Introduction to Accounting

1. LECTURE 1:
INTRODUCTION

2. History and development of
accounting record
Ancient accounting record:
Using system called “stewardship”. The
document facilitate the owner to control
and identify their asset, which is under the
custody of the steward
Renaissance in Italy:
Accounting technique using double entry
book-keeping was introduced. A system to
ensure that financial information was
recorded efficiently and accurately.

3. Industrial Age:
In 19th century the emergence of large
corporations, separation of the owners
from the managers, makes the businesses
reports became more complex. Needs to
prepare financial statements to the
shareholders.
Post Industrial Age:
Accounting is a need for decision making
– information element.

4. What is accounting?
Accounting is an information system
that provides quantitative, financial
information to stakeholders about the
economic activities and condition of a
businessso that they can make
business/economic
decisions.

5. The different between accounting and
bookkeeping:
Accounting:
“a process of identifying, recording, classifying and
summarizing in a significant manner and in terms
of money, transactions and events which are, in
part at least, of a financial character, and
interpreting the result thereof” (AICPA, 1961)
Bookkeeping:
“ only involves activities of collecting and recording
financial data”

6. Accounting: Definition
The process of
identifying, measuring, recording
and communicating economic
information to permit informed
judgment and decisions by users of
the information.

7. Identifying Recording Communicating
INTERNAL
USERS
EXTERNAL
USERS
Measuring

8. Identifying: Identify those events that are
considered as an evidence of
economic activity relevant to the
business
Recording: Keeping of a chronological
diary of measured events in an orderly
and systematic manner
Communicating: Communicate through
the preparation and distribution of
accounting reports to the interested
parties.

9. USERS OF FINANCIAL
INFORMATION
Internal Users
Managers who plan, organise and run
the business
e.g. production supervisors, marketing
managers, and directors
Owners of the business

10. USERS OF FINANCIAL
INFORMATION continued
External Users
Resource providers
e.g. investors, employees, creditors
Recipients of goods and services
e.g. customers, beneficiaries
Reviewers
e.g. regulatory
agencies, media, governments, trade
unions, special interest groups

11. FINANCIAL STATEMENTS
Income Statement
Reports revenues less expenses for a
particular period of time
Balance Sheet
Reports assets and claims to those
assets at a particular point in time

12. FINANCIAL STATEMENTS
continued
Statement of Changes in Equity
Reports amount of profit for the period
and the changes in equity
Cash Flow Statement
Reports information regarding cash
receipts and cash payments for a
particular period of time

13. Definition: FRS 101 (MASB 1)
• Financial statement is a structured
financial representation of the
financial position of an enterprise and
the transaction undertaken by an
enterprise
Introduction to Financial
Statements

14. Objectives and purposes
of Financial Statement
1. Provide information about the financial
position, performance and cash flow of an
enterprise
2. Show the results of management’s stewardship
of the resources entrusted to it
3. Assists users in predicting the enterprise’s
future cash flow and the timing and certainty
of the generation of cash and cash equivalents.

15. Components of FS
1. Balance Sheet
2. Income Statement
3. A statement showing:
• All changes in equity
• Changes in equity other than those arising
from capital transaction with owners and
distribution with owners
4. Cash Flow Statement, and
5. Accounting policies and explanatory notes

16. Accounting policies and explanatory
notes
Important additional notes to define
statement prepared e.g accounting
policies
Any additional information that is not
shown in the financial statement will
effect the fairly presentation

17. Income Statement
$10 600
Wong PTY LTD
Income Statement
for the year ended 31 October 2008
Service revenues
Expenses
$3 200
1 500
900
50
50
40 5 740
4 860
2 000
Salaries expense
Supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation expense
Profit before tax
Tax expense
Profit after tax $ 2 860

18. Statement of Changes in Equity
WONG PTY LTD
Statement of Changes in Equity (extract)
as at 31 October 2008
Profit $ 2 860
Retained earnings 1/10/08 0
Dividends (500)
Retained earnings 31/10/08 $ 2 360

19. WONG PTY LTD
Balance Sheet
as at 31 October 2008
Assets
Cash
Accounts receivable
Advertising supplies
Prepaid insurance
Office equipment
Total assets
$15 200
200
1 000
550
4 960
$21 910
Liabilities and equity
$ 2 500
50
800
1 200
5 000
$ 9 550
10 000
2 360
Liabilities
Accounts payable
Interest payable
Revenue received in advance
Salaries payable
Bank loan
Total liabilities
Equity
Share capital
Retained earnings 31/10/08
Total equity 12 360
$21 910

20. Cash Flow Statement
WONG PTY LTD
Cash Flow Statement
for the month ended 31 October 2008
Cash flows from operating activities
Cash receipts from operating activities $11 200
Cash payments from operating activities
Net cash provided by operating activities
(5 500)
$ 5 700
Cash flows from investing activities
Purchased office equipment (5 000)
Net cash used by investing activities (5 000)
Cash flows from financing activities
Issue of shares 10 000
Proceeds from bank loan 5 000
Payment of dividend
Net cash provided by financing activities
(5 000)
14 500
Net increase in cash
Cash at beginning of period
15 200
--
Cash at end of period $15 200

21. Accounting Roles:
Language of Business
Decision making tool
Create accountability and control
As an Information system

22. DECISION TOOLKIT
Are the business operations
profitable?
Does the business rely mainly on
debt or equity to finance its assets?
Does the business generate
sufficient cash from operations to
fund its investing activities?
Is the company using its assets
effectively?

23. DECISION TOOLKIT continued
Is the company maintaining an
adequate margin between sales and
expenses?
Can the company meet its short-term
obligations?
Can the company meet its long-term
obligations?