Primary Function of Accounting:
 To provide financial information for decision making.
 Management accounting provides information for decision making within the business.
 Financial accounting provides information to assist external users' decision making.
Accounting Process:
 Accounting is the process of identifying, measuring, recording and communicating the
economic transactions and events of a business operation. Transactions are economic
activities relevant to a particular business (e.g. sale of item to customer, purchase of office
stationery from supplier)
Conceptual frameworks (CFs):
 Set of concepts defining the nature, purpose and content of general-purpose of financial
reporting.
 Used by preparers and standard setters.
Objective of general purpose financial reporting:
 According to the Conceptual Framework 2010 the objective of general-purpose financial
reporting is to provide information useful for existing and potential users (investors, lenders
and other creditors) to make decisions about the reporting entity.
 Types of decisions including: buying, selling, investing, providing loans.
 Stewardship and accountability objectives:
Entities where there is a separation of ownership from control, general-purpose financial
reports can support Stewardship/accountability function.
Managers use reports to show owners they're fulfilling their stewardship function and
managing resources effectively.
Shareholders use reports to check on managers and make the accountable.
Decision-usefulness objective:
Objective of general-purpose is to provide information to users that's useful for making and
evaluating decisions about allocation of scarce resources.
Primary users of general purpose financial reports are the resource providers:

Equity investors contribute resources (usually cash) for a return; includes shareholders
(existing and potential), holders of partnership interests. Lenders contribute by lending
resources for the purpose of receiving a return in the form of interest; e.g. banks. Other
creditors provide resources in the form of credit; e.g. suppliers, employees.

Other users:
 Recipients of goods and services:
o e.g. customers, beneficiaries.
 Parties performing a review or oversight function:
o e.g. regulatory agencies, media, governments, trade unions, special interest
groups.

Currently Australian business entities and standard setters still use the definition from the
Australian conceptual framework:

‘an entity in which it is reasonable to expect the existence of users who depend on
general-purpose financial reports to enable them to make economic decisions’ (SAC 1).
Indicators:

If the entity is managed by individuals who are not owners of the entity

If the entity is politically or economically important

If the entity is considered large in sales, assets, borrowings, customers and employees

Then the entity is more likely to be a reporting entity.
Conceptual Framework:
Statement on Financial Position:
 Reports assets and claims to those assets (liabilities and equity) at a specific point in time.
 Based on the basic accounting equation A = OE + L
 Assets must balance to the claims on assets
Interrelationships between the statements:


The financial statements are interrelated:

The statement of financial position is linked to the statement of profit or loss and the
statement of changes in equity by the ending retained earnings balance.

The statement of cash flows is linked to the statement of financial position by the
ending cash balance.
Monetary principle:


Items included in accounting records must be able to be expressed in monetary terms
(e.g. $).
Accounting entity concept:



Every entity can be separately identified and accounted for.

Owner’s transactions are separate from entity’s transactions.
Accounting period concept:

The life of a business entity can be divided into artificial periods.

Useful reports covering those periods can be prepared for the entity.
Going concern principle:



Cost principle:

All assets are initially recorded in the accounts at their purchase price or cost.

To provide useful information, sometimes entities need to deviate from cost principle
(e.g. revaluation of non-current assets).
Full disclosure principle:


Business will remain in operation for the foreseeable future.
All circumstances and events that could make a difference to decision-making process
should be disclosed in the financial statements.

Fundamental Qualitative Characteristics:

Relevance:
o


provides a basis for predictions confirms or corrects previous expectations
Faithful representation:
o
complete, neutral and free from material error
o
depicts the economic substance
o
unbiased
o
judgements and estimates reflect best available information.
Costs versus benefits:

Costs of preparing financial reports should not exceed the benefits to be derived from
the reports.


Definition of Assets:
‘a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity’

There are three essential characteristics.
The entity must have control over the asset:
o
mostly means ownership, but not always the case (e.g. in finance lease).
o
Economic substance over legal form
The control must be as a result of a past transaction or event:

i.e. after purchase of asset has taken place

resources to be purchased in the future are not considered assets until
exchange takes place.
The resource must be able to provide future economic benefits or service potential:

e.g. being sold for cash, exchanged for another asset, used to produce
goods and services.
Definition of Liabilities:
‘a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits’
The entity must have a present obligation:

a duty to act or perform in the future, e.g. providing goods/services, delivering
cash repayments.
The obligation must be as a result of a past transaction or event:

e.g. after purchase of assets has taken place

an intention to buy an asset is not a present obligation.
A liability must result in an outflow of resources or economic benefits:

outflow of economic benefits will reduce the entity’s future cash flows, e.g.
paying cash, providing goods/services or issuing another liability.
Definition of Equity:
‘the residual interest in the assets of the entity after deducting all its liabilities’
Transactions/events that affect equity: gains/losses, owner’s activities (capital
investments, drawings, dividends).
Definition of Income:
revenue:

increases in economic benefits arising in the course of ordinary activities

e.g. sales revenue, rent, dividends
gains:

other increases in economic benefits that do not arise from ordinary course of
business

e.g. gains from the sale of non-current assets.
Definition of Expenses:
‘decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants’ .
1. expenses:

decreases in economic benefits that arise in the ordinary activities of the entity

e.g. cost of sales, salaries.
losses:

expenses that do not necessarily arise in the ordinary course of business

e.g. loss from natural disasters.
Measurement of elements in financial reports:
‘the process of determining the monetary amounts at which the elements of the financial
statements are to be recognised and carried in the statement of financial position and income
statement’
1. Historical cost:

Assets are recorded at the amount paid or consideration given at the time of
acquisition.

Liabilities are recorded at the amounts of expected to be paid to satisfy the
liability in the normal course of business.
2. Current cost:

Assets are carried at the amount that would have to be paid if the same asset was
acquired currently.

Liabilities are carried at the undiscounted amount that would be required to
settle the obligation currently.
3. Realisable (settlement) value:

Assets are carried at the amount that could currently be obtained by selling the
asset in an orderly disposal.

Liabilities are carried at settlement value.
4. Present value:
o
Assets are carried at the present discounted value of future net cash inflows that is
expected to be generated in the normal course of business.
o
Liabilities are carried at present discounted value of the future net cash outflows
required to settle liabilities in the normal course of business.
Integrating GAAP:

a set of rules and practices, having substantial authoritative support, that are recognised as a
general guidance for financial reporting purposes.
GAAP consists of:
o
statutory rules (standards) and interpretations
o
concepts and principles developed over time.
Order of applying GAAP:

Corporations Act accounting standards &
concepts & principles.
interpretations conceptual framework
Reporting entities (SAC 1) are required to prepare general purpose financial reports that are useful
for decision making by the resource providers and the usefulness is dependent upon the
information’s qualitative characteristics.

Accounting period concept and revenue and expense recognition criteria are interrelated.

The definitions of assets, liabilities, equity, income and expenses are linked.
Integrated Reporting (IR):

IR is becoming the new norm for corporate reporting.

The International Integrated Reporting Council (IIRC) developed the International Integrated
Reporting Framework (IIRF).

The IIRF provides a set of guidelines to support organisations to integrate sustainability into their
objectives and to account more fully for the value created by organisations in the short, medium
and long term.

Sustainability: making sure the social, economic and environmental needs of our community are
met and kept healthy for future generations. Three main areas including: Economic, Environmental,
Social.
Types of Transactions:

External Transactions

Involve an outside party

Exchange of economic resources and/or obligations
o

Internal Transactions

Transformation of economic resources
o

Sale of inventory, Purchase of supplies
Use of office supplies
Non-Transactional Events

Not usually recorded, but may be in the future
o
Receiving an order from a customer