A conceptual framework for financial accounting

Chapter 1 : Accounting & its Environment

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Lecture Objectives

Define accounting Identify users of financial information Identify 3 different types of entities Understand the role of the accounting information system Identify the financial statements Identify the sources of accounting regulation

Accounting: Introduction 2003 Pearson Education Australia

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Define Accounting:

Is the process of identifying, measuring & communicating economic information Enables users to make informed judgements & decisions

Accounting: Introduction 2003 Pearson Education Australia

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Users of financial information

Internal Managers Owners External Present & prospective owners Suppliers of goods/services Lenders Employees & labour organisations Customers Taxation & Regulatory authorities

Accounting: Introduction 2003 Pearson Education Australia

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Types of Entities

Profit-oriented entities

Sole proprietorship Partnership Company

Not-for-profit entities

Government departments Statutory authorities Charitable organisations

Accounting: Introduction 2003 Pearson Education Australia

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Types of Entities Sole Proprietorship

Owned by 1 person Easy & inexpensive to form & dissolve Not a separate entity for tax purposes, therefore only taxed once, but owner is liable for all debts Size is limited by owners wealth & ability to borrow Ownership can only be transferred only by selling the business

Accounting: Introduction 2003 Pearson Education Australia

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Types of Entities Partnership

Owned by 2 or more people acting as partners Easy & inexpensive to form, but need a partnership agreement Can combine the wealth & talents of individual partners Not a separate entity, Partners are personally liable for debts Partnership will terminate if a partners interest is sold or the partner dies Disputes between partners can be damaging

Accounting: Introduction 2003 Pearson Education Australia

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Types of Entities Company

Managed by Board of Directors Ownership interest - represented by shares Separate legal entity has the rights, duties & responsibilities of a person i.e. It can conduct operations in its own name, buy / sell property, enter into contracts Liability is limited to the amount unpaid on shares Indefinite life continue to operate regardless of changing owners

Accounting: Introduction 2003 Pearson Education Australia

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Types of Entities Company

Expensive to establish & operate. Subject to onerous regulation. Difficult to motivate managers & staff who are employees of the company. Company profits may be taxed twice, in the company & in the hands of the shareholder (depends on the tax system imposed by the government).

Accounting: Introduction 2003 Pearson Education Australia

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Financial information & Reporting

Transaction economic event between an external entity & another entity. Other events do not involve another entity, economic event within an entity, i.e.. The charging of depreciation Classification grouping similar transactions & events into categories useful for reporting. Summarisation information presented in a report format for decision making.

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Financial information & Reporting

Management accounting provision of financial reports to managers. Special purpose financial reports prepared for i.e.managers who can command information specific to their needs. Financial accounting provision of financial information to external users. General purpose financial report reports prepared to meet a wide range of users needs, who cannot command information. Financial statements will be covered in detail in chapters 4 & 13.

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Statement of financial performance (overview)

Operating statement Measures the entitys performance over a period of time i.e.. Profit / loss Net profit / loss determined from the elements revenues less expenses. Refer to Table 1.1 p.9 for an example.

Accounting: Introduction 2003 Pearson Education Australia

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Statement of financial position (overview)

Financial position of the entity at a point in time Snap shot of the entitys financial resources Contains elements of assets, liabilities & owners equity. Inclusion of net profit / loss in owners equity links statement of financial position & financial performance Refer to Table 1.2 p.10 for an example.

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Statement of Cash Flows (overview)

Provides information on entitys cash receipts & payments Provides information on solvency of the entity Cash flows classified into operating, investing & financing Refer to Table 1.3 p.11 for an example.

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The Accounting Profession

Public Practice Audit Services Taxation Services Management Consulting Services Business recovery & insolvency management Accountants in industry & commerce Not-for-profit accounting

Accounting: Introduction 2003 Pearson Education Australia

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The Accounting Profession

Accountants in industry & commerce

External financial reporting Internal reporting Taxation Internal auditing

Not-for-profit accounting

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Regulation of external financial Reporting

Government legislation Australian Stock Exchange (ASX) Accounting Standards UIG Abstracts

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