Learning Objectives
• Define accounting and describe the accounting
process
• Identify users of accounting information
• Explain the characteristics of the main forms of
business organisations
• Identify the elements of the financial statements
• Describe the financial reporting environment in NZ
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Learning Objectives
• Analyse transactions using the accounting equation
• Prepare a journal entry and ledger account
• Apply the rules of debit and credit
• Identify the basic steps in the accounting process
• Understand Goods and Services Tax (GST) as it
applies to accounting in NZ
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Definition of ‘Accounting’
The process of identifying, measuring and
communicating economic information to permit
informed judgements and decisions by users of
the information.
American Accounting Association
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The Accounting Process
• recording
• classifying
• reporting and
interpreting
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Users of Accounting Information
• owners/shareholders
• creditors
• customers
• prospective investors
• taxing agencies
• regulatory agencies
• labour union
• employees
• general public
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Forms of Business Organisation
• Sole proprietorship
(sole traders)
• Partnership
• Company
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The Accounting Equation
ASSETS = OWNERS’ EQUITY + LIABILITIES
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Assets
For an asset to exist there must
be:
• service potential or future
economic benefits
• control by the entity
• a past event or transaction
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Current Assets
An entity shall classify an asset as current when:
a) It expects to realise the asset, or intends to sell or
consume it, in its normal operating cycle;
b) It holds the asset primarily for the purpose of trading;
c) It expects to realise the asset within twelve
months after the reporting period; or
d) The asset is cash or a cash equivalent ...
The entity shall classify all other assets as non-current.
[NZ IAS 1 para 66]
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Liabilities
For a liability to exist there must be :
• a present obligation to pay the amount owed
• future sacrifice of cash or service for the entity
• a past transaction or event
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Current Liabilities
An entity shall classify a liability as current when:
a) It expects to settle the liability in its normal operating
cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve
months after the reporting period; or
d) It does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.
An entity shall classify all other liabilities as non-current.
[NZ IAS 1 para 69]
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Owners’ Equity
• This represents the owners’ claim
on assets of the firm.
• It is a residual claim (that is a claim
to assets remaining after debts to
creditors have been discharged)
• A - L = Owners Equity
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Components of Owners’ Equity
OE = C + P – D
OE = Owners’ Equity
C = Capital
P = Profit
D = Drawings
P=R–E
R= Revenue
E = Expense
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Alternatively, the expanded accounting
equation can also be written as:
A+E+D=L+C+R
A = Assets
E = Expense
D = Drawings
L = Liabilities
C = Capital
R = Revenue
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Revenue
• A business firm earns
revenue by providing goods
or services – owners’
equity increases
• It is measured by the assets
received in exchange, e.g.
cash, or by a reduction in
liabilities
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Expenses
• Expenses are payments
incurred by the business in
an accounting period in
producing income, the
benefits of which accrues
to one accounting period
only
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The General Ledger Accounts
• Present the accounts in T-form
• A separate account for each item
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Double Entry System
• Debit (DR) always on the left side of any
account
• Credit (CR) always refers to the right side
• Increases in assets and expenses are debit
entries
• Increase in liabilities, owner’s equity and
revenue are credit entries
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Golden Rules
• Whenever there is a debit(s), there must be a
corresponding credit(s)
• Total debits must equal total credits.
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Normal balance of accounts
Debit balances
Credit balances
Assets
Liabilities
Expenses
Revenue
Drawings
Capital
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