Welcome to

MCD 2010 - ACCOUNTING 1 ! Tutorial 1

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Tutorial -1

Note for tutors

This first Tutorial aims to introduce students to the unit, the unit outline, the assignments and other requirements to be completed. Since the tutorial session might be held, in some cases, before the first lecture, a brief introduction to the study of Accounting, the Australian Framework, some important terms and definitions may be introduced to students through these slides. The tutor may distribute the unit outline and go over it, clarifying the important points, particularly the exams and assignments. It is possible that students may not have text books and some are in the process of purchasing the book. Some students may already have had their first lecture and some may have it later in the week.
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Accounting and its background

Accounting is: the process of identifying, measuring & communicating economic information about an entity to permit informed judgements and decisions by users of the information. American Accounting Association quoted in Peirson & Ramsay page 4.

Accounting Information and its Background

Types of entity (legal, accounting and reporting)

Legal forms include Sole Proprietor, Partnership, Company, etc. General Purpose Financial Reports (GPFRs) for users decisions: Statement of Financial Position (Balance Sheet)
(Assets = Liabilities + Owner Equity)

Statement of Changes in Equity

Opening equity + Contributions/increases + Net Profit Distributions = Closing Equity

Income Statement (Statement of Financial Performance)

(Profit = Revenue Expenses)

Statement of Cash Flows

(Cash Inflows - Cash Outflows = Net Cash Flow)
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Accounting information and its background General Purpose Financial Reports (GPFR)

The major formal General Purpose Financial Reports are: Income Statement Statement of Financial Position /Balance Sheet (Classification of elements) Statement of Changes in Equity Statement of Cash Flows
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Are there dependent users?

The focus is on the existence of dependent users (which is a matter of judgement).

Factors which help to determine whether a reporting entity exists are: 1. Separation of management from economic interest. 2. Economic or political importance / influence. 3. Financial characteristics (SAC 1 para 20-22).
An entity satisfying any one factor constitutes a reporting entity.
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Why define a reporting entity?

If an entity is a reporting entity, it must prepare general purpose financial reports that comply with accounting standards. It is important that all entities that have dependent users fulfil their obligation and prepare reports.

Fundamental qualitative characteristics Relevance: - quality to influence users decision - predictive value and feedback value. Faithful Representation:
Freedom from error and bias Substance over form Neutrality Completeness Accuracy

1. 2. 3. 4. 5.

The AASB Framework Definition and Recognition of the Elements from which Financial Statements are constructed.

The Framework defines the elements of the financial statements i.e. what types of items are included.These are:
Assets Liabilities Equity Revenue Expenses
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Assets
Definition : An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Main points:
Control Past transaction or event Future economic benefit e.g. Cash, Land, Equipment, Vehicles, Debtors/Accounts Receivable

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Liabilities
Definition : A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Main points:
Present obligation Past event/transaction Future outflow of resources e.g. loans, creditors/accounts payable, wages owing to employees
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Equity
Definition: Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Main points: Dependent upon the definition of A & L. Simply a numerical calculation.

EQUITY(OWNER EQUITY) = A - L
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Income (Revenue)
Definition : Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
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Income (Revenue)
Main Points: Inflow of future economic benefits. Increase in assets or reduction in liabilities. Excludes owner contributions. Increases equity.
Examples:

Inflows of assets
Such as Cash from cash sales or Debtors from credit sales.

Reduction in liabilities
Such as selling goods to a creditor which reduces the amount due to creditors.
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Expenses
Definition : Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
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Expenses
Main points: Outflow of economic benefits to an outside entity. Decrease in assets or increase in liabilities. Excluding owner distributions / drawings. Decreases owner equity.
Examples:

Outflows of assets
Payment of wages or electricity.

Use of assets
Depreciation (using up non-current assets).

Increases in Liabilities
Wages payable.
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Recognition Principle Transactions and events should be included in the reports only when they satisfy both the definition and recognition of an element.
Definition Recognition
reports
asset

Motor Vehicles
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Recognition contd.
Transactions and events should be included in the financial reports only when they satisfy both the definition and recognition of an element. An item that meets the definition of an element should be recognised if: (1) it is probable that any future economic benefit associated with the item will flow to or from the entity: e.g. If a transaction or event is to be an Asset then it must have a probable future benefit. The probability threshold has to be above 50% certainty e.g. a motor vehicle purchase with a benefit expected to be used for 3 years. (2) the item has a cost or value that can be measured with reliability e.g. a motor vehicle purchased at the arms length price of $30,000 supported by documentary evidence.
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Questions (for discussion in class)

Are the following items Assets under the ASSB Framework?
1. 2 3 4 5 6 Motor Vehicle, previously used by owner, brought into the business as capital. Coca Cola brand (for the company). Employees of a computer software company. A bank balance of $100,000. A bank overdraft of $100,000 (negative cash at bank). Stock of materials held for sale by a retailer.

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Questions (for discussion in class)

Tom Lawyer, an experienced barrister, starts his legal consultancy business on 1 Jan 2010 with the following: Cash $10,000. New car $ 34,000. Bank loan for car $ 20,000. A fresh, gold medallist law student (employee) who, according to Tom, is a great asset to the organisation and who is paid $60,000 a year as salary. Office furniture worth $10,000. Computer and other new office equipment worth $12,000. Applying the Accounting Equation, calculate the equity of the business on 1 January 2010. If Toms business were to make $100,000 in fees during the year 2010 and spend $80,000 in expenses which includes salaries of employees, what is the Equity of the firm on 31 Dec 2010?

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Additional questions for discussion in this tutorial 1. What are elements under the Framework? 2. What is meant by definition of an element and what is the difference between definition and recognition? 3. What are the fundamental qualitative characteristics of financial information? 4. Explain the following enhancing characteristics of financial Information: Understandability Timeliness Verifiability

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