Topic 1: The Accounting Environment AWS
Topic 1: The Accounting Environment Accounting and Its Role in Society Why is accounting important? • Corporate collapses • Regulatory response What is accounting? • An information system that: o Identifies o Records o Communicates the economic events of an organization to interested users
The role of accounting • Provides the financial information required for making decisions with regards to money and business issues • A means of communication • A means of measuring business activity Who uses accounting data? Internal Users (Management Accounting) • Managers who plan, organize and run the business o E.g. marketing managers, production supervisors, chief financial officers, other employees
External Users (Financial Accounting) • Investors to make decisions to buy, hold or sell shares • Creditors to evaluate risks of giving credit and lending money o E.g. suppliers, bankers • Government and regulatory bodies o E.g. Australian Tax Office (ATO), Australian Securities and Investments Commission (ASIC) Bookkeeping and Accounting • Bookkeeping involves the recording of economic events (transactions) which is only one part of the accounting process • Accounting involves the entire process of identifying, recording and communication economic events, plus the use of considerable judgement Accounting and you • Employment in Accounting o Accounting practice o Corporate accounting o General management o Sports management o Marketing o Finance o Real estate o Optometry o Law practice o Entrepreneurship
The Accounting Elements Assets Liabilities Owner’s Equity Revenue Expenses Assets definition criteria • Resources controlled by a business which are o A result of past transactions or events AND o Have the capacity to provide future economic benefit • Used in carrying out such activities as production, consumption and exchange • Usually physical in nature, such as land, buildings, supplies to be used, and inventory that the business expects to sell to its customers • Sometimes intangible, like trademarks Liabilities definition criteria • Present obligations claimed against assets which are
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o A result of past transactions or events AND o Lead to an economic sacrifices Examples include outstanding accounts payable, bank loans, wages payable, etc
Owner’s Equity • Represents the ownership claim to total assets • Owner’s Equity is increased by o Capital (Investment by the owner) o Revenue • Owner’s Equity is decreased by o Drawings o Expenses
Increases in Owner’s Equity • Capital o Are the assets the owner puts in the business • Revenues o Gross increases in owner’s equity from business activities entered into for the purpose of earning income o May result from sale of merchandise, services, rental of property, or lending money o Usually result in an increase in an asset Decreases in Owner’s Equity • Drawings o Are withdrawals of cash or other assets by the owner for personal use • Expenses o Decreases in owner’s equity that result from operating the business o Cost of assets consumed or services used in the process of earning revenue o E.g. utility expense, rent expense, supplies expense and tax expense Recognition • The process of incorporating items in the statement of financial position (balance sheet) if it meets the definition of an element • An item must meet recognition criteria: o Probability (benefit will be received or sacrifice made) o Reliable measurement
The role of accounting • Provides the financial information required for making decisions with regards to money and business issues • A means of communication • A means of measuring business activity Who uses accounting data? Internal Users (Management Accounting) • Managers who plan, organize and run the business o E.g. marketing managers, production supervisors, chief financial officers, other employees
External Users (Financial Accounting) • Investors to make decisions to buy, hold or sell shares • Creditors to evaluate risks of giving credit and lending money o E.g. suppliers, bankers • Government and regulatory bodies o E.g. Australian Tax Office (ATO), Australian Securities and Investments Commission (ASIC) Bookkeeping and Accounting • Bookkeeping involves the recording of economic events (transactions) which is only one part of the accounting process • Accounting involves the entire process of identifying, recording and communication economic events, plus the use of considerable judgement Accounting and you • Employment in Accounting o Accounting practice o Corporate accounting o General management o Sports management o Marketing o Finance o Real estate o Optometry o Law practice o Entrepreneurship
The Accounting Elements Assets Liabilities Owner’s Equity Revenue Expenses Assets definition criteria • Resources controlled by a business which are o A result of past transactions or events AND o Have the capacity to provide future economic benefit • Used in carrying out such activities as production, consumption and exchange • Usually physical in nature, such as land, buildings, supplies to be used, and inventory that the business expects to sell to its customers • Sometimes intangible, like trademarks Liabilities definition criteria • Present obligations claimed against assets which are
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o A result of past transactions or events AND o Lead to an economic sacrifices Examples include outstanding accounts payable, bank loans, wages payable, etc
Owner’s Equity • Represents the ownership claim to total assets • Owner’s Equity is increased by o Capital (Investment by the owner) o Revenue • Owner’s Equity is decreased by o Drawings o Expenses
Increases in Owner’s Equity • Capital o Are the assets the owner puts in the business • Revenues o Gross increases in owner’s equity from business activities entered into for the purpose of earning income o May result from sale of merchandise, services, rental of property, or lending money o Usually result in an increase in an asset Decreases in Owner’s Equity • Drawings o Are withdrawals of cash or other assets by the owner for personal use • Expenses o Decreases in owner’s equity that result from operating the business o Cost of assets consumed or services used in the process of earning revenue o E.g. utility expense, rent expense, supplies expense and tax expense Recognition • The process of incorporating items in the statement of financial position (balance sheet) if it meets the definition of an element • An item must meet recognition criteria: o Probability (benefit will be received or sacrifice made) o Reliable measurement
