NOTES. ACC1000: Principles of Accounting and Finance. Monash University

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1 NOTES ACC1000: Principles of Accounting and Finance Monash University

2 Table of Contents 1 ACCOUNTING IN ACTION USERS OF ACCOUNTING INFORMATION ASSUMPTIONS OF FINANCIAL ACCOUNTING QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION STRUCTURE OF BUSINESS ENTITIES SOLE PROPRIETORSHIP/ SOLE TRADER PARTNERSHIP COMPANY/CORPORATION (LIMITED LIABILITY) ACCOUNTING EQUATION ASSETS LIABILITIES SHAREHOLDERS EQUITY 7 2 FINANCIAL STATEMENTS AND ACCOUNTING ASSUMPTIONS ACCRUAL ACCOUNTING CASH ACCOUNTING ACCOUNTING EQUATION IN DETAIL DOUBLE ENTRY ACCOUNTING THE ACCOUNTING CYCLE INITIAL STEPS OF THE RECORDING PROCESS 8 3 RECORDING TRANSACTIONS PERPETUAL INVENTORY CONTROL SYSTEM PURCHASES PURCHASE RETURNS AND ALLOWANCES SALES SALES RETURNS OR ALLOWANCES PERIODIC INVENTORY CONTROL SYSTEM PURCHASES PURCHASE RETURNS AND ALLOWANCES SALES SALES RETURNS AND ALLOWANCES SPECIAL JOURNALS SALES JOURNAL PURCHASE JOURNAL CASH RECEIPTS JOURNAL CASH PAYMENT JOURNAL ACCOUNTING FOR G.S.T GST PAID > GST COLLECTED: ATO OWES YOU MONEY GST PAID < GST COLLECTED: BUSINESS ENTITY OWES THE ATO MONEY ADJUSTING ACCOUNTS THE FULL ACCOUNTING CYCLE ACCRUAL ADJUSTMENTS (STEP 5 AND 6) EXPIRATION OF ASSETS UNEARNED REVENUE ACCRUAL OF UNRECORDED REVENUE 16

5.3 SHAREHOLDERS EQUITY 7 2 FINANCIAL STATEMENTS AND ACCOUNTING ASSUMPTIONS 8 2.1 ACCRUAL ACCOUNTING 8 2.2 CASH ACCOUNTING 8 2.3 ACCOUNTING EQUATION IN DETAIL 8 2.3.1 DOUBLE ENTRY ACCOUNTING 8 2.

3 4.2.4 ACCRUAL OF UNRECORDED EXPENSES CONTRA ACCOUNTS ALLOWANCE FOR DOUBTFUL DEBT DEPRECIATION 17 5 PREPARING THE FINANCIAL STATEMENT WORKSHEETS CLOSING ENTRIES POST CLOSING TRIAL BALANCE PREPARE FINANCIAL STATEMENTS BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT 21 6 FINANCIAL STATEMENT ANALYSIS PERFORMANCE RATIOS ACTIVITY RATIOS LIQUIDITY RATIOS FINANCIAL STRUCTURE RATIOS ANALYTICAL METHODS LIMITATIONS ON FINANCIAL STATEMENT ANALYSIS 24 7 MANAGEMENT AND CONTROL NON FINANCIAL PERFORMANCE MANAGEMENT BALANCED SCORECARD DIVISIONAL PERFORMANCE MANAGEMENT RESPONSIBILITY ACCOUNTING FINANCIAL METHODS ANALYSIS OF PROFIT 27 8 COST AND COSTING COST BEHAVIOUR HIGH LOW METHOD CVP ANALYSIS BREAK EVEN ANALYSIS TO FIND THE PRICE WE SHOULD SELL A GIVEN AMOUNT OF PRODUCTION FOR HOW TO DETERMINE NET PROFIT BEFORE TAX: HOW TO DETERMINE THE UNITS NECESSARY TO REACH A PROFIT AFTER TAX GOAL: OVERHEAD ALLOCATION: ABSORPTION COSTING ACTIVITY BASED COSTING 30 9 STRATEGIC MANAGEMENT ACCOUNTING TECHNIQUES TQM (TOTAL QUALITY MANAGEMENT) CONFORMANCE COSTS NON CONFORMANCE COSTS JIT PROCESSING LIFECYCLE COSTING TARGET COSTING KAIZEN COSTING CUSTOMER PROFITABILITY ANALYSIS 32

1 PERFORMANCE RATIOS 22 6.2 ACTIVITY RATIOS 22 6.3 LIQUIDITY RATIOS 22 6.4 FINANCIAL STRUCTURE RATIOS 23 6.5 ANALYTICAL METHODS 23 6.

4 9.7 ENVIRONMENTAL MANAGEMENT ACCOUNTING BUDGETING BEHAVIOURAL ASPECTS OF BUDGETING & 11 INTRODUCTION TO FINANCE AND FINANCIAL MATHEMATICS FINANCIAL MATHEMATICS FUTURE VALUE: PRESENT VALUE: EFFECTIVE INTEREST RATES CONTINUOUS COMPOUNDING CAPITAL BUDGETING STEPS OF CAPITAL BUDGETING NET PRESENT VALUE (NPV): INTERNAL RATE OF RETURN (IRR): 35

1 BEHAVIOURAL ASPECTS OF BUDGETING 33 10 & 11 INTRODUCTION TO FINANCE AND FINANCIAL MATHEMATICS 34 10.

5 1 Accounting in Action 1.1 Users of Accounting Information Users of accounting information are the people that depend on and use the financial information (provided by financial statements) to make economic decisions. 1.2 Assumptions of Financial Accounting Assumptions are the tools and principles that we assume accountant will always use when presenting and creating financial statements Relevant assumptions: Accrual Accounting Measure the performance and position of a company by recognising economic events regardless of when cash transactions occur. Going Concern A business will continue to operate for the foreseeable future Monetary Unit - Measured in common denominator Accounting Period Discrete equal periods Historical Cost Cost at initial acquisition 1.3 Qualitative Characteristics of Accounting Information Understandability Relevance Reliability Materiality Fair representation (represent what really existed/happened) Neutrality (freedom from bias) Substance over form (reflects the economic reality) Prudence (caution in estimates) Completeness (material info not omitted, not misleading) Comparability 1.4 Structure of Business Entities Sole Proprietorship/ Sole trader The owner is called the proprietor Separate accounting entity Not separate legal entity

2 Assumptions of Financial Accounting Assumptions are the tools and principles that we assume accountant will always use when presenting and creating financial statements Relevant assumptions:

6 Not separate taxable entity Unlimited liability - owner personally liable for debts of business Partnership Separate accounting entity Not separate legal entity Not separate taxable entity Unlimited liability - individual partners personally liable for debts of partnership Company/Corporation (limited Liability) The owners are called the shareholders Separate accounting, legal and taxable entity Limited liability - shareholders personally liable up to the value of their shares 1.5 Accounting Equation A = L + SE Assets Definition: Resources controlled by an entity. Ability to provide future economic benefit. As a result of a past event/transaction. Recognition: Probability item is recognised if it is probable that any future economic benefit associated with the item will flow to or from the entity i.e. more likely than less likely, not absolute certainty. AND Reliably measured item is recognised if it has a cost/value/$ figure that can be measured with reliability i.e. if item arises from a transaction and hence, possesses a cost Liabilities Definition: Present obligation of an entity. As a result of a past event/transaction. Expected to result in an outflow of resources of economic benefit

3 Company/Corporation (limited Liability) The owners are called the shareholders Separate accounting, legal and taxable entity Limited liability - shareholders personally liable up to the value of

7 Recognition: Probability item is recognised if it is probable that any future economic benefit associated with the item will flow to or from the entity i.e. more likely than less likely, not absolute certainty. AND Reliably measured item is recognised if it has a cost/value/$ figure that can be measured with reliability i.e. if item arises from a transaction and hence, possesses a cost Shareholders Equity Definition: Residual interest in the assets. After liabilities have been deducted.

AND Reliably measured item is recognised if it has a cost/value/$ figure that can be measured with reliability i.e. if item arises from a transaction and hence, possesses a cost.

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NOTES. ACCG100: Accounting 1A. Macquarie University. Check spoonfeedme.com for free video summaries, notes & cheat sheets by top students.

NOTES. ACCG100: Accounting 1A. Macquarie University. Check spoonfeedme.com for free video summaries, notes & cheat sheets by top students. NOTES ACCG100: Accounting 1A Macquarie University Table of Contents 1 ROLE OF ACCOUNTING 4 1.1 USERS OF ACCOUNTING INFORMATION 4 1.2 ASSUMPTIONS OF FINANCIAL ACCOUNTING 4 1.3 QUALITATIVE CHARACTERISTICS