Lecture 1: The Nature and Purpose of Accounting Regulatory and Conceptual Frameworks COPY Flashcards
What is Accounting?
The process of identifying, measuring and communicating financial info about an entity for decision making purposes.
What is Management Accounting?
Communicating financial info to internal stakeholders - Special Purpose Financial Reports
What is Financial Accounting?
Communicating to external stakeholders in General Purpose Financial Repors - bound by GAAP (Generally Accepted Accounting Principles)
Sole Trader (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)
Setup and admin: Straighforward + cheap
Lifetime: Limited to life or desire of owner
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Not seperate entity
Liability of owner: Unlimited
Tax implications: Owner reports profit as income
Partnership (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)
Setup and admin: Straighforward + cheap
Lifetime: Limited to life or desire of partners
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Not seperate entity
Liability of owner: Unlimited
Tax implications: Partner declares share of profit as income
Company (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)
Setup and admin: Complex
Lifetime: Indefinite
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Seperate entity
Liability of owner: Limited
Tax implications: Entity is taxed seperate to owners, shareholders declare dividends as income
Private/Propreitary Company (+classification of large v. small)
- Less than 51 shareholders
- Restrictions on raising capital and transfer of ownership
Large if meets two or more:
- Operating revenue of 25m
- Total assets of 12.5m
- 50 full time employees
Public Company (+small v. large)
- No restrictions on number of shareholders
- No restrictions on raising capital or transferring ownership
Split into small and large as there are different accounting requirements under the Corporations Act 2001.
Small:
- Less external accounting requirements - GPFR is not publicly accountable as there is not a large number of external users reliant on it
Large:
- Required to prepare a full, audited GPFR as large number of external uses are dependent on it
Reporting guidlines that must be followed by all entities
- International Financial Reporting Standards (IFRS)
- Australian Accounting Standards (AAS): Australian modified IFRS to include specifics such as our 10% GST - Corporations Act 2001: main source of company regulation and other rules overseen by the Australian Securities and Investment Commission (ASIC)
Reporting entities
An entity that has users who rely on the information in GPFR to meet their needs and thus, have to prepare a full GPFR.
- Public and large proprietary/private companies
Disclosing entity
Those entities that issue securities that are quoted on the stock market or made available to the public via a propectus and thus, must prepare additional half-year reports.
- Some public companies who have decided to list
Conceptual Framework
Guide to how to prepare GPFR, including objective, desired qualitiative characterisitcs and the definiiton and recognition criteria of elements - esstentially the underlying rules for the deveopment of accounting standards
Objective of GPFR
To provide financial info about the entity that is useful to investors, lenders and other creditors in making decisions about providing resources to the entity.
Information given in GPFR
Information concerning:
- Financial position - economic resources and caims at a point in time.
- Financial performance - the changes in economic resources and claims over a period of time.
Limitation of GPFR
- Time lag - between when events occur and when they are reported.
- Historical nature of the data doesn’t necessarily represent future data.
- Costs for business to create the reports
- Possible disadvantages the business is put in due to releasing the info e.g. competitive advantage to competitors.
Qualitative characterisitcs
The qualitites that information in the reports should possess in order to be useful.
Fundamental qualitative characteristics
- Relevance - information is relevant when it is capable of making a different to decisions made by users (ie. is has predictive or confirmatory value)
- Faithful representation - information is complete (includes all necessary descriptions and explanaitions, includign extra info in notes), neutral (isn’t manipulated to appear in a certain way) and erorr free (no calculation error or omissions).
Enhancing qualitiative characteristics
- Comparability - info should be internally (against other periods) and externally (against other businesses comparable.
- Understandability - info presented in a clear and concise manner using simple language and explanaition (assumes users will have reasonable knowledge fo accounting)
- Verifiability - a range of independent and knowledgeable people could reach consensus of faithful representation (if it can’t be verified then assumptions should be disclosed)
- Timeliness - should be available in time to be capable of influencing decisions (3 months)
Elements of Financial Statements
- Measures of entity’s financial position:
- Assets
- Liabilities
- Equity - Measured of financial performance:
- Income
- Expenses
Assets
Resource controlled by the entity as a result of past events which are expected to result in an inflow of economic benefits to the entity.
- Current assets- those that will be realised, sold or consumed within the financial year after the reporting date or are cash and cash equivalents
- Non-current assets - will last past 12 months from reporting
Liabilities
A present obligation of the entity as a result of past events, the settlement of which is expected to result in a probable outflow of economic benefits.
- Current liabilites - those expected to be settled within the financial year
- Non-current liabilities will be settled after 12 months from the reporting date
Equity
The assets belonging to the owners after the liabilities have been distributed to the external parties.
EQUITY = ASSETS - LIABILITIES
= CONTRIBUTED EQUITY + RETAINED EARNINGS
- Contributed equity - equity contributed by investors e.g. owners contributing cash in exchange for shares.
- Retained profits - profits earned by the business that have been reinvested in the business and not spent
Income
Inflows of economic benefits (or decreases in outflows) from the entity providing a good/service/resource that results in increases in assets or decreases in liabilities that increases equty, except for contributions from equity participants.
Expense
Outflows of economic benefits (or decreases in inflows) that decreases assets (or increases liabilities) that reduce owner’s equity except for distributions to equity participants (as a resource must be used).
Profit formula
PROFIT = INCOME - EXPENSES
Retained earnings formula
RETAINED EARNINGS = PROFIT (INCOME-EXPENSES) - DIVIDENDS
Recognition
Process of incorporating an item that meets the definition of an accounting element into the reports - must be probable and hsve reliable measurement.
What happens to the partnership if a partner dies or retires
It will be automatically dissolved
The main difference between the accounting reports for the various types of business structures is in the:
Equity part of the balance sheet
