CHAPTER 1 â INTRODUCTION TO FINANCIAL ACCOUNTING
SAMPLE NOTES
CHAPTER 1 – INTRODUCTION TO FINANCIAL ACCOUNTING Accounting is a process of identifying, measuring and communicating economic information to allow informed decisions by users.
1. 1 People Involved
Users ( Decision makers) - demand credible periodic reporting o Business owners (partners, entrepreneurs, shareholders) o Potential owners o Creditors and potential creditors o Managers (planning) o Employees o Competitors Preparers (decision facilitators) o Managers )issue accounting and other information but often leads to conflict of interest as they are users) o Bookkeepers and clerks (record keeping) o Accountant ( financial statements) Auditors (credibility enhancer)
1.2 Accrual Accounting
Impact of transactions on the financial statement is recognised in period when revenue and expenses are recognised rather than when cash is paid
1.3 Demand on the quality of financial accounting information
Understanability – Reports should be prepared having regard to the interest of users who are willing to exercise diligence in examining reports and can comprehend accounting practices. Relevance - useful to users o Materiality – concerned with assessing whether omission, misstatement or non-disclosure of a piece of a piece of information would affect the decisions of users of the accounting reports Reliability - without bias or undue error, not misleading so not overstating/understating impact o Prudence – if there are uncertainties, asset, revenues and profit should not be overstated and liabilities, expenses and losses should not be understated o Faithful representation – must represent what really happened o Substance over form – in accordance with substance and economic reality not merely the legal or technical requirement for reporting o Neutrality – freedom from bias o Completeness – material info not omitted Generally Accepted Accounting Principles GAAP – Auditors will say auditor’s opinion i.e. statement is prepared in accordance with GAAP Disclosure - notes and accounts description
Relevance vs Reliability – information may be relevant but be so unreliable in nature or representation as to be useless or potentially misleading e.g if there was a lawsuit and outcome is uncertain it shouldn’t recognise the asset yet but included in the notes
SAMPLE NOTES
1.4 Financial statement assumptions
Accrual basis Going concern – organisation will continue to operate Accounting entity – separate from owner Accounting period – discrete periods Monetary – measured in common denominator (e.g. AUD) Historical Cost – assets are initially recorded at cost
CHAPTER 1 – INTRODUCTION TO FINANCIAL ACCOUNTING Accounting is a process of identifying, measuring and communicating economic information to allow informed decisions by users.
1. 1 People Involved
Users ( Decision makers) - demand credible periodic reporting o Business owners (partners, entrepreneurs, shareholders) o Potential owners o Creditors and potential creditors o Managers (planning) o Employees o Competitors Preparers (decision facilitators) o Managers )issue accounting and other information but often leads to conflict of interest as they are users) o Bookkeepers and clerks (record keeping) o Accountant ( financial statements) Auditors (credibility enhancer)
1.2 Accrual Accounting
Impact of transactions on the financial statement is recognised in period when revenue and expenses are recognised rather than when cash is paid
1.3 Demand on the quality of financial accounting information
Understanability – Reports should be prepared having regard to the interest of users who are willing to exercise diligence in examining reports and can comprehend accounting practices. Relevance - useful to users o Materiality – concerned with assessing whether omission, misstatement or non-disclosure of a piece of a piece of information would affect the decisions of users of the accounting reports Reliability - without bias or undue error, not misleading so not overstating/understating impact o Prudence – if there are uncertainties, asset, revenues and profit should not be overstated and liabilities, expenses and losses should not be understated o Faithful representation – must represent what really happened o Substance over form – in accordance with substance and economic reality not merely the legal or technical requirement for reporting o Neutrality – freedom from bias o Completeness – material info not omitted Generally Accepted Accounting Principles GAAP – Auditors will say auditor’s opinion i.e. statement is prepared in accordance with GAAP Disclosure - notes and accounts description
Relevance vs Reliability – information may be relevant but be so unreliable in nature or representation as to be useless or potentially misleading e.g if there was a lawsuit and outcome is uncertain it shouldn’t recognise the asset yet but included in the notes
SAMPLE NOTES
1.4 Financial statement assumptions
Accrual basis Going concern – organisation will continue to operate Accounting entity – separate from owner Accounting period – discrete periods Monetary – measured in common denominator (e.g. AUD) Historical Cost – assets are initially recorded at cost
