality. Info = material if omitting it or misstating it could influence decision making. o o Faithful representation info = complete, neutral, free from error Comparability users of FS must be able to compare aspects of an entity (+ between entities) at one time & over time measurement & display of transactions & events consistent. o o o o Verifiability info faithfully represents what is suggested Timeliness available to all stakeholders in time (within 3 months of the end of a financial period) Understandability Cost constraint on financial info

Limitations of Accounting info Time Lag a lot can happen to business entities within a few months o o o in market competition can dramatically change future demand for an entitys products An unsettled legal dispute can be resolved Fire & flood can damage an entitys stockholdings

Historical information FS based on past transactions doesnt provide forecast info o E+I are reported for in the IS for the past financial period not an accurate indication of future E+I

Subjectivity of info o There is much choice involved in the inclusion of items to be reported & choice of accounting policies to adopt E.g. report certain assets @ cost/current market value

Potential costs of providing accounting info 1. Information costs costs involving gathering, summarizing & producing info contained in FS 2. Cost of releasing info to competitors

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Info disclosed in an entitys financial report potentially contains proprietary info that could be used by competitors to strengthen their market position