topic 1 - intro to accounting
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8/6/2019 Topic 1 - Intro to Accounting
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INTRODUCTION TO ACCOUNTING
Accounting Concepts & Equation
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Learning Objectives
� Identify the users of accounting information
� Provide an overview to the accounting process
� Understand the conceptual framework and basic
concepts of accounting
� Overview to assets, liabilities, revenue and expenses
� Understand the accounting equation.
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Users of Accounting Information
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ACCOUNTING CONCEPTS
Accounting is a service provided for those who
need information about an entity¶s financial
performance, its assets and liabilities.
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Service
Provide useful data to other people
Information Quantitative monetary terms (P&L,
Balance Sheet, C/Flow, Statement of Shareholder¶sEquity)
Entity
Organization or individual
Financial performance Profit or Loss
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Boundary Rule ± Entity Concept
Separation of owner¶s private and business
affairs
Owner¶s Private Affairs
- Property
- Investments
- Loans
- Cash & Bank Accounts
- Amounts owing
Owner¶s Business Affairs
- Property
- Investments
- Loans
- Cash & Bank Accounts- Amounts owing
Capital
Profits
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Boundary Rule
Accounting Period Interval or time period for reporting
Common intervals:
- Yearly
- Monthly
- Quarterly
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Boundary RuleBoundary Rule ± ± Going ConcernGoing Concern
Entity will continue in existence for the
foreseeable future
Boundary RuleBoundary Rule ± ± QuantitativeQuantitative
Only items that are able to be measured are recorded.
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Measurement Rule - Monetary
Common recognizable measure.
Objective measurement
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Measurement Rule
Historical Cost Recorded at original cost
Original cost � Market Value
Ignore inflation
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Measurement Rule
Realization In strictest sense Cash flow accounting
Recognize sale only when cash is received OR
when ³reasonably confident/certain´ to doso
Recognize expenses when they are paid
May produce misleading results
Example Bad debts
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Measurement Rule
Realization� In general, realized value is amount of cash that
could be obtained from an asset in an orderly
disposal.
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Measurement Rule
Matching principle Accrual accounting
³Non cash effects´
Record income as it is earned
Record expenses when they are incurred
Need to match all income earned and expenses
incurred during a specific time period
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Measurement Rule
Matching principle (cont/«) Accrual/Provisions
- Amount owed during a time period that has
not been paid.- May involve estimates
Prepayment Amount paid in advance for goods and/or services
that have not been delivered.
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INCOME
EXPENSES
For this periodFor previous
period
For current period
Cash
Received
CashPaid
Amount
receivable
Credit
sales
Previous
Amount
receivable
PreviousCredit
sales
Amount
Owing Payables
Amount
owing Previous
Payables
+
+
-
-
minus
equals
Profit/Loss
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Measurement Rules
Dual Aspects Double entry book-keeping
Assets = Liabilities + Equity
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Measurement Rules
Materiality Record significant items
Small items can be ignored
Practical but subjective
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Ethical Rules
Relevance Useful ± influences decisions
Timely reporting
Confirms and/or help predictions
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Ethical Rules
Conservatism/Prudence ± Due caution given to uncertain
conditions.
(Revenue recorded when realized beyond reasonable doubt.
Expenses recorded as soon as they come into notice)
Consistency ± Do not change the rules, assumptions and/or
principles
Objectivity ± Evaluation should be made based on complete,
authourised/reliable and relevant information Not biased
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Ethical Rules
Relevance ± Enable the user to get a fair and
³accurate´ view
Integrity ± Practice professionalism in expressing
opinion
Confidentiality ± Do not disclose information to parties that are not privy to them
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Ethical Rules - Comparability
� Consistently applied over time
� Should not change accounting method without good
reason
� Disclosure of information (qualitative) to provide
meaningful explanations of accounting treatment you
have done.
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Ethical Rules - Understandability
Capable of being understood by users:
Having a reasonable knowledge of business, economic and accounting
Willing to study with reasonable due diligence theinformation provided.