BSD110 Accounting

Week 2 Revision
 Regulation of Accounting

• Accounting standards have been established to determine

appropriate measurement and reporting rules in financial
statements.

• Australia’s accounting standards are fully compatible with

those of the international standard-setters
 Reporting Entity

• The accounting entity concept is a basic accounting

concept because it defines what we account for and states
that:

– The transactions of each entity are recorded separately from the

transactions of all other organisations and persons, including the
owners of the entity.
 Objective of Financial Reporting
• to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources
to the entity. These include the business’s:
– ability to generate cash in the future
– future borrowing needs and how future profits and cash
flows will be distributed among those with an interest in
the entity
– likely success in raising further finance and meeting
commitments when they fall due
– Investing, financing and operating activities.
 Fundamental Qualitative
Characteristics of Financial Information
• Understandable
• Relevant
• Reliable - faithful representation
• Comparable

Constraints on relevant and reliable information:

• Timeliness
• Costs v Benefits
 Concepts and Principles

• Entity concept
• Accounting period concept
• Historical cost principle
• Matching principle
• Profit recognition principle
• Conservatism or prudence principal
• Going concern assumption
 Elements of Financial Statements

• Assets
• Liabilities
• Equity
• Revenue
• Expenses
 The accounting equation
It measures the resources of a business and the claims to
those resources

Assets Liabilities Equity

 Understanding the Accounting Equation
An example of a person
buying a house

You have an valuation

What is your from a valuer which says
personal your house is worth
wealth? $500K.
(i.e. your ‘OE’) You owe XYZ Bank
$300K.
Therefore, your equity
(residual interest) is
$200K.
A – L = OE
A = L + OE

E.g. House worth $500K = A

Bank loan $300K = L
Equity of owners $200K = OE
 Understanding the Accounting Equation: A Business
An example of a sole trader business

Assets Liabilities Equity

How does a sole trader business fund assets such as equipment?

a) Pay with cash: Equipment (Asset)  Cash (Asset) 
b) Borrow: Equipment (Asset)  Loan Payable (Liability) 
c) Owners provide funds : Equipment (Asset)  Capital (Equity) 
 Financial Statements
1. Income Statement (Statement of Comprehensive Income) presents a
summary of an entity’s income and expenses and all changes in equity,
other than new owner investments and drawings, for a specific period
of time.
2. Statement of Changes in Equity shows the changes in owners’ equity
during a specific time period
3. Balance Sheet (Statement of Financial Position) lists all the entity’s
assets, liabilities and owners´ equity as at a specific date.
4. Cash Flow Statement (Statement of Cash Flows) reports the cash
coming in and the amount of cash going out during a period.

• Collectively known as general purpose financial reports

 Order of financial statements
• Profit must be calculated first, so

1. Income statement is prepared first

2. Statement of Changes in Equity must be prepared to

calculated closing equity figure.

3. Balance Sheet (Statement of financial position) depends

on results of income statement and statement of
changes in equity.

• The ending cash figure in the statement of cash flows is

reported in the statement of financial position