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Review of Accounting Basics&Accounting EnvironmentFINANCIAL ACCOUNTING APPLICATIONSFinancial Accounting Applications2Unit Coordinator: Mamun BillahCampbelltown : Building 11.13Phone: (02) 4620 3230Email for unit:m.billah@uws.edu.au Parramatta day Lecturer: Mamun Billah Parramatta:Vernon BuildingPhone:(02) 4620 3230Email (preferred):m.billah@uws.edu.au

3Parramatta evening Lecturer:Rina Datt

Email (Preferred) : r.datt@uws.edu.au

Bankstown evening

Lecturer:HemayetUddin

Email (Preferred):m.uddin@uws.edu.au

Campbelltown day

Lecturer: Mamun Billah

Email (preferred): m.billah@uws.edu.au Presentation of this unit4Full lecture slides posted on vUWS as an aid for summaries, reference and to prepare for homework These lecture slides are examinable (their content will be on the exams)Online workshops will be conducted each week in the posted lecture timesThese will be focusing on working out problems and not on discussing content of lecture slidesHomework set each weekWill be assessed through online submission each weekIn class tutorial workshop will be attempted & submitted in tutorial time Workshop slides and homework solutions will be posted on vUWs at the end of the week Friday, there will be no in class tutorial solutions posted.FAA Passing grade essentialsTo ensure your success in this unit you will need to :-Attend 80% of your classesPass the threshold mark in the final exam and achieve an overall mark over 50Sit for Mid semester exam in week 7Submit your practice set assignment in week 12SUBMIT HOMEWORK ONLINE AND TUTORIALS!!!!!And enjoy success!!!!!What is Accounting6Nature of AccountingAccounting is a service activity. Its function is to provide and interpret financial information that is intended to be useful in making economic decision

Accounting is used by all organisations includingBusiness (Woolworths Ltd, JB Hi Fi Ltd etc)Government (ATO, Dept of Immigration, CityRail etc.)Charities (Salvos, St Vincents De Paul, World Vision etc.)Not-for-profits ( Powerhouse museum, Westmead Hospital research Foundation etc.)

What is AccountingAccounting Defined

As a PROCESS of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions by users of accounting information 7ACCOUNTING PROCESSBASIC FINANCIAL STATEMENTSAccounting is an information systemDesigned to communicate financial informationTo interested usersFor making economic decisionsFinancial statementsAre the outcome of the accounting processAre a primary information source for usersAre useful for many decisions

3 PRIMARY INFORMATION TYPESFinancial PerformanceThe ability of the entity to utilise its assets effectively and efficiently.What are the business goals (i.e. profit/nor for profit)?Financial PositionThe financial resources controlled by the entityFinancial structureMeasure of liquidity and solvency Cash MovementsThe ability of the entity to generate cash flow, focussing on three areas: Operating, Investing and Financing activities

Financial Accountants use these Basic Financial StatementsIncome statement (Financial Performance) Operating efficiency over a period of time Week ended, month ended year ended etc.

Balance Sheet (Financial Position)Economic condition at a point in time (as at , freeze frame it now!)

Cash flows (inflows and outflows of cash over a period of time)

USERS OF ACCOUNTING INFORMATIONInternal UsersHow much profit?What should be produced?What resources are available?How much does it cost?How much do we owe?What would happen if?Do we have enough cash?External UsersShould I invest?Can the business pay?Wages? Loans?Will they make a profit?Are they behaving ethically?Is the business socially and environmentally friendly?FINANCIAL REPORTS AND USERS

14ASSUMPTIONS MADE AND CHARACTERISTICS OF INFORMATIONAssumptionsAccounting entity assumptionIdentify clearly the boundaries of the entity being accounted forPersonal transactions of the owner must remain separate from the transactions of the entity Accrual basis assumptionTransactions and events recorded when they occurGoing concern assumptionUnless we have evidence to the contrary, we assume an entity will continue to operate in the futurePeriod assumptionThe life of the entity can be broken up into equal time intervalsProfit is determined for particular periods of time in order to be comparable.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTSRelevanceInformation is useful for decision makingCan influence economic decisions by usersFaithful RepresentationInformation presented faithfully, without bias or undue errorEconomic substance over formComparability and ConsistencyUsers can identify similarities and differences between two sets of economic data

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTSVerifiabilityDifferent, independent observers can reach consensus that information faithfully represents what it claims toUnderstandabilityExpect a reasonable knowledge of business and economic activity and financial accountingStudy the information with reasonable diligenceMaterialityThe extent to which omission or misstatement would be misleading to usersBenefits and CostsBenefits of providing information must justify cost of providingTYPES OF BUSINESS ENTITIESSingle proprietorship or sole traderOwned by one personPartnershipOwned by two or more partnersCompany or corporationOwned by shareholdersSeparate legal entityLimited liability

18What are Accounts ?The account is the basic summary device of accounting.

Each account provides a record of increases and decreases in that specific item.

Accounts are grouped into five categories:AssetsLiabilitiesOwners Equity RevenuesExpenses

Reported on the Balance Sheet (Statement of Fin Position)Reported on the Income Statement (Statement of Comprehensive Income)AccountsAssets are the economic resources controlled by an entity that will provide a future economic benefit. Liabilities represent the debts of an entity. They reflect a current obligation to sacrifice economic benefits at some given time in the future. Owners Equity is the net assets of a firm (ie Assets liabilities)Revenue: inflows of economic benefits, ie income earned from performing services or selling goodsExpenses: outflows of economic benefits, ie the costs incurred in operating a business

Current and Non Current

Examples of AccountsAccount TypeAccount Name (some examples only, not the complete list)AssetsCurrent Assets: Cash, A/c receivable, Inventory, Supplies Non-current Assets: Furniture, Motor vehicles, BuildingLiabilitiesCurrent Liabilities: A/c payable, Rent payableNon-current Liabilities: Bank Loan, MortgageOwners equityShare capital, Retained earnings: which is reduced by Dividends (for a company) ORCapital which is reduced by Drawings (for a sole trader or partnership)RevenueSales revenue, Service revenue, Interest revenue, Rental revenue, Advertising revenue etcExpenseWages expense, Electricity expense, Supplies expense, Rent expense, Bank charges, Fuel expense, Telephone expense etcDOUBLE-ENTRY ACCOUNTINGEach transaction must be analysed to determine:What type of accounts are affectedAssets; Liabilities; Equity; Income; ExpenseBy how much each item must be increased or decreasedThe accounting equation must always remain in balanceAnalysing a transactionBusiness transactions need to be analysed to identify which accounts they affect so we can record them.Remember: The basic accounting equation, is

Assets = Liabilities + Owners Equity

Following the principles of double entry book-keeping transactions will cause CHANGES in at least TWO accounts. Extending the accounting equationThe basic accounting equation can be extended by recognising the following relationships:Assets = Liabilities + Owners Equity

Owners Equity is made up of:CapitalAnd Profit/(Loss)(Revenues Expenses)Less drawings

Or for a company:Share CapitalAnd Retained profitsLess dividends

24Effects of Transactions on Accounting Equation and Financial StatementsTransactions result in changes in assets, liabilities and equityEvery transaction affects at least 2 components of the accounting equationAfter each transaction is recorded the equation is still in balance

Assets = Liabilities + Equity

24Debits and CreditsAssets = Liabilities + OE

If we expand this

Assets = Liabilities + [Capital - Drawings+ Revenues Expenses]

If we put like signs on the one side

Assets + Drawings + Expenses = Liabilities +Capital + Revenues Dr Dr Dr=CrCrCr

DEBITS AND CREDITSRulesAssets are debit in natureDebits = CreditsAccounting equation: A = L + EqTherefore, Liabilities and Equity must be credit in natureIncome increases Equity; credit increases EquityTherefore Income must be credit in natureExpenses decreases Equity; debit decreases EquityTherefore Expenses must be debit in nature

DEBIT AND CREDIT RULESAccounts: Balance Sheet Assets =Liabilities + EquityDebit toincreaseCredit todecreaseDebit todecreaseCredit toincreaseDebit todecreaseCredit toincreaseNormalbalanceNormalbalanceNormalbalanceDEBIT AND CREDIT RULESAccounts: Income StatementDebit todecreaseCredit toincreaseDebit toincreaseCredit todecrease Income (incl. revenues)ExpensesNormalbalanceNormalbalanceDEBIT AND CREDIT RULES All assets accounts = All liability accounts + All equity accounts Dr Cr Dr Cr Dr CrDebit todecreaseCredit toincreaseNormalbalanceDebit toincreaseCredit todecreaseNormalbalanceDebit todecreaseCredit toincreaseNormalbalanceDebit toincreaseCredit todecreaseNormalbalanceDebit todecreaseCredit toincreaseNormalbalance Expense accounts Dr Cr Income accounts Dr Cr29Debits and CreditsNormal balancesAssets are debitsADrawings are debitsDExpenses are debitsE

Liabilities are creditsLCapital are creditsCRevenue are creditsR

NORMAL ACCOUNT BALANCES Normal IncreasesAccount balance recorded on

AssetsDr LHS sideLiabilities ? ? sideOwners equityCapital (Investment in entity) ? ? sideDrawings (from the entity)? ? sideRevenues? ? sideExpenses? ? side 31Try thisTsz Yeung Printers ledger accounts are listed below:Identifying type of account, debit/credit analysis and normalFor each account listed below, complete a solution form as shown below by placing a tick in the proper columns to indicate the type of account, the side of a T account on which increases are recorded, and the side on which normal balances are recordedAccounts PayableAccounts ReceivableRent RevenueTsz Yeung , CapitalCash at bank Tsz Yeung , DrawingsInterest expenseUnearned RevenuePrepaid Insurance

Type of AccountIncreasesNormal balanceAccountAssetLiabilityEquity(includes income and expenses) DebitCreditDebitCredit1. Accounts Payable2. Accounts Receivable3. BuildingsThings to do this weekAttend your registered tutorial class 34Participate in the discussion and work in groups and submit your workshop attempt in the tutorial

Submit you homework online through Wiley Plus link on vUWS