chapter 1 the role of accounting © cambridge university press 2012
TRANSCRIPT
Chapter 1The Role of Accounting
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The Purpose of Accounting
The purpose of accounting is to provide business owners with financial information that will assist them in making decisions about the activities of their firm
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The Accounting Process
The accounting process involves collecting source documents, recording financial data and then reporting financial information, and subsequently advising the owner on an appropriate course of action
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Accounting Principles
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• Entity – the business is assumed to be separate from the owner and other businesses, and its records should be kept on that basis
• Going Concern – the life of the business is assumed to be continuous, and its records are kept on that basis
Accounting Principles
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• Reporting Period – the life of the business must be divided into periods of time to allow reports to be prepared
• Historical Cost – the recording of a transaction at its original cost or value, as this value is verifiable by reference to the source document
Accounting Principles
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• Conservatism – losses should be recorded when probable but gains should only be recorded when certain, so that liabilities and expenses are not understated and assets and revenues are not overstated
• Consistency – accounting methods should be applied in a consistent manner to ensure that reports are comparable between periods
Accounting Principles
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Monetary Unit – all items must be recorded and reported in a common unit of measurement; that is, Australian dollars
Qualitative Characteristics
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• Relevance – is the information in the report useful for decision-making?
• Reliability – is it accurate, and free from bias or error?
• Comparability – can the reports be compared over time?
• Understandability – is the information presented in an easy-to-understand manner?
Financial Reports
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The three general-purpose financial reports are the:• Cash Flow Statement• Income Statement • Balance Sheet
The Elements of Financial Statements
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• Asset – a resource controlled by an entity, as a result of past events, from which future economic benefits are expected to flow to the entity
• Liability – a present obligation of the entity as a result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
The Elements of Financial Statements
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• Owner’s equity – the residual interest in the assets of the entity after the deduction of its liabilities
• Revenue – an increase in assets (or decrease in liabilities) that increases owner’s equity, except for capital contributions by the owner
• Expense – the decrease in owner’s equity that occurs through business activities