Introduction: Accounting & Governance

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Textbook
Textbook
Financial Accounting, 6
Financial Accounting, 6ththEdition, by Edition, by CarlonCarlonet al.et al.
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4 https://www.wileydirect.com.au/buy/financialhttps://www.wileydirect.com.au/buy/financial–accountingaccounting–reportingreporting–analysisanalysis–andand–decisiondecision–makingmaking–6th6th–edition/edition/
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5
“Begin with the end in mind”
“Begin with the end in mind” ––Steven R. CoveySteven R. Covey
Assessments
Assessments
To pass this unit, your overall performance must be satisfactory.
To pass this unit, your overall performance must be satisfactory.
6
Weight
Weight
Due date
Due date
Weight
Weight
Assessed Coursework
Assessed Coursework ––TutorialTutorialHomeworkHomework
Weekly from Week 2
Weekly from Week 2
8%
8%
Class Tests
Class Tests
Week 8
Week 8
17%
17%
Assignment
Assignment
a)
a)Individual report Individual report
Week 10
Week 10
10%
10%
b)
b)Group componentGroup component
Week 10
Week 10
10%
10%
Final Exam
Final Exam
Examination
Examination periodperiod
55%
55%
Total
Total
100%
100%
Let’s begin with the end in mind!
Let’s begin with the end in mind!
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PART ONE:
PART ONE:ACCOUNTING AND GOVERNANCEACCOUNTING AND GOVERNANCE
Learning objectives
Learning objectives
1.
1.Role of accountingRole of accounting
2.
2.Use of accounting informationUse of accounting information
3.
3.Management Accounting vs. Financial AccountingManagement Accounting vs. Financial Accounting
4.
4.Diverse roles of accountantsDiverse roles of accountants
5.
5.Forms of business organisationForms of business organisation
6.
6.Accounting and GovernanceAccounting and Governance
LO1: Role of accounting
LO1: Role of accounting
Primary function of accounting is to provide financial
Primary function of accounting is to provide financial informationinformationfor decision making.for decision making.
Accounting is regarded as the language business.
Accounting is regarded as the language business.
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LO2: Use of accounting information
LO2: Use of accounting information
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INTERNAL USERS
INTERNAL USERS
EXTERNAL USERS
EXTERNAL USERS
Investors, customers, suppliers
Investors, customers, suppliers and banks, government and banks, government authorities (e.g., ATO, ASIC), etc.authorities (e.g., ATO, ASIC), etc.
Should I invest?
Should I invest?
How solvent
How solventis the business?is the business?
Can
Canthey repay?they repay?
Will
Willthey make a profit?they make a profit?
Is
Isthe business producing products the business producing products that are socially and that are socially and environmentally friendly?environmentally friendly?
Is the business performing better this
Is the business performing better this year?year?
Managers: e.g. production
Managers: e.g. production supervisors, marketing supervisors, marketing managers, and directorsmanagers, and directors
What should be produced?
What should be produced?
What resources are available?
What resources are available?
How much does it cost?
How much does it cost?
How much do we owe?
How much do we owe?
Do we have
Do we haveenough cash?enough cash?
Are we meeting the budget?
Are we meeting the budget?
Management accounting provides information for
Management accounting provides information for decision making within the business.decision making within the business.
Financial accounting provides information to assist
Financial accounting provides information to assist external users’ decision making.external users’ decision making.
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LO3: Management Accounting vs. Financial Accounting
LO3: Management Accounting vs. Financial Accounting
Financial accounting
Financial accounting
Management accounting
Management accounting
External users, who include
External users, who include shareholders and creditorsshareholders and creditors
Main users
Main users
Internal users, who are officers,
Internal users, who are officers, department heads, managers in department heads, managers in the businessthe business
Classified financial statements
Classified financial statements
Delayed, historical
Delayed, historical
Issued quarterly, half
Issued quarterly, half–yearly and yearly and annuallyannually
Types and
Types and frequency of frequency of reportsreports
Internal reports
Internal reports
Current, future
Current, future–orientedoriented
Issued as frequently as need
Issued as frequently as need arisesarises
To provide general purpose
To provide general purpose information for all usersinformation for all users
Purpose of
Purpose of reportsreports
To provide special purpose
To provide special purpose information for a particular user information for a particular user for a specific reasonfor a specific reason
LO3: Management Accounting vs. Financial Accounting
LO3: Management Accounting vs. Financial Accounting
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LO3: Management Accounting vs. Financial Accounting
LO3: Management Accounting vs. Financial Accounting
Financial accounting
Financial accounting
Management accounting
Management accounting
Pertains to entity as a whole and
Pertains to entity as a whole and is highly aggregatedis highly aggregated
Limited to double
Limited to double–entry entry accounting system and cost dataaccounting system and cost data
Reporting standard is GAAP
Reporting standard is GAAP
Contents of
Contents of reportsreports
Pertains to subunits of entity and
Pertains to subunits of entity and may be very detailedmay be very detailed
May extend beyond double
May extend beyond double–entry entry accounting system to any type of accounting system to any type of relevant datarelevant data
Reporting standard is relevance to
Reporting standard is relevance to decision being made decision being made
Annual independent audit by
Annual independent audit by external auditorexternal auditor
Verification
Verification processprocess
No independent audit
No independent audit
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LO4:Diverse roles of accountants
LO4:Diverse roles of accountants
Commercial accountants:
Commercial accountants:

•Work in industry and commerce.Work in industry and commerce.

•Undertake roles such as management accounting and financial accounting.Undertake roles such as management accounting and financial accounting.
Public accountants:
Public accountants:

•Provide their professional services to the public and work in a range of Provide their professional services to the public and work in a range of offices from small to multioffices from small to multi–national.national.

•Services provided include auditing, taxation and advisory services.Services provided include auditing, taxation and advisory services.
Government accountants:
Government accountants:

•Employed by local councils, state government and federal government.Employed by local councils, state government and federal government.

•Variety of roles such as financial accounting and auditing.Variety of roles such as financial accounting and auditing.
Not
Not–forfor–profit accountants: profit accountants:

•Work in the notWork in the not–forfor–profit sector.profit sector.

•Engage in planning, decision making, preparing financial and management Engage in planning, decision making, preparing financial and management reports for both internal and external users.reports for both internal and external users.
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LO5: Major forms of business organisation
LO5: Major forms of business organisation
Sole proprietorship (sole trader):
Sole proprietorship (sole trader):
Owned by one person:
Owned by one person:
E.G. RESTAURANTS, PANEL BEATERS.
E.G. RESTAURANTS, PANEL BEATERS.
Partnership:
Partnership:
Owned by more than one individual:
Owned by more than one individual:
E.G. ACCOUNTANTS, SOLICITORS, DOCTORS.
E.G. ACCOUNTANTS, SOLICITORS, DOCTORS.
Company:
Company:
Organised as a separate legal entity and owned by
Organised as a separate legal entity and owned by shareholders:shareholders:
Most companies have limited liability.
Most companies have limited liability.
E.G. BHP, CSR, WESTPAC, RM WILLIAMS.
E.G. BHP, CSR, WESTPAC, RM WILLIAMS. 14
15
In
In–class Review class Review
LO6: Accounting and Governance
LO6: Accounting and Governance

“AccountingAccountingplaysplaysaapotentiallypotentiallycrucialcrucialroleroleinincorporatecorporategovernancegovernance””(La(LaPortaPortaetetal,al,19981998))..

“AccountingAccountingprovidesprovidesthetheinformationinformationrequiredrequiredforformostmostgovernancegovernancemechanismsmechanismstotooperateoperateefficientlyefficiently(Sloan,(Sloan,RR..,,20012001))..
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LO6: What is corporate governance?
LO6: What is corporate governance?
Corporate governance
Corporate governance –““the the system of checks and system of checks and balances, both internal and external to companiesbalances, both internal and external to companies, , which ensures that companies which ensures that companies discharge their discharge their accountabilityaccountabilityto all their to all their stakeholdersstakeholdersand act in a and act in a socially responsible way in all areas of their business socially responsible way in all areas of their business activity” (Solomon, 2013, p.7)activity” (Solomon, 2013, p.7)
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Internal systems of checks and balances:
Internal systems of checks and balances: e.g. e.g. internal control, risk management, independent internal control, risk management, independent board of directors. board of directors.
External systems of checks and balances:
External systems of checks and balances: e.g. e.g. codes and principles of good corporate codes and principles of good corporate governances, industry guidelines. governances, industry guidelines.
Accountability:
Accountability: The readiness or The readiness or preparedness of an organization to give preparedness of an organization to give an explanation and a justification for its an explanation and a justification for its judgments and/or actions when judgments and/or actions when appropriately called upon to do so appropriately called upon to do so ((RascheRasche& & EsserEsser, 2006, p.252), 2006, p.252)
Stakeholder
Stakeholder––“any“anygroupgroupororindividualindividualwhowhocancanaffectaffectororisisaffectedaffectedbybythetheachievementachievementofofthetheorganization’sorganization’sobjectives”objectives”(Freeman,(Freeman,19841984,,pp..4646))..
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LO6: Accounting for Governance
LO6: Accounting for Governance
Accounting is an instrument of governance:
Accounting is an instrument of governance:
1.
1.It helps managers discharge accountability to It helps managers discharge accountability to stakeholders (especially shareholders).stakeholders (especially shareholders).
STEWARDSHIP
STEWARDSHIP––FINANCIAL STATEMENTS SHOW HOW FINANCIAL STATEMENTS SHOW HOW THE MANAGERS HAVE ACCOUNTED FOR THE THE MANAGERS HAVE ACCOUNTED FOR THE RESOURCES ENTRUSTED TO THEM BY THE RESOURCES ENTRUSTED TO THEM BY THE SHAREHOLDERSSHAREHOLDERS
2.
2.Accounting information is the basis for decisionAccounting information is the basis for decision–making.making.
3.
3.Accounting Accounting has a direct role in providing information to has a direct role in providing information to facilitate the various mechanisms of corporate facilitate the various mechanisms of corporate governance. governance.
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LO6: Why is governance important?
LO6: Why is governance important?

•Prevent organizational fraud and Prevent organizational fraud and scandalsscandals

•Protect investors’ interest and promote Protect investors’ interest and promote investors’ confidenceinvestors’ confidence

•Enhance organizational reputationEnhance organizational reputation

•Lower cost of capitalLower cost of capital
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21
In
In–class Reviewclass Review
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PART TWO:
PART TWO:BRIEF REVISION BRIEF REVISION
Learning objectives
Learning objectives
1.
1.Accounting concepts and principlesAccounting concepts and principles
2.
2.Accounting cycleAccounting cycle
LO1: Accounting concepts and principles
LO1: Accounting concepts and principles
Monetary principle:
Monetary principle:

•Items included in accounting records must be able to be expressed in Items included in accounting records must be able to be expressed in monetary terms (e.g. $).monetary terms (e.g. $).
Cost principle:
Cost principle:

•All assets are initially recorded in the accounts at their purchase price or All assets are initially recorded in the accounts at their purchase price or cost.cost.

•To provide useful information, sometimes entities need to deviate from cost To provide useful information, sometimes entities need to deviate from cost principle (e.g. revaluation of nonprinciple (e.g. revaluation of non–current assets).current assets).
Accounting entity concept:
Accounting entity concept:

•Every entity can be separately identified and accounted for.Every entity can be separately identified and accounted for.

•Owner’s transactions are separate from entity’s transactions.Owner’s transactions are separate from entity’s transactions.
Going concern principle:
Going concern principle:

•Business will remain in operation for the foreseeable future.Business will remain in operation for the foreseeable future.
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LO1: Accounting concepts and principles
LO1: Accounting concepts and principles
Accounting period concept:
Accounting period concept:

•The life of a business entity can be divided into artificial periods.The life of a business entity can be divided into artificial periods.

•Useful reports covering those periods can be prepared for the entity.Useful reports covering those periods can be prepared for the entity.
Full disclosure principle:
Full disclosure principle:

•All circumstances and events that could make a difference to decisionAll circumstances and events that could make a difference to decision–making process should be disclosed in the financial statements.making process should be disclosed in the financial statements.
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Transaction
Transaction
analysis
analysis
Journalise
Journalise
transactions
transactions
Post to
Post to
ledger accounts
ledger accounts
Journalise & post
Journalise & post
adjusting entries
adjusting entries
Prepare adjusted
Prepare adjusted
trial balance
trial balance
Prepare post
Prepare post–closingclosing
trial balance
trial balance
LO2:
LO2: ACCOUNTING CYCLE ACCOUNTING CYCLE
Prepare
Prepare
financial statements
financial statements
Journalise & post
Journalise & post
closing entries
closing entries
Prepare
Prepare
trial balance
trial balance
Debit to
Debit to
decrease
decrease
Credit to
Credit to
increase
increase
Normal
Normal
balance
balance
Debit to
Debit to
increase
increase
Credit to
Credit to
decrease
decrease
Normal
Normal
balance
balance
Debit to
Debit to
decrease
decrease
Credit to
Credit to
increase
increase
Normal
Normal
balance
balance
Debit to
Debit to
increase
increase
Credit to
Credit to
decrease
decrease
Normal
Normal
balance
balance
Debit to
Debit to
decrease
decrease
Credit to
Credit to
increase
increase
Normal
Normal
balance
balance
*
*Expense accountsExpense accounts
Dr Cr
Dr Cr
*
*Income accountsIncome accounts
Dr
DrCrCr
All assets accounts = All liability accounts + All equity accounts
All assets accounts = All liability accounts + All equity accounts
Accounting Equation
Accounting Equation
Asset accounts
Asset accounts
Dr Cr
Dr Cr
Liability accounts
Liability accounts
Dr Cr
Dr Cr
Equity accounts
Equity accounts
Dr Cr
Dr Cr
Expanded Accounting Equation:
Expanded Accounting Equation: Assets = Liability + [Capital + Income Assets = Liability + [Capital + Income ––Expenses] Expenses]
T
Transactionransactionanalysis analysis
Adjusting entries
Adjusting entries

•In many cases the period in which cash is paid or In many cases the period in which cash is paid or received received does not coincide does not coincide with period in which with period in which expense and income are recognised.expense and income are recognised.

•Therefore, in order for our statements to reflect Therefore, in order for our statements to reflect what has actually happened, some accounts must what has actually happened, some accounts must be adjusted on the last day of the accounting be adjusted on the last day of the accounting period to correctly recognise income and period to correctly recognise income and expenses not reflected in cash receipts or expenses not reflected in cash receipts or payments.payments.
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Classifications
Classifications
Prepaid expenses
Prepaid expenses
Unearned revenue
Unearned revenue
Accrued expenses
Accrued expenses
Accrued revenues
Accrued revenues
Classification
Classification
(paid but not yet incurred)
(paid but not yet incurred)
(received but not yet delivered)
(received but not yet delivered)
(incurred but not yet paid)
(incurred but not yet paid)
(earned but not yet received)
(earned but not yet received)
Each entry affects the income statement (revenue or expense)
Each entry affects the income statement (revenue or expense)
and the balance sheet (asset or liability)
and the balance sheet (asset or liability)
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PREPAID EXPENSES
PREPAID EXPENSES
T
T
ASSET
ASSETACCOUNTACCOUNT
T
T
EXPENSE
EXPENSEACCOUNTACCOUNT
Initial cost
Initial cost
Debit
Debit
Adjusting entry
Adjusting entry
Credit
Credit
Adjusting entry
Adjusting entry
Debit
Debit
Costs consumed or expired
Costs consumed or expired
Example
Example: 1 March, 2018: Insurance premium of $2400 has been paid for the next 12 : 1 March, 2018: Insurance premium of $2400 has been paid for the next 12 months in advance. Assume the Company uses prepayment accounts.months in advance. Assume the Company uses prepayment accounts.
Dr Prepaid Insurance $2400
Dr Prepaid Insurance $2400
Cr Cash at bank $2400
Cr Cash at bank $2400
30 June 2018 adjusting entry:
30 June 2018 adjusting entry:
Dr Insurance expense $800
Dr Insurance expense $800
Cr Prepaid insurance $800
Cr Prepaid insurance $800
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UNEARNED REVENUE
UNEARNED REVENUE
T
T
INCOME
INCOMEACCOUNTACCOUNT
T
T
LIABILITY
LIABILITYACCOUNTACCOUNT
Cash receipt
Cash receipt
Adjusting entry
Adjusting entry
Credit
Credit
Adjusting entry
Adjusting entry
Debit
Debit
Revenue
Revenueearned during the periodearned during the period
Example
Example: 1 May, 2018. Clients have paid accounting fees of $3000 in advance for services : 1 May, 2018. Clients have paid accounting fees of $3000 in advance for services to be rendered in preparing their financial statements in June. to be rendered in preparing their financial statements in June.
Dr Cash at Bank $3000
Dr Cash at Bank $3000
Cr Unearned Revenue $3000
Cr Unearned Revenue $3000
30 June 2018 adjusting entry:
30 June 2018 adjusting entry:
Dr Unearned Revenue $3000
Dr Unearned Revenue $3000
Cr Service Revenue $3000
Cr Service Revenue $3000 32
ACCRUED EXPENSES
ACCRUED EXPENSES
T
T
LIABILITY
LIABILITYACCOUNTACCOUNT
T
T
EXPENSE
EXPENSEACCOUNTACCOUNT
Adjusting entry
Adjusting entry
Credit
Credit
Adjusting entry
Adjusting entry
Debit
Debit
Expenses incurred
Expenses incurred
Example
Example: B Ltd has a 20 year mortgage of $300 000, at 8% pa with an annual payment of : B Ltd has a 20 year mortgage of $300 000, at 8% pa with an annual payment of $15000 plus interest payable on February 28, 2014. Prepare the journal entry to record the $15000 plus interest payable on February 28, 2014. Prepare the journal entry to record the accrued interest for this transaction for the month of accrued interest for this transaction for the month of March 2013.March 2013.
Dr Interest Expense $2000
Dr Interest Expense $2000
Cr Interest Payable $2000
Cr Interest Payable $2000
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ACCRUED REVENUES
ACCRUED REVENUES
T
T
INCOME
INCOMEACCOUNTACCOUNT
T
T
ASSET
ASSETACCOUNTACCOUNT
Adjusting entry
Adjusting entry
Credit
Credit
Adjusting entry
Adjusting entry
Debit
Debit
Revenue earned but not yet received
Revenue earned but not yet received
Example
Example: Z Ltd signed an agreement on 1 June to provide accounting services : Z Ltd signed an agreement on 1 June to provide accounting services for a monthly fee of $1200 to one of their clients. The agreement provides for the for a monthly fee of $1200 to one of their clients. The agreement provides for the client’s fee to be paid on the 5 day of the following month. No journal entry was client’s fee to be paid on the 5 day of the following month. No journal entry was made on 1 June as no services had been provided. Prepare the journal entry to made on 1 June as no services had been provided. Prepare the journal entry to record this transaction for the month of June 2013.record this transaction for the month of June 2013.
Dr Accounts Receivable $1200
Dr Accounts Receivable $1200
Cr Revenue $1200
Cr Revenue $1200
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Closing Entries
Closing Entries
Permanent and temporary accounts
Permanent and temporary accounts
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Closing Entries
Closing Entries

⚫Income and expense accounts must be closed at the end Income and expense accounts must be closed at the end of each period to determine the profit and loss for the of each period to determine the profit and loss for the period.period.

⚫They begin and end each accounting period with a zero They begin and end each accounting period with a zero balance.balance.

⚫Profit and loss summary account is used to facilitate Profit and loss summary account is used to facilitate closing process and determination of profit.closing process and determination of profit.

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