PRINCIPLE OF ACCOUNTING NOTES CHAPTER 1- INTRODUCTION LEARNING OUTCOME: (To gain background to accounting and bookkeeping principles and practice) KEY TERMS: The key terms introduced in this chapter include the following: ■ Accounting entity—a business having a separate identity from its owner. ■ Accounting equation—Assets less Liabilities equals Equity. ■ Accrual concept of accounting—transactions are accounted for at the time they are earned or incurred rather than when payment has been made. ■ Assets—items owned by a business (for example, motor vehicles and trading stock). ■ Australian Accounting Standards—specific accounting policies concerning a particular topic or industry related to businesses that are ‘Reporting entities’ ■ Balance date—the final date of the accounting period (for example 30 June) ■ Balance Sheet—a statement of what a business owns: its assets; what the business owes: its liabilities; with the difference between assets and liabilities being the Equity of the owner in the business. ■ Capital—part of the Equity, which is the owner’s investment in the business. ■ Chart of Accounts—an index to all ledger accounts. ■ Double entry system—where a transaction provides both a debit and a credit entry. ■ Drawings—amounts of cash or inventories drawn out of the business by the owner. This is a reduction in Equity. ■ Equity—the total investment in the business by the owner represented by assets less liabilities. ■ Expenses—costs incurred in operating a business. ■ Legal entity—the business is legally able to buy, sell and own property in its own name. ■ Liabilities—items owed by a business to other parties (for example loans to a bank). ■ Reporting entity—an organisation required by law to report its financial activities (for example, company reports to shareholders). ■ Reporting period—the period covering a financial report. A full financial year is the period 1 July to 30 June. ■ Revenue—the earnings of a business, mainly from sales of trading stock or fees for services. ■ Rules of double entry—the double effect of each transaction on the five groups of accounts. ■ Sole trader—a business owned by a single person. ALTERNATIVE TERMS There are alternate terms in accounting to describe the same item. Some to be familiar with at this stage are: Inventories Trading stock or goods Debtors Accounts receivable Creditors Accounts payable Revenue Income DEFINITION OF ACCOUNTING Accounting can be defined as providing information about business organisations to interested parties. BUSINESS ORGANIZATION Examples of business ownership include: ■ A sole trader (a single proprietor)—ownership is vested in one party only. The sole trader is liable under law and is responsible for all of the business debts and usually has complete control of the business activities. ■ Partnerships—two or more owners carrying on a business. The partners are responsible for the business debts in a ratio stated in the partnership agreement and with a legal position similar to that of a sole trader. Ownership of the business is shared. Each state has a Partnership Act. Examples of partnerships are lawyers, accountants, doctors and dentists. ■ Limited liability companies—these are created by law and are regarded as separate entities from the persons who contribute the capital (the shareholders) or the persons who control the enterprise (the directors). There is limited liability for the business debts. Shareholders elect directors to act on their behalf in the conduct of the company. The Corporations Law states the information that must be supplied to shareholders and authorises the use of standards in accounting. ■ Co-operatives—these are groups of people with similar interests and the members may be entitled to cheaper goods and services provided by the co-operative. ■ Clubs and societies—generally the motive is not for profit, but to improve the facilities of the club or society, for the benefit of members. ■ Government, semi-government, local government and statutory authorities—these entities provide services and some goods; however, there has been a tendency since the late 1990s away from government to private ownership (for example, share issues for larger former government organizations such as Telstra, the Commonwealth Bank and Qantas). INTERESTED PARTIES Those parties interested in the performance of a business include: ■ owners, managers and shareholders for business performance and calculation of profit or loss ■ tax authorities to assess the tax liability of the business ■ investors to assess the business for investment potential ■ auditors to ensure that internal controls are working effectively and to prepare audit reports where appropriate ■ creditors to ensure that a line of credit is justified ■ bankers to ensure that the business is a sound proposition for loans. TYPES OF BUSINESS There are three main types of businesses: ■ Trading—these businesses sell products and can be either wholesale or retail. A wholesaler operates between the manufacturer and the retailer. Retail businesses sell products to customers (for example, household goods, clothes, food and computers). ■ Service industries—these businesses provide services to customers and include plumbers, electricians, dentists and doctors. ■ Manufacturing—these businesses convert material and labour into finished products that are then sold to trading businesses.
Posted on: Sun, 11 Aug 2013 06:42:51 +0000
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