CHAPTER 1 Introduction

Learning outcome
Gain a grounding in accounting and
bookkeeping principles

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-1
KEY TERMS
• Australian Accounting Standards
• International Accounting Standards
• A brief history
• Definition of accounting
• Types of businesses
• Basic accounting principles

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-2
KEY TERMS cont.
• Revenue and expenses
• Assets, liabilities and equity
• Five groups of accounts
• Accounting equation
• Accrual accounting
• Financial statements
• Chart of accounts
• Internal controls
PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-3
ACCOUNTING STANDARDS
Accounting standards:
• provide concepts for recording transactions
• require specific disclosure of certain transactions in
reports
• increase the value of information
• standardise financial reports
• are mandatory for reporting entities (Corporations Act
2001).

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-4
DEVELOPMENT OF
ACCOUNTING STANDARDS

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-5
ACCOUNTING REPORTS
Internal reports
– give assurance to managers to allow them to perform tasks to
optimise the benefits of the business
External reports
– allow a company to comply with legislation and regulations

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-6
ACCOUNTING SYSTEMS
Accounting systems are designed to:
• provide information to aid management decision
making
• disclose to interested parties relevant and reliable
financial information on which to base their decision
making

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-7
INTERNAL CONTROLS
• Controls need to be built into the
accounting system to ensure that
information meets the needs of users

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-8
INTERNAL CONTROLS cont.
Some examples of internal controls
• Clear allocation of staff responsibilities
• Procedure and practice manuals
• Segregation of duties
• Physical controls to safeguard assets
• Staff rotation
• Independent checks, verifications and reconciliations

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-9
ACCOUNTING ETHICS
Virtues considered essential to professionals:
• Honesty and integrity
• Trustworthiness
• Reliability and dependability
• Care for others
• Confidentiality

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-10
DEFINITION OF ACCOUNTING
Accounting provides information about business
organisations to interested parties.
Accounting information could include:
– profits/losses for a given period
– sales figures for the day
– comparisons of actuals with budgets
– statements of assets and liabilities

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-11
BUSINESS ORGANISATIONS
• Sole traders
• Partnerships
• Limited liability companies
• Co-operatives
• Clubs and societies
• Government and statutory authorities

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-12
INTERESTED PARTIES
• Owners, managers and shareholders
• Government authorities
• Investors
• Auditors
• Creditors
• Bankers

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-13
MAIN TYPES OF BUSINESSES
Trading—selling products
Service industries—providing services
Manufacturing—producing products for sale

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-14
FIVE BASIC ACCOUNTING
PRINCIPLES
1. Principle of double entry
2. Principle of recording
3. Principle of profit determination
4. Principle of reporting
5. Principle of control

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-15
OTHER ACCOUNTING PRINCIPLES
AND CONCEPTS
• Accounting entity—separation of business and owner
• Legal entity—owner and business as same legal entity
• Reporting entity—large businesses that legally must
report their financial activities

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-16
OTHER ACCOUNTING PRINCIPLES
AND CONCEPTS cont.
Reporting period and balance date (in Australia)
– Reporting period—12 months
– Balance date—30 June
Accrual concept
– The recognition of revenues when earned and expenses when
incurred

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-17
REVENUE AND EXPENSES
Revenue
– Revenue items are earnings of the business

Expenses
– Expenses are outflows of the business

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-18
PROCESS OF THE OPERATING
CYCLE
table
SALES
Goods Customers

PURCHASES

PAYMENT
Suppliers Cash

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-19
ACCOUNT TYPES
Assets
– Items owned/controlled by a business
Expenses
– Outflows from a business
Equity
– Owner’s investment
Revenue
– Inflows to a business
Liabilities
– Amounts owed by a business

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-20
INVENTORIES/TRADING STOCK
ACCOUNTS
Opening inventories
– Start-of-year balance
Purchase of inventories
– Expense
Sale of inventories
– Income/Revenue
Closing inventories
– End-of-year balances
Value of inventory
– Asset

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-21
CHART OF ACCOUNTS
• Assets
• Liabilities
• Equity
• Revenue
• Expenses

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-22
ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY

A = L + EQ

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-23
EXTENDED EQUATION — EFFECT
OF PROFIT

ASSET = LIABILITIES + EQUITY + PROFIT

A = L + EQ + P
A = L + EQ + (R – E)
A + E = L + EQ + R

PPTs to accompany Accounting and Bookkeeping: Principles & Practice by AAT and David Willis
 2011 McGraw-Hill Australia Pty Ltd 1-24