BUSS1030

Provide an example of poor internal control

* In 2019 one fo the finance executives of Coles embezzled almost 2 million by transferring money out of the company and using fraudulent emails to make it seem like the payments were approved * E.g. he transferred money to company accounts that were under his name and used ABNs belonging to other companies to make them seem legitimate * The money he transferred were suspicious as some did not have invoices or invoices sent from the person's personal email address

What is causing the change in the accounting environment and what questions have they stimulated

Over the years, the environment within which businesses operate has become increasingly turbulent and competitive. This can be due to: * Customers are increasingly sophisticated and demanding * National frontiers are less important in a global economy * Technology is changing rapidly * Domestic markets are becoming more deregulated * Shareholders are increasing pressure for competitive returns * Financial markets are more and more volatile * Increasing awareness of the need to recognise the implications of the actions of business on the environment and society at large To meet the changing needs of users in this environment, there has been a change in the kind of information to be reported: * The internationalisation of businesses has created a need for accounting rules to have an international reach * There is a search for a clear framework and principles upon which to base financial accounting reports (ensure they portray economic reality more faithfully and more transparent) * This has been emphasised by scandals over the decades relating to the financial reports prepared for general purpose external users which can be misleading Sustainability reporting — The environment * Concern with the environment has led to more focus being directed to environmental and social factors i.e. sustainable reporting * Idea of integrated accounting which is about value creation, has been developed

What is posting and what is the difference between journalising a transaction and posting it What are the headings for the ledger account

Posting is the procedure where information is transferred from the general journal entries to the general ledger accounts * the difference between journalising a transaction and posting it is that journalising it is just noting down the transaction whereas posting is the act of entering the transactions from the journal to the account LEDGER HEADERS At the top title + account number * date * item * journal reference * debit * credit * balance * whether the balance is debit or credit STEPS 1. Find the amount to be debited 2. Enter the transaction date in the account 3. Enter the name of the account that will be credited 4. Enter amount of the debit 5. Go back to the journal and enter the account number to show that part of the entry has been posted and place a tick next to the line in the journal 6. Repeat the steps 1-5 for the accounts to be credited

What is the chart of accounts and its importance

The chart of accounts is a list of all fo the accounts of an organisations accounting system organised so the accounts link to the profit and loss statement and the balance sheet IMPORTANT - the COA is imoportnat because it is an organisational tool that provides a digestible breakdown of all the financial transactions that a company conducted during an accounting period, broken down into subcategories - companies use the COA to organise their finances and give interest parties such as investors and shareholders a clearer insight into the financial health of the company HOW IT WORKS * it must include all accounts needed to complete the final accounts * the chart of account varies depending on the size and scope of the organisation * if it is a large organisation it needs to be reviewed to deal with all the complexities * it is separated by assets, liabilities, equity, revenues and expenses it will vary depending on - the reporting requirements - it is important to create a chart of accounts that is unlikely to change over the years as consistency is needed for comparison - it needs to be viewed periodically for redundancy i.e. if they are not producing material information then they need to be moved into a larger, more general acccount

Describe closing off a simple set of accounts

The final stage is to close off the accounts This involves transferring the revenues and expenses to the profit loss account and then transferring the balance of the profit and loss account and drawings account to the capital acount

What can cause a difference between the firm's books and bank statements?

The lack of agreement between the firm's books and the bank statements results from 2 main reasons: 1. TIME LAGS * time lags between when the cheque is written and dated and the date it is paid by the bank fo the customer * time lags between when the receipts are recorded and when recorded by the bank * may have been paid into a different bank and not yet credited to the customer's branch or account * cheques paid out by the business which have not been recorded in the cash account of the business may not have been paid in by the recipient or cleared by the bank. These are unpresented cheques 2. ERRORS * errors by either party in recording transacitons

What do we need to know in the recording process of transactions

WHAT DO WE NEED TO KNOW? 1. Has a transaction occurred? * check the source documents. They provide documentary evidence that a transaction has occurred and internal control over the firm's resources * examples of source documents include cash receipts invoices, credit card receipts, cash register tapes, cancelled check, customer invoices, supplier invoices, purchase orders, deposit slips, bank statements, notes for loans, payment stubs 2. If so is the transaction a business transaction? * external, internal or non business transaction 3. How does the transaction affect the account equation? 4. Wha specific accounts are affected by the transaction?

How to record inventory in a general ledger

WHEN YOU SELL INVENTORY: Cash at bank debit (or accounts receiveable) Revenue credit Cost of goods debit Inventory credit

What are claims against the asset

A claim is an obligation on the part of the business to provide cash or some other benefit to an outside party * this is the other side of the statement of financial position -- the claims against the asset of an entity or simply the different interests in those assets There are 2 types -- external claims (liabilities) and internal claims (owners equity or equity capital)

Define claim

A claim is an obligation on the part of the business to provide cash or some other benefit to an outside party * This is the other side of the statement of financial position — the claims against the assets of an entity or simply the different interests in those assets * There are 2 types of claims: * External claims — liabilities * Internal claims — owners' equity or equity/capital

What is a control account and its advantages

A control account summarises all of the transactions that have been recorded in a particular ledger. They can appear in the subsidiary ledger and general ledger. They are useful for trial balance purposes * if the balances of the control account for the ledgers agrees with the sum of the individual balances in the ledger then the accounts may be correct but this is not a guarantee ADVANTAGE * the control account provides an effective check on the accuracy of postings from the subsidiary records and additions of those records * because the control account has a limited number of postings it is possible to extract balances extremely quickly * the control account can be easily and quickly kept by someone other than the one making the detailed posting. This improves internal control and makes fraud more difficult because collusion is necessary to make fraud successful

* A bank reconciliation identifies missing transactions and it is crucial especially for small medium businesses * The missing transactions can identify fraud, error in accounting/bank records and or a host of other reasons and unless it is rectified the error may go unnoticed and create disastrous consequences for the business * The bank rec is a way for the business to control the assets and to ensure the financial statements are free from material misstatements

Are bank reconciliations just an account procedure or do you think there are other good reasons for preparing a regular bank reconciliation?

What is the difference between permanent and non permanent accoutns

Asset, liabilities and capital are permannt accoutns thus you bring the balance forward fro all of these Revenues and expenses are not permanent because you take these to find profit and then bring the profit forward. Dividends are not permanent either because dividends deduct from profit so they are used to help bring profit forward Drawings are not permanent because they go to capital and reduce the capital to bring it forward

What is the accounting equation and why must ti always be in balance

Assets = OE + liabilities OE = capital + revenue - drawings - dividends - expenses Assets + expenses = liabilities + equity at the start of the period + injections - drawigns + revenues Assets + expenses + drawings = equity at the start of the period + liabilties + injections + revenues It must always be in balance by the definition i..e the assets must always equal the claims against the assets

LIQUIDITY Meaning -- the ability to pay debts when they are due. The speed with whcih the assets can be converted to cash Assessed * current ratio: CA/CL * quick ratio: liquid assets/liquid liabilities * asset turnover ratios Stakeholders * those with short term focus ASSET MIX The relative proportion of assets: * current/non current * tangible/intangible * monetary/non monetary Assessed -- based on the ratios above Stakeholders -- those concerend wtih the efficient use of assets to generate returns FINANCIAL STRUCTURE The level of funding * short term/long term * internal/exteral Assessed: Based on the above ratios like: * liabilities/assets * long term liabilities/owners equity * interest cover Stakeholders -- those with long term focus

Define liquidity, asset mix and financial structure (solvency) How could they be assessed from the state of financial position figures and which external stakeholders would be interested in these items?

What is the difference between the items recorded by the business and that of the company

ITEMS THAT RE RECORDED BY THE COMPANY NOT ON THE BANK STATEMENT * Deposits in transit -- moeny that has bene received by the company and sent to the bank but is yet to be processed and posted to the account by the bank * Outstanding cheques ITEMS ON A BANK STATEMENT THAT ARE NOT RECORDED BY THE BUSINESS * bank collections * electronic funds transfers * service charges * NSF cheques * interested earned or paid on account

Locks, CCTV, safes, restricted area access and control, passwords

Identify some common safeguards

Define internal control and the types and the integrated components

Internal control is the process effected by the entity's board of directors, management and other personnel designed to provide reasonable assurance regarding the acheivment of objectives relating to operations, reporting and compliance Internal control can be preventative or detective * preventative -- preventative controls are policies and procedures designed to prevent errors, inaccuracy or fraud before it occurs * detective controls are those deesigned to identify problems that already exist

Adv and dis of double entry

It provides a means of tracking transactions through to the final accounts. It is systematic. It is logical and relatively easy to follow. It can be quite ponderous and time-consuming. It does not deal with large volumes of transactions easily.

What is a journal and what are the rules and steps to recording (include ledger account)

LEDGERS * the ledger is a book that is used to record transactions using the system of double entry bookkeeping * in this system, every type of asset, liability, equity revenue or expense that is needed in the financial statements has an indivudal account in which everything that affects it is recorded * eacch account has a debit and a credit side * to identify what goes into these accounts a subsidiary record e.g. a general journal, is used to make record keeping more manageable * expenses, assets and drawings are on the debit side and OE, liabilities, revenues and capital is in the credit * a credit entry is anything that is a minus to asset or expense and a plus to capital, revenue and liability * a debit entry is anything that is a plus to the asset or expense and a minus to the equity, revenue or liability account JOURNALS A journal is a list in chronological order of all of the transactions of a business * the effect of business transactions on assets, liabilities, equities, revenues and expenses are first recorded in a journal (subsidiary record) * they are referred to as journal entries * the purpose of the general journal is to act as a first point of entry for data so that we can ensure that every transaction is recorded in sufficient detail to be coreclty posted in subsequent accounts. It is highly unlikely that it will be used for all transactions but it is a necessary part of the recording process With recording in the journal: 1. Identify the transaction from the source documents 2. Undertake transaction analysis 3. Specify the accounts affected 4. Apply debit/credit rules 5. Record transaction with a description Rules of journal entries i.e. what they all must contain: * The date that the business transaction occurred * Details of the amount to be debited (name, account number and amount) * Details of the accounts to be credited (name, account number and amount) * A narration or description of the transaction

List the main groups that use accounting reports of a business entity and why they would want to use it

Managers -- they use special purpose reports such as management reports which include both mgmt + fin acc info GENERAL PURPOSE REPORTS * Mangers + Governing bodies * resource providers e.g. investors, emplyees, suppliers, creditors * recipients of goods/services e.g customers, cients, beneficiaries * reviewers and overseers e.g. govt, agencies, employer groups SPECIAL PURPOSE REPORTS, VARIOUS TAX RETURNS E.G. GST INCOME, PAYROLL * govrnment agencies

Difference between bills and accounts receiveable

Bills is negotiable in the time period whereas accounts is not

Explain why accounting information is generally considered to be useful and why you need to know the basics of accounting

Why we need accounting information: * Accounting report information should reduce uncertainty about the financial position and performance of the business * It should help answer questions concerning the availability of funds to pay owners a return, to repay loans, to reward employees etc Importance of knowing the basics * Accounting within a business is a central part of its management information system * Managers will make decisions concerning the alocaitno of resources on the basis of this information * Examples: continue with or expand certain business operations, invest in particular projects or sell particular products * These décisions affect all user groups thus they all must have a basic understanding of accounting * Important aspects of accounting and finance that all who work in a business should be familiar will include: * How financial reports should be read and interpreted * How financial plans are made * How investment decisions are amde * How businesses are financed

What is an asset and its characteristics? Provide examples

"A resource controlled byt he entity as a result of past events, and from which economic benefits are expected to flow to the entity" The assets can be tangible (items with a physical substance) or intangible (no physical substance e.g. copyrights, trademarks, patents, goodwill) * Cash * Freehold premises * Machinery and equipment * Fixtures and fittings * Patents and trademarks * Accounts receivable * Investments MAIN CHARACTERISTICS By AASB conventions. If it doens't ahve all 4 of these characteristics then it isnt an accounting asset * Expected future economic benefit * The business has exclusive right to control the benefit * The business doesn't necessarily have to purchase it, just have control * For example, leasing a building for 15 years means you can control the building for 15 years. Therefore, you record it as an asset because you have long term control * The benefit must arise from some past transaction or event * The asset must be capable of reliable measurement in monetary terms There are intangible assets those that proivde expected future benefit but have no physical substance, not on balanace sheet OR tangible i.e. assets that have physical substance

What is AASB

* AASB Standards govern measurement rules and level of disclosure * Australian Accounting Standards Board is responsible for technical accounting standards * Australia has adopted International Accounting Standards. This means you can work any where in the world because you have an understanding of these standards * These standards apply to both public and private public sector -> private sector -> public sector <- public PUBLIC SECTOR The internaltional accounting standards board (AASB) sets IFRs which are used as a basis for equivalent Australian Accoutnig standards PRIVATE SECTOR * professional accoutnants apply australian accuntig standards PUBLIC SECTOR * The federal governemnt through the financial council (FRC) and the Australian Accounting Standards board (AASB) reguales accounting standards

Why is the entity concept important

* Allows the financial position of different entities to be separated and evaluated (e.g. owner vs business) * Tax purposes for the businesses and owners * Measures the performance (profitability) of different entities without the entities financial positions being intermingled * Allows the correct audit of the records of the different entities * Allows the entities to be taxed correctly * Allows comparability of similar entities e.g. business to businesses for investment and other decisions . Thus it is a business for which a separate set of accounting records is maintained. The organisation should engage in clearly identifiable economic activities, control economic resources and be segregated from he personal transaction of its officers, owners and employees From an accounting perspective, this is necessary to facilitate transaction recording and reporting in relation to the business or operating activities of that entity Legally, The entity structures (besides company) are not separate legal entities i.e. no distinction between the business and the owners of the business

Key elements of internal control and ways to implement internal control

* An honest and capable staff * clear system fo responsibility, authority, delegation and separation of duties * proper procedure for processing transactions * production of suitable documents and record to create an audit trail * appropriate control over assets * independnet verification of performance * processes for checking the IT systems WAY TO IMPLEMENT * Develop an organisation chart and clear job descritpiosn * Prepare and use a procedures manual * Use comparative financial statements * Complete relevant reconciliations * Number appropriate documents * Hire good people with good references * Appropriately train staff * Utilise staff feedback process * Assign appropriate responsibility for compliance * Separate record keeping from custodianship of assets * Require 2 signatures on payments above a specified amount * Separate purchasing from receiving * Rotate key jobs * Process customer complaints * Keep detailed records of assets and list access to the records * Have clear guidelines about personal use fo assets * Verify that records of assets reflect assets in your possession * Have safeguards to protect documents and computer files * Regularly change passwords * Use firewalls and protective devices * Conduct an annual audit * Deposit receipts intact * Reconcile bank stamens indpenendlety * Reqruie annual vacations to be taken * Have and enforce a conflict of interest policy

What is the cost principle

* Assets and services acquired should be recorded at their actual cost (historical cost * Historical cost is objective but does not reflect current cost and hence may be suitable for assets whose value does not change much. It prevents the overvaluation of an asset when asset appreciation Amy be the result off volatile market conditions * Valuable for assets whose value does not change * Fair value — more flexible however it is more subjective so not used on every asset, only those that appreciates a lot * Land is recorded at historical costs * E.g. if the garage purchases petrol pumps for $25000 it would record these at the same amount

Give examples as to why it is important for accounting information to have qualitative characteristics

* For investment decisions all these characteristics will allow a shareholder to compare financial statements between countries and use this reliably to invest in companies * To raise finance— companies preparing accounting information fulfilling these characteristics will allow shareholders in different countries to decide if they should invest in a company. Comparability, timeliness and faithful representation will be essential among other characteristics * Stakeholders e.g. banks will be able to use the accounting information prepared by companies to evaluate the risk levels of companies and to lend companies money. * Suppliers and customers want to know how your business performs (account payable, performance, they hope your information is relevant and reliable)

Reflecting on Week 3's tutorial, why is necessary to organise accounting information as Account Types with Account Numbers?

* From journal to ledgers, the account numbers and names make it easier to post manually * It is easier to collate information about a particular account with a unique identifier i.e. account number and also access aggregating e.g. ledger account information through this account number * Account types allows the accounts to be organised in the balance sheet and hence understand the key financial statistics of the business e.g. how much of liabilities does a business have, how much equity etc

Describe cloud computing

* Likely to be used by large organisation * A small to medium sized business more likely to use smaller computerised accounting system and still use manual systems in part * Computerised accounting systems usually have same principles as manual systems e.g.banking transactions and reconciliations, sales, expense, contacts etc in MYOB * Likely to beused when" * High volumes of transactions * Supporting documentation e.g. invoice, cheques etc or detailed analysis are needed * Savings can be achieved through automatic postings * There is scope for using the data provided for range of other useful purposes e.g. analysis or planing Cloud Computing * Use and store data file on online server instead of physical computer * This means as long as the internet is working the accounting system is reliable and current * Advantage * Minimises redundant bookkeeping work of most businesses as it can provide real time data i.e. real time accounting * Back up is automatic which is good for data security * Business can link its accounting system to external parties e.g. banks. * Can provide automated bank reconciliation. This means the traditional paper trail of documents replaced by the electronic audit of systems * Small business owners sending invites to organisations such as ATO via mobile devices * Disadvantages * Concerns about internet reliability e.g. hacking, both in terms of access and unauthorised user access * Concerns about the reliability of cloud accounting system provider e.g. temporary system outages, company reputability and longevity * Concerns about privacy and legal issues e.g. there are regulations that some types of information should not leave the country of origin Main elements of computerised accounting system * Computerised interface usually has a number of sub systems e.g. debtors, credits, banking etc which are further divided and have individual records * Sound system of coding so the system can it can provide information from detailed to __ level * Properly coded information can be input into the system through a variety of ways e.g. barcodes * Accounting system records are automatically updated and can be generated for aspects of each subsystem e.g. sales, purchases, inventory etc * The files provided to business enables them to produce a range of reports (costing and management reports historic and forecast analysis) which could not be easily done with a manual system

How does double entry bookkeepikng mirror he first principles appraoch

* The first principles approach is producing a statement of financial position and statement of financial performance through recording a range of transactions using a series of pluses and minuses * This approach will not cope with high volumes of transactions * The system of double entry bookkeeping allows us to handle large volumes of data when producing a statement of financial position and statement of financial performance

Why do we need the folio and narrative section in the recording process

* These act as a means of cross referencing the entries, and thus provides a means of tracking.

Provide a brief overview of the recording process of transactions to the balance sheet

1. TRANSACTIONS -- all of them are recorded 2. SUBSIDARIRY RECORDS (general journal) * subsidiary records used by all business however they may use a variety of records not just general 3. Ledger Accounts Individual accounts covering asssets, liabilities, equities, revenues and expenses * Used by all businesses 4. Financial statements * statement of financial position (balance sheet) * statement of financial performance (income statement) required by all businesses

What is accrual accounting and its difference with cash accounting

ACCRUAL Accrual accounting measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. CASH Cash accounting is an accounting method in which payment receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid. In other words, revenues and expenses are recorded when cash is received and paid, respectively. DIFFERENCES * Cash flows are easy to recognise however do not provide an adequate measure of performance of most enterprises * accrual accounting employs wider criteria to decide whether revenue has been realised or expense been incurred. This provides more information results which are useful to those using accounting reports. General consensus that it provides a better view of financial position and performance than cash based * as tests other than cash flow are less easy to define precisely, some certainty and objectivity is lost i.e. there is more scope for the overstatemetn of assets and understataement of liabilities with cash based accounting.

Classify assets and why are they always classified State the conditions in whcih the classifications wil occur

ASSETS ARE CLASSIFIED AS CURRENT OR NON CURRENT CURRENT ASSETS * these are not held on a continuing basis. It expects to realise the asset, intends to sell or consume within its normal operating cycle * it holds the asset primarily for the purpose of trading * expects to realsie the asset (cash and other assets expected to be consumed or converted into cash) within 12 months after the reporting or operating cycle * the asst is cash or cash equivalents uneless the asset is restricted from being exchanged or being used to settle a liability for at least 12 months after the reporting period NON CURRENT ASSETS * held for the purpose of generating

COMPARE AND CONTRAST FINANCIAL AND MANAGEMENT ACCOUNTING

Accounting has 2 areas: 1. Management accounting - internal user focus 2. Financial accounting -- this is concerned with providing users with useful information (external user focus or primary users) * e.g. how to use financial statement analysis to determine for example, whether or not to invest into a certain company COMPARISONS The main difference is that management is less constrained than financial 1. Definition * Financial -- preparation and presentation of financial information that allows users to make economic decisiosn about the entity * Management -- provides economic information for internal users. This is concerned with providing managers with the information they require for the day to day running of their business (internal user focus) 2. Focus * Financial -- external user focus * Management -- internal user focus 3. Nature of the reports produced > Financial * They produce general purpose financial reports that are useful for a broad range of users * includes transaction statements and financial statement analysis * in the transaction statements: - statement of income (comprehensive income) - statement of financial position (balance sheet) - statement of changes in equity - cash flow > Management * planning + budgets, pricing and costs * they produce specific reports which are designed with a particular decision or manager in mind 4. Level of detail > Financial * provides users with a broad overview of the position, performance and cash flows of a business for a particular period * details often lost > Management * the reports are very detail to enable managers to make decisions 5. Restrictions > Financial * Financial reports is subject to legal and accounting regulations to ensure the content is presented in a standard form > Management * since it is only for internal use there is no restrictions to the format and content 6. Reporting interval > Financial * produce on an annual basis, sometimes half yearly or quarterly > Management * produced as frequently needed for managers to check progress 7. Time horizon > Financial * reflect performance and position of the performance to date i.e. backward looking * sometimes incorporate future expectations > Management * provide info on the expected future and past performances 8. Range of information > Financial * Concentrate on info that can be quantified in monetary terms * Emphasis on objective verifiable evidence when preparing reports > Management * produce additional reports on non financial matters e.g. the physical quantity of inventory (stocks) and output * intended for less objective and verifiable for managers

What is accounting

Accounting is the collection, analysis and communication of economic information. This information can be used as a took for decision making, planning and control The primary objective of financial reporting is to provide information useful for making investment and lending decisions Decisions include: * what to buy? * is it goo dvalue? * what to sell? * how much to price a product?

What is accrual accounting

Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term "accrual" refers to any individual entry recording revenue or expense in the absence of a cash transaction.

There is no options in MYOB to deal with identified errors. The only possibility is to rectify the errors immediately and hence balance the books. Any errors related to the bank can also not be rectified or taken note off by MYOB. Helen the MYOB version fo bank reconciliation is fairly restricted in its use

Accounting software is designed to operate under set parameters. Based on the purposes of undertaking a bank reconciliation does the treatment of the identified bank error in MYB meet the requirements?

Relationship betwen expenses and assets

An asset provides benefits. When it no longer provides benefits it is an expense. Therefore assets are prepaid expenses (don't use this term) * When an asset goes down the expenses go up e.g. fuel is an asset that increases my assets by 100. However, once I use it up it is an expense. Land is never an expense

How to create a final set of accounts

At the end of the period the accountant prepares the financial statements WORKSHEETS -- WHAT ARE THEY? * a worksheet is a TOOL to assemble the information required to adjust the accounts and prepare the final financial statements * they are made after the adjustmenets but before the closing entries i.e.they contain the adjustments but profit an loss are shown with their balances * a worksheet is not a substitute for journals and ledgers and does NOT FORM PART OF THE FINAL FINANCIAL STATEMENTS While a worksheet can help you organise the end of month adjustments and prepare financial statements: * the worksheets is just a tool to organise the data * it is not part of your accounting information system so you will still need ot prepare+post adjusting entries Steps: 1. Using the adjusted trial balances, put in all the account titles, and the unadjusted general ledger balances in the columns 1-3 2. Enter the amounts of the end fo period adjusting entries in the adjustment columns 3. Prepare the adjusted trial balance (6-7) by adding the adjustments (column 4-5) to the unadjusted trial balance (2-3) 4. Extend adjust balanaces of revenues and expense to the income column and the remaining items to the balance sheet column COLUMNS * column 1: account titles * trial balance (debit and credit) * adjustments (debit and credit( * adjust trial balance (debit and credt) * profit and loss (debit and credit) * balance sheet (debit and credit) Rules: the total of all 5 debit columns should equal all 5 credit columns. if A PERIODIC INVENTORY SYSTEM IS USED THE COST OF SALES DOES NOT APPEAR ON THE SHEET DIRECTLY

Describe the 2 types of posting

COMPUTERISED * account name on the LHS at the top and the accoutn number on the RHS on he top * then label the date, description, journal reference, debit, credit, balance and then whether the balance is in debit or credit * for example, if the cash at bank balance is positive then put in debit but if it is not then put in credit * if it is liabilities and the balance is positive then it is in the credit but if the balance is negative then but it in the debit T ACCOUNTS * these act as manual ledgers, They are normally not used but if they are it is usually by the small businesses WRITE: date, item, journal reference (!!) amount Writing opening and closing balance * if the debit is higher than the credit, then write the closing balance in the credit area to balance both sides. HOWEVER, this does not mean anything. Then write opening balance of the next month on the other side (must always be on the opposite side). NOTE: the closing balance is on the DEBIT SIDE * only write balance on permanent accounts

What are the 5 integrated components of internal control

CONTROLLED ENVIRONMENT * the set of standards, processes and procedures that provide the basis for carrying out internal control across the organisation e.g. integrity and ethical values RISK ASSESSMENT * a precondition fo risk assessment is the establishment of objectives linked at different levels of the entity CONTROLLED ACTIVITES * the actions established through policies and procedures that help ensure that management directives to mitigate risks are carried out INFORMATION AND COMMUNICATION * information necessary for entity to carry out internal control. Internal communication is the means info is disseminated through the organisation MONITORING ACTIVITIES * ongoing evaluations, separate evaluations or some combination of the 2 used to ascertain whether each of the 5 components of internal control are present and functioning

* In electronic bank reconciliation there is no possibilities for the cash at bank balance and the bank balance stamens to not be the same i.e. the closing balances of both cash at bank and bank statements must always balance * In a manual setting the bank reconciliation process identifies where the differences are and address the nature of the differences

Can you see any advantage of electronic bank reconciliation versus a manual bank reconciliation? Discuss

Difference between accruala nd cash account

Cash -- accounting involving cash Accrual -- The cash method is a more immediate recognition of revenue and expenses while the accrual method focuses on anticipated revenue and expenses.

* Accrual: * Revenue is recognised on the basis that it has been earned irrespective of whether the cash receipt is in arrears or advance * Revenue is deemed to be earned when it is realised; realisation being closely linked to the probability of occurrence and reliability of measurement * N.B. recall that manual adjustments are sometimes required for accrued revenues and unearned revenues * Cash accounting means recognising transactions at the time when cash flows take place

Cash vs Accrual recognition on the income sheet

Bodies affecting accounting in Australia

Corporations Act * Enforced by ASIC * Needs to be followed by private and listed companies * Legislation regulating companies in Australia ASX (Australia Securities Exchange) * they operate Australia's largest sharemarket., providing a transparent and regulated environment where companies and investors come together ASX Listing Rules * A entity must be admitted to the ASX and sign agreements to comply with the listing rules * the listing rules serves the interest of listed entities and investors in order to maintain the reputation and integrity of the ASX market ICAA, CPA, Institute of Public Accountants * Accoutning principles, standards, ethics and disciplinary procedures of accounting * These bodies regulate the accounting profession and ensure they act ethically ASIC (Australia Securities Investment Comission) * they enforce the corporations act * they can pursue legal action against companies if they violate these rules ACCC( Australian Consumer and Compeitition Commission) * Enforce the Competition and Consumer act 2010 * * Astraualin Consumer and Competition Commission * Enforce the Competition and Consumer Act 2010 * Ensure individuals comply with Australian competition, fair trading and consumer protection laws administered under the CC act 2010 Reserve bank of Australia * Their role is to conduct Australia's monetary policy and issues it currency * Seeks to foster financial system stability and promote the safety and efficiency of payments system APRA (Australia Prudentail Regulation Authority) * regulate financial bodies e.g. insurance companies ATO (Australian Taxation Office) * role is to achieve confidence in the administration of Australia's taxation and superannuation systems

What are the steps completed each month and those completed at the end of the financail period or half yearly in the process of double bookkeeping

EACH MONTH * identify new transactions * record in the journal * prepare the trial baalcen * repare internal management reports if needed after doing the necessary adjustmnets FINAL * prepare end of period adjustments * prepare financial statments

What is bank reconciliation and how does it contribute to good internal control

DEF: A bank reconciliation statement is a summary fo banking and business activity that reconciles an entity's bank account with its financial records. OR The purpose of bank reconciliation statement is to explain any differences between the bank balance at the end of the period as shown in the bank statement and the firm's ledger respectively. Any errors discovered may be rectified before completing the journals and postings for the period * the statement outlines the deposits, withdrawals and other activities affecting a bank account for a specifi cperiod HOW IT CONTRIBUTES TO GOOD INTERNAL CONTROL * the use of bank reconciliation contribtues significantly to good internal control over cash by: - minimising the amount of cash account - double record of all the bank transactions; one by the company and that of the bank * it helps the company safeguard its cash by using the bank as a depository and clearing house for cheques received and written * thus it is a useful financial control tool to thwart fraud

Define owners equity and the equation definitions

DEFINITION The claim of the owners' against the business or: "the residual interest in the assets of the entity after deducting all its liabilities" * due to the entity concept the owner can make a claim against a business i.e. any funds the owner contributes to finance the business is regarded as a claim against the business in the statement of financial position (balance sheet) There are 2 additional accounts to the owner's equity contribtued acocunt * owners equity retained -- represents the profits left in the business by the owner * reserves -- represents 'special purpose' owners equity accounts e.g. profits reserves. These represent the ownership interests in the assets not the assets themselves. Reserves are not separate deposits of cash available for one purpose OE = capital + revenue - expenses - drawings - dividends REVENUES * the amount received or to be received from customers for the sale of their products or services e.g. sales, performance of services, rent received, interest received EXPENSES * amount that have been paid or will be paid later for costs that have been incurred to earn revenue e.g. salaries and wages, electricity and gas, supplies used, advertising

What are liabilities, examples (and their definitions) and characteristics and types

Definition A liability is a present obligation of the entity arising from past events, the settlement which is expected to result in the outflow from the entity of resources embodying the economic benefit * Most liabilities represent legal clams by external parties against the entity for satisfaction in cash or the provison of a goods or service Examples * Accounts payable * Staff entitlements * Loans and other credit facilities * Warranty provisions and other social or moral obligations * Provision for employee bonuses or owners' distribution Characteristics (By AASB) * Probability of occurrence (in the case of liabilities, it is more likely than not that a future sacrifice of economic benefits will occur) * Reliability of measurements (in the case of liabilities the amount of the claim can be determined with acceptable precision or accuracy) Other types * Provisions — estimated liabilities for which there is greater uncertainty regarding the amount or timing of the amount that for a normal liability * E.g. you put money aside just incase the liability occurs e.g. warranty provision * Contingent — a potential liability that might arise in the event of a particular event occurring i.e. a liability that has not happened but the probability of occurrence is 50 percent e.g. being sued for defamation * Will become a liability contingent on that event happening (50 percent chance) * Not recognised in financial statements until the event actually occurs, but often disclosed in a note in the annual report

PROFIT MEASUREMENT AND RECOGNITION OF EXPENSES Definition: Expenses -- measure the outflow for assets e.g. cash or increase in liabilities that result from trading and generating revenue Recognition: 'Matching principle' * the expenses should be matched to the income they helped generate i.e. the expenses associated with a particular item of revenue must be taken into account in the same period that the item of revenue is included. THis means that the expenses in the income state for the period may not be the same as when the cash paid for the item during the period (accrual accounting) This gives rise to 3 possibiliites when recognising expenses for a particular period 1. The cash payments are the same as the expenses incurred (benefits used up or consumed) 2. The cash payments are less than the expenses incurred 3. The cash payments exceed the expenses incurred Manual adjustments are sometimes needed for accrued expenses, prepayments and depreciation

Describe expenses in relation to definition, recognition, classification and measurement.

Segregation of duties is essential to internal control. It is based on the principle that the a process can be split into phases which enable the work of one person to be checked by another. Careful examination of work flows and associated systems should enable the internal control advantages to be achieved

Discuss segregation of duties as an internal control device

How can the bank be used as a control device

Documents used to control a bank include: * deposit slips * cheques as multiple people are required to sign it * bank statement * bank reconciliation. Bank reconciliation contributes significantly to good internal control as it minimises the amount of cash that is kept on hand and provides a double record of all bank transactions: one by the bank and one by the business * helping a company safeguard its cash by using the bank as a depository and clearing house for cheques received and written

What is double entry bookkeping and its rules

Double entry bookkeeping means to record the dual effects of each business transaction i.e. every transaction that a company makes is recorded in a debit and credit account Assets = liabilities + owner's equities OE = capital + reveue - drawings - expenses - dividends OR asset + expense = liabilities + equity at start of period + injections + revenue Assets+expenses are on the debit side and liabilities+equity are on the credit side DEBIT AND CREDIT * A debit entry is an increase in the assets or expense account and a minus to an equity, liability or revenue account * A credit entry is a minus to the asset or expense account and a plus to an equity, liability, or revenue account

What are the challenges does e commerce pose to internal control and what are the corresponding special considerations

E commerce presents new challenges to internal control * the electronic transactions don't have a paper control * internal control needs to be changed from one that is intra-organisational to what that is interorganisational * new elements of risk e.g transaction integrity * internet is public rather than a private network * lack of technical expertise * legal and technical issues Special considerations for e commerce and internal control * internal controls need to consider cybersecurity * many issues are international making consensus difficult * threats are happening more quickly than regulations * threats include e.g. stolen credit card numbers, computer viruses and Trojan horses

Types of e commerce internal control

ENCRYPTION * def: the coding of messages ot make them unintelligible to any user not authorised to red the message. Ensure confidentiality * how it works: plain text messages are rearranged using some mathematical process and they cannot be read by anyone who doesn't know the process FIREWALLS * Def: they limit access to a local network to keep out intruders * Firewalls prevent unauthorized internet users from accessing private networks connected to the internet, especially intranets, ensuring confidentiality * They can block e.g. virises, spam, unwanted internet traffic, hackers * they enable members of the local network to access the internet while keeping non members out fo the network * there are usually several firewalls built into a local network OTHER METHODS * ensure the proper knowledge and skill of staff regarding the effect of ecommerce * use fraud prevention tools to prevent risk * comply with Payment Card Industry Data Security standards * Ensure accessibility to records for audit purposes * align e commerce with the overall strategy * be aware of the implications of outsourcing * extend and expand policies to cover e commerce * ensure legal and regulatory issues are understood * use firewalls and encrypt messages

What is an accrued liability

Expenses incurred but not paid

USEFULNESS OF THE STATEMENT OF FINANCIAL POSITION * It provides insights about how the business is financed and how its funds are deployed * It provides insights into the liquidity of the business — i.e. the ability of the business to meet short term obligations from liquid (cash and near cash) assets * It can provide a basis for assessing the value of the business * It provides a means of assessing relationships between assets and claism * It provides insights into the mix of assets being held by the business * It can help users in assessment performance

Explain the main ways in whcih the statement of financial position can be useful for users of accounting information

The purpose of the income statement is to measure and report how much profit (financial progress or wealth) the business generated voer a period * profit = the difference between OE(capital or income) and the decreases in equity (expenses) * income = revenue from operating activities + other gains not from operating activities * expenses = the outflow of assets ( or increases in liabilities) incurred as a result of generating revenue RELATINOSHIP * the balance and income sheet are related but not substitutes * the income sheet links the statement of financial position at the start of the period with that at the end of the previous * at the start of the new reporting period the balance sheet shows the opening wealth position and after the period the income statement is prepared to show the wealth generated over that period. * the balance sheet is then also prepared to show the wealth position at the end of the period which will reflect the changes in wealth that have occurred since the previous statement Assets end = Liabilities (end) + OE (beg) + profit (or - loss) + contributes - drawings or dividends

Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position

Provide an overview of the main financial reports prepared by a business and hwo they are used for external users and internal

FINANCIAL ACCOUNTING Financial statements are designed to provide a picture of the overall financial position and performance of a business. The reports must answer the following questions: 1. What is the cash movement?: i.e. cash in and out over a particular period 2. How much did the wealth increase over the time period as a result of operating and other activities? 3. What is the financial position of the business at the end of the period? The Type of Statements -- these statements provide an overall picture of the financial health of a business and the cash movement 1. Statement of cash flow for the period 2. Profit and loss statement -- this is the statement of the financial performance of the business over that time period. For limited companies the published statement is now called the statement of comprehensive income 3. Balance sheet -- this is the statement of the financial position of the business at the end of the period 4. Statement of changes in equity. This is only important for limited companies. Equity is used to indicate the share of the business which represents the owners' interests All the statements combined are called the final accounts of the business * The statement of financial performance (profit and loss) and statement fo cash flow are concerned with measuring flows of wealth and cash over time. The period may be one day, one month, one year etc * The statement fo financial position (balance sheet) is concerned with the financial position (wealth) at a particular moment in time External users * as the reports are usually backward looking, for an external user it can provide feedback on past performances and help identify trends for future performance * the reports can also be prepared using projected data to assess likely future profits,cash flows etc but this is usually for internal decision making purposes MANAGEMENT ACCOUTNING Use financial and non financial information to achieve good decisions e.g. predict future financial performance as part of long term planning, budgeting a a means of both planning and control, cost control and savigins, pricing and project appraisal

* Non current assets have lives that are either finite or indefinite. Initially they are recorded at their historic costs * Non current assets with finite lives — used up over time and their cost is recognised as an expense in each period (depreciation or amortisation) * Non current assets with indefinite lives — may or may not be used up over time and are not subject to routine annual depreciation over time e.g. land FAIR VALUE Definition -- current market value i.e. the exchange values in an arms length transaction * Fair values can be used for recording on current and non current assets provided these values can be measured reliable (alternative to historic) * Revalutions can be used only where there is an active market, thereby permitting fair values to be properly determined * Intangible assets are seldom revalued to fear values because active markets for them do not exist * Once assets are revalued the frequency of revaluation is important as assets recorded at out of date revaluations can mislead users * Example: (look at revaluation reserve in OE) IMPAIRMENT Definition -- the amount of loss that must be written off for an asset in the situation where the carrying amount of the assets exceeds its recoverable amount. Can also apply for current assets e.g. inventories Why it occurs * when a non current asset suffers a significant fall in value this fall may lead to the carrying amount of the asset being higher than could be recvered from the asset through its continued use or through its sale * this fall coudl be caused by changes in market conditions, technological obsolescence etc * therefore the asset is impaired

How are assets valued and what is fair value and impairment

ON THE INCOME: Profit before tax (value) Tax at __ percent (value2) Profit after tax (value - value2) ON BALANCE SHEET Current Liabilities Income Tax Payable (value2) Equity (will include the current year profit or the profit after loss (value-value2)

How do we treat income tax in the statement of financial performance and position

There are 3 main influences on the accounts in the statement of financial position: 1. Traditional accounting conventions that have underpinned the practice for decades 2. More recent theoretical developments in conceptual framework projects 3. Continuing development of professional and statutory accounting standards CONVNTIONAL ACCOUNTING PRACTICE * Accounting is based on a number of conventions i.e. rules in order to deal with practical problems experienced by preparers and users of financial reports * i.e. the Generally Accepted Accounting Principles (GAAP) which are the principles, assumptions or accepted ideas on which accoutnign rules, records and reports were or are based Conventions: * Business entity convention — for accounting purposes, the business and its owners are treated as quite separate and distinct * Historic cost convention — holds that assets should be recorded at their historic (acquisition) cost. * Some accountants prefer this method of valuing assets on some current assets * Against: historical costs are unlikely to help asset current financial position, recording fair value would give realistic view of financial position. * For: However, it is difficult to define a degree of objectivity with current values. It can be more reliable to produce information based on historic costs * Prudence convention — financial reports should err on the side of caution * Losses should be all recorded at once in full (both expected and actual losses) * Recognise profits when they are realised * More emphasis on expected losses than expected profits * Going concern (or continuity) convention — holds that financial statements should be prepared on the assumption that the business will continue operations for the foreseeable future i.e. there is no intention or need to liquidate the business * Dual aspect convention — each financial transaction has 2 aspects and each aspect must be recorded in the financial statements i.e. double entry bookkeeping * Money measurement convention — accounting should only deal with those items which are capable of being expressed in monetary terms * Not all resources held by the business can be measured in monetary terms so some may be excluded from balance sheet. This limits the scope of the balance sheet * Examples (intangible non current assets): * Goodwill * Patents * Trademarks * Copyright * Human Resources * Stable monetary unit convention — holds that money which is the unit of measurement in accounting, will not change in value over time OTHER THINGS THAT INFLUENCE THE CONTENT AND VALUES IN THE BALANCE SHEET * how assets are valued and fair value * impairment * conceptual framework

Identify the main conventions that influence the content and values in a statement of financial position

BALANCE SHEET DEFICIENCIES * potential conflicts wtih the GAAP e.g. the monetary unit is not always stable and GAAP does not take fluctuations in exchange rates or inflation into account * the use of judgemenet and the requirement to make estimates or guesses about future events e.g. uncollectible account, salese returns, useful lives of assets * the wide range of methods which are generally accepted under GAAP but which reslut in different financial figures e.g inventory costing and asset depreciation methods

Identify the main deficiencies or limitations in the statement of financial position

How can you determine the profit or loss from the worksheet

If the income statement has a credit higher than the debit, then the company is at a profit, where the profit = credit-debit If the income has a debit higher than the credit then the company is at a loss

Identify the main purpose of a business (which recognising a range of other influences) and explain the traditional risk return relationship

MAIN OBJECTIVE * the main objective of a business is to enhance the wealth of the owners * however the needs of the groups associated with the business need to be considered, and the satisfaction of them is usually consistent with increasing the wealth of the owners long term * e.g. a dissatisfied workplace may result in low productivity which can negatively affect the owner's wealth Short term gains and long term problems * unconstrained wealth maximisation can damage individuals, society and the environment * businesses are pressured to generate money for shareholders which can lead them to cut corners in order to improve current profit at the expense of future profit e.g fraud * generating wealth for owners is not equivalent to maxmising the current year's profits. Wealth creation is concerned with the long term i.e. profit for not only now but also future years BALANCING RISKA ND RETURN * you need to balance the required return with the risk level associated with the business * the relationship between balancing risk and return is important for setting financial objectives. Owners need a min level of return to induce them to invest into a business at all however they also need additional return in order to compensate for taking higher risks. The higher the risk the higher the return

How are businesses managed and what is the role of accounting in the business context planning and contrl process

MANAGING * Strategic management is the process of identifying, choosing and implementing activities that will ehance the long term performance of an organisation * businesses must plan for the future and planning encompasses making decisions about the best course of action Steps in planning 1. Setting objectives or mission of the business i.e. what they want to achieve 2. Setting long term plans i.e. how the business plans to achieve these objectives over a certain period of time 3. Setting detailed short term plans and budgets. Budgets are financial plans for the short term and their role is to convey long term plans into actionable blueprints for the future and usually defined as targets in areas such as cash receipts and payments, sales etc IMPORTANCE OF ACCOUNTING IN THE BUSINESS CONTEXT 1. Planning * planning and decision making is the responsibility of managers, however since planning is often expressed in financial terms accountants provide assistance in these areas 2. Control -- this is the process of making planned events actually occur i.e. compelling tenets to conform to the plan * accounting is useful because it ispossibel to state both plans and actual outcomes in accounting terms and thus make the comparison between the 2 eays PLANNING AND CONTROL PROCESS (need to write)

Compare types of financial accounting reports

NATURE * income statement/comprehensive income -- flow report (for the period) * balance sheet (financial position) -- static report (end of the period) * cash flow -- flow report (for the period) BASIS OF TRANSACTION RECOGNITION * income statment -- accrual * balance sheet -- accrual * cash flow - cash RELATED ELEMENTS (ACCOUNT TYPES) * income - income + expenses * balance - liabilities, assets + owners equity * cash flow - the change in cash or cash equivalents for the period

Importance of ethics in accounting, who enforces it and examples

Many of the scandals that have occurred in the past have been the result of the pressure on companies to generate wealth for investors or the greed of executives whose pay is linked to the financial performance of the company Tighter regulatory frameworks and code of ethics have been made as a result of these scandals and the rise of illegal and unethical behaviour For example, the International Federation of Accountants (IFC) are an organisation with a purpose to "develop and enhance a worldwide coordinate accounting profession with harmonised standards." They developed a Code of Ethics which major accounting bodies in Australia such as the CPA and ICAA use as a basis for their Code of Ethics for Professional Accountants: 1. Integrity 2. Objectivity 3. Professional Competence and due care 4. Confidentiality 5. Professional behaviour EXAMPLE Enron was accused of complicating financial arrangements to obscure losses and inflate profits to mislead investors What they did: * They formed a lot of subsidiaries, whenever it made expenses it went to other subsidaries * They reported a high amount of profit 2 bill but they had made losses of 10 billion dollars * The SEC (US of ASIC) took legal action against them * Enron managed to find grey areas to create fraud * The company would build an asset e.g. a power plant and immediately claim the projected profit on its books even though it hadn't made one dime from it. If the revenue from the power plant were less than the projected amount instead of taking the loss, the company would then transfer the assets to an off the books corporation where the loss would go unreported. This type fo accounting enabled them ot write of losses without hurting the company's bottom line * 74 million dolars was the amount that shareholders lost in the 4 years leading up to their bankruptcy Influence * Because fo Enron, you can now sue the directors of the company * this led to new regulations and legislation to promote the accuracy of financial reporting * led to compliance measures such as the financial accounting standards board raising its ethical conduct * In July 2002 President Bush signed the Sarbanes Oxley Act which heightened the consequences for misleading financial statements as a means of defrauding shareholders

What are the limitations fo internal control

Most internal control measures can be circumvented or overcome. Limitations include: * cost versus benefit * cost of establishing a procedure should not exceed the expected benefit * human element -- collusion is when two or more employees work in team with a purpose to defraud the firm. An individual can also can dishonestly and perpetrate fraud * size of the business * dishonesty and judgment errors * unexpected transactions * management override -- this is the intervention by managers in handling financial information and making decisions contrary to internal control policies * weak internal control

RECOGNITION It is possible to recognise income at different points in the production/selling cycle Main criteria for recognising revenue: * the amount of revenue can be measured reliabilty * it is probably that economic benefits will be received * fi the revenue comes from the sale of a good then the ownership and control of the items should be passed to the buyer Since some contracts for both goods and services can last for more than one reporting period thus they may be broken down into different stages to facilitate revenue recognition throughout the contract provided that the outcome of the contract as a whole can be estimated reliability e.g. a motor car dearler recognising revenue on a customer sale could be: * at the time the order was placed * when the car was collected by the customer * when the customer pays them LONG TERM SERVICES AND CONTRACTS * some contracts last more than one reporting period and services for more than a year. Thus if they only recognise when the service/contract is fulfiled the income statement could give a misleading impression of the wealth generated in various reporting periods how to reconcile * thus, the revenue recognition may be broken down into stages and the revenue recognised as eahc state is complete * if the breakdown is not possible then the revenue will not be recognised until the service is fully complete Timing Difference * this applicatino of revenue recognition criteria means that the revenue is often recognised before the related cash is received * alterantively cash may be received in advance of the revenue being recognised e.g. a cash deposit

Profit measurement and recognition of income How do long term contracts and services affect the recognition of income

ASSETS - cash, accounts receiveable, plant, equipment, land and buildings, prepaymetns, intangibles LIABILITIES: accounts payable, revenue in advance, loan, other payables e.g. income tax and wages, provisions EQUITIES: share capital and retained profits EXPENSES: electricity, income, salaries and wages, rent sundry, depreciation REVENUE: sales, dividends from investments, other revenue

Provide examples of assets, liabilities, equity, revenue and expense accounts

What are examples of internal control that are relevant to all areas and then all those relevant to accounting

RELEVANT TO ALL AREAS * segregation of duties -- this reduces the risk fo mistakes and makes responsibility and specialism clear. Makes fraud more difficult. Segregation of duties is based on the principle that the job of one person can be split into multiple, allowing the work of one person to be checked by another. Careful examination of work flows and associated systems should enable internal control devices to be achieved * good records maintenance -- this ensures proper documentation exists that can back up transaction. This requires storing and safeguarding paper or electronic records and eventually assuring they are destroyed. Godo records maintenance requires appropriate back up wtih paper copies or more commonly, computer copies. * safeguards -- prevents the loss of valuable business assets. Safeguards include physical items like locks or safes, CCTV, restricted staff areas and other things such as computer passwords and access controls * approval authorities -- this relates to safeguards and requires specific managers to authorise certain tyeps or sizes of transactions before they go ahead SPECIFICALLY RELEVANT TO ACCOUNTING * physical audits -- e.g. counting cash or checking asset balances exist in physical form, can reveal discrepancies in the system. * standardised documents -- e.g. inventory receipts and invoices require careful linkage and standard approahces. Standardisedisation of docuemnt forms and types can make it easier to check forms for consistency and pre numbered documents can enable better control is achieved * trial balances -- doesn't guarantee no errors but does provide some added reliability to the figures. Drawing up a trial balance regularly could idnetify some discrepencies in the system and allow them to be investigated quickly * reconcliations -- necessary for comparing figures from the comany tot he bank

What are the roles of acounbting

ROLE * to discharge accuntabiliyt function of management and to influence the decisikons of those who use the informatikon produced It fulfils 2 roles 1. Stewardship role -- it focuses on providing a stewardship or accountability report on the status of transction for the period i.e. what was the position at the beginning of the period, what happened during the period and what is the position at the end of the period 2. Decision usefulness role * it assists users in mkaing informed decisions about the allocation of scarce resources

Classification of owner's equity What happens if you paid for land 500,000 in Jan 2019 and the land increased to 800,000? And then what happens when it drops to 600,000 in July?

Represented in a single account for sole trader (owner's capital) * Usually the end fo period balance sheet of a sole trader will show the opening capital + profit minus any drawings, giviing the end of year capital Types On the statement of financial position there are 2 additional accounts to the owner's equity contributed account: * Reserves — represent 'special purpose' owners' equity accounts e.g. Capital profits reserve * These represent the ownership interests in the assets not the assets themselves. Reserves are not separate deposits of cash available for other purposes (It is common to combine categories 2 and 3 into 'reserves' with subcategories (a) retained profits and (b) other reserves ) 1. Owners equity contributed * represents profits left in the business by the owners 2. Retained profit (or retained earnings in a company) Last years profit + this years profits - dividends = reserves * this is the profits less any amounts drawn out by the owner * in partnerships the profits and drawings are usually collected and shown in seprate current account for each partner * in company the withdrawels usually take the form of dividends * retained earnings shown reflect the cumulative figure after including earnings and dividends 3. Other reserves * Reserves — represent 'special purpose' owners' equity accounts e.g. Capital profits reserve * These represent the ownership interests in the assets not the assets themselves. Reserves are not separate deposits of cash available for other purposes (i.e. This is when you put money aside for something you want to do in the future) * Before you put aside you must ask shareholders * E.g. The Asset Revaluation Reserve (putting money aside in case the land value drops) * All non current assets depreciation except land which can increase or decrease * For example, say as if in 2019 Jan you paid for land 500,000. In 2019 June, the land increase to 800,000 * Dr Land 300,00 and Cr Asset Revaluation Reserve 300,000 * If the land drops to 600,000 in July: * Dr Asset Revaluation reserve 200,000 and Cr Land 200,000

Outline the main types of business ownership, describe the way in which a business is typically organised and managed and explain the importance of accounting in the business context

SOLE PROPRIETORSHIP (not separate legal entity) Definition -- individual is the sole owner Characteristics (6) Advantages * min reporting regulations however the GST increased requirement for regular detailed report * easy to set up as it is low cost to establish a soel proprietorship * no restrictions to the type of business * total undivided authority Disadvantages * limited life -- the life of the business restricted to the period the owner is in that position * unlimited liability -- the owner is responsible for all obligations and debts of the business incurrerd * limitations on size -- this is because the ownership funding is restricted to the personal resources of the proprietor * experience and knoweldge is limited to the entent that the sole owner is the sole manager * access to non ownership funding e.g. external loans is limited PARTNERSHIP ( not separate legal entity) > Definition -- relationship that 2 or more individuals share with the aim of generating financial profit > Adv * pooling in different resources of the partners therefore greater capital * the partners bring in differnt skills to the partnership * simple to form * taxation advantages as the partnership income is spread among the partners > Dis * limited life -- each time change of ownership e.g. new partners introduced, the current partnership concluddes and the new one commences * unlimited personal liability for general partners -- the personal assets of the partners can be used to satisfy the needs of creditors well beyond the individual's aprtners shares of the business * partnership agreement highly recommended to avoid future problems (decision making restrictions) * higher level of regulation * giving up profit share to other owners (co ownership) * giving up indivudal asset ownership to other owners (co ownership) * mutual agency imposes extra responsibility for the business actions fo toehr partners COMPANY Definition -- businesses owned by multiple investors each of which own a share of the compnay. Owners of a limited company are known as shareholders * finance comes from shareholders or lenders. In larger limited company there is usually a board of directors Characteristics (3) Advantages * separate legal existence * can create a large scale business because the number of individuals that invest in the company become part of the owners which is unlimited * limited liability of shareholders -- you cannot take legal action against the shareholders. individuals subscribing capital to the company are only liable for company debts incurred up to the amount they agreed to invest * transferability of ownership is relatively easy * unlimited life Disadvantages * separation of ownership and control * the company can be expensive to establish and maintain * if directors fail to meet legal obligations they are personally liable for the company debts * profits distributed to shareholders are taxable * extensive government regulations needed e.. need to register for ASIC, Australian Company Number and ABN. Also need regular financial annual reports

What is stakeholder theory and why it is important What are their needs, demands + why should they be met? Does it affect the choice of busines structure

Stakeholders, not just managerial self interest and shareholder profits, are an important driving force for a business. Whilst there may be conflicts between stakeholder interests, harmonising them can provide an opportunity for value creation. Value is not just financial value but also when businesses do things that people find valuable Meaning of stakehoder -- individuals or groups that are affected by the decisions of a b usiness or influence those decisions Thei needs include: * More effective and efficient management * More timely and transparent financial disclosures * Better treatment of employees e.g. working conditions + training * Enhanced contributions to the community in which they operate * Improved environmental products and services * Lower costs and prices * Compliance with existing regulations Why? * Stakeholders are a driving force for a business etc. For example, in a company it is necessary to consider the needs of shareholders and produce profit for them. But it is also important to consider e.g. its host communities because it improves reputation and strengthens their market presence Affecting choice of business structure * Consideration of future stakeholder demands is fundamental issue in the choice of business structure * E.g. the protection provided by the limited liability of the copout form of organisation is just one example * The loss of control is one of the downsides of a company that should be taken into account before this type of structure is selected

Define t account, account, journal, receieveable, and payable, accrued liability, exp

T ACCOUNT * Used in double entry bookkeeping where each transaction is recorded in 2 individual accounts in one separate account (debit and credit) * Set of financial records using double entry bookkeeping ACCOUNT JOURNAL RECEIVEABLE PAYABLE

What is the conceptual framework

The CF is a comprehensive set of concepts for financial reporting. It sets out: Definition: Represents a logical theoretical structure to support and direct accounting practice * Adopted in 2010 Encompasses: * SAC1: Definiton of the reporting entity * SAC2: Objective of general purpose financial reporting * AASB Framework: Qualitative characteristics of financial information * Relevance and faithful representation * Comparability, verifiability, timeliness and understandably * AASB Framework: Definition and recognition of the elements of financial statements How it works * CF is a set of concepts defining the nature, purpose and content of general purpose financial reporting * It is used by both preparers and standard setters Why it exists — trying to merge all the world standards into one * Prior to the 1970s there were no generally accepted accounting principles (GAAP) * This resulted in inconsistencies between accounting standards and practices * As a result, US, UK, NZ and Australia started developing normative theory of financial accounting * Prior to 2005, CF in Australia was developed by AASB and AARF * From 1 Jan 2005 Australian standards converged with international accounting standards * Following Sep 2010 the IASB issued CF but Australia continues to use a mixture of this new CF and Australia's own CF * IASB issued an exposure draft on 28 May 2015 for revised CF

What is the trial balance, its importance and why it exists Describe its rules and how to locate the errors

The next stage of double entry bookkeeping after posting everything from the general journal entries into the ledger accounts is a checking stage. This is especially important if there are high volume of transactions where chances of errors are very high WHAT IS IT A trial balance is a prima facie check that every credit entry has a debit entry. It does not prove that the accounts have been correctly entered or posted but if it does not balance then it is a clear sign that the entries have not been completely accurate. It can be completed as often as you like IT IS done at the end of every month * this ensures that the accounting content follows the fundamental characteristics such as faithful representation and relevance * before computers it provided a check on accuracy by showing whether total debits equals total credit * computerised accounting systems usually prohibit out of balance entries RULES * Account name title * put in the date e.g. 30 June 20XO * account title and then balance with subheadings debit and credit * do total at the bottom so you can check it balances * lists all of the accounts and their related balances * it must show totals to prove that the debit balances of the accounts in the general ledger equal the credit balances of the accounts in the general ledger * it is an internal document * a trial balance that balances is not a guarantee that everythign has been recorded correctly however it is a positive indication of overall correctness and completeness of information LOCATING ERRORS * are the additions correct? * are all the accounts listed * are the balances listed correctly * review the accounts for reasonableness Types of errors * Check that you have not omitted the balance of an account by mistake. Try to locate the missing value amount in the general ledger e.g. you have 99 000 credit and 90 000 debit. Try to find the 9000 debit Dr bal - Cr bal = Missing Value * Check that you have not recorded an amount on the wrong side e.g. recorded a debit instead of a credit. With the example above, when you divide by 2 its 4500. You may have recorded 2 4500 in credit instead of one in credit and one in debit (Dr bal - Cr bal)/2 = Amount on wrong side * Check that you have not made a transposition error e.g. recording 210 as 120. If you get a whole number then you have made this error (Dr bal - Cr bal)/9 = a whole number * If these steps cannot identify the error then you may have more than one mistake and so will need to go back and recheck all your entries

What are the qualitative characteristics of financial reporting

The primary objective of financial reporting is to provide information useful for making investment and lending decisions FUNDAMENTAL QUALITIES 1. Relevance * the information that is capable of making a difference to the decision made by users * it needs to have predictive or confirmatory value or both * it needs to cross a threshold of materiality i.e. if omission or misrepresentation doesn't alter the decision then it is not material 2. Faithful representation * info is complete, neutral and free from error * financia information is not always free from error however no errors or omissions should not affect the description fo the economic phenomena ENHANCING QUALITIES Comparability * this helps users to identify the similarities and differences between different periods within a set of financial statements and across different reporting entities e.g. identify changes in the business over time, evaluate the performance of the business in relation to similar businesses Verifiability * enables knowledge and independent observers to reach a consensus if a particular event or transactikon is a faithful representation Timeliness * provide information at the right time i.e. at the end of the financial year in 30 June. The information usually released in sept 1 * the older the information the less useful it is * depends on the users' needs * decision makers need information available in time to be capable of making informed decisions Understandability -- if its classified and presented in a clear concise way the info can aid understanding Constraint -- cost of preparation versus benefit

STEPS TO BANK RECONCILIATION

The reconciliation has 2 main ideas: * reconcile the balance per book (firm) and balance per bank to their adjusted or correct balances * it should be done by an employee who has no other responsibilities pertaining to cash There are 2 records of the business cash * cash accounts in the business's own ledger * the bank statement which tells the actual amount of cash the business has in the bank STEPS 1. Start with 2 figures -- that being the balance per book (company cash at bank account ) and the balance per bank (bank) 2. Bank side of reconciliation -- with the balance per bank, add to or adjust the bank balance those items that appear in the books but not on the bank statement * debit deposits in transit in the bank balance * credit outstanding cheques * calculate the adjsuted bank balnace 3. Book side of reconciliation -- after checking their correctness, with the company, journalise the items that appear in the bank balance but not in the firms' books. i.e. when reconciling the company statement, THERE ARE 2 MAIN STEPS: RECONCILE AND DO ADJUSTING ENTRIES Debit to cash at bank: * bank collections * EFT cash receipts * interest revenue earned on money in the bank Credit to cash at bank: * EFT cash payments * service charges * cost of printed cheques * other bank charges e.g. charges for dishonoured cheques 4. Compare the adjusted bank balance and the adjusted book balance to ensure they are euqla 5. Notify the bank of any errors that may have occurred

DEFINE: - unadjusted and adjusted entries - unadjusting and adjusted trial balance And when and why are they done? What are the kinds of adjustments?

The unadjusted trial balance only lists the revenues and expenses of the entity, howefver these amounts omit various transactions Adjusted trial balance: internal document that lists the general ledger account titles and their balances after any adjustments have been made to ensure it complies with the accrual method of accounting Adjusting entries * definitions: adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting * it is usually made on the last day of the accounting period * they also update the asset and liabilities account * we use adjusted trial balance because it enables further checking of the period end adjustments TYPES * receiveables and payables i.e. prepayments and accruals -- if some of the amount debited into the expense account belongs to the next period then it it become a prepaid expense, and the expense amount needs to be credited and asset account (prepaid expense) is debited e.g. wages incurred but not paid, supplies paid not used, rent paid but not used * interest incurred but not paid * revenues due and prepaid - just like how cash and expenses are not always in tandem, same goes for cash and revenues * depreciation > depreciation expense is a non permanet account which is an EXPENSE. It is an expense that is used for NON CURRENT assets. Since it is an expense it is a on permanent account therefore you don't bring the balance forward e.g. for supplies that are assets, when you use it up it becomes an expense because it is a current asset. Howefver machines are non current assets. You dont have x amount left, you have x BENEFIT left > depreciation=cost-residual/useful life > accumulated depreciation is a contra asset account which is identified in a separate account from depreciation expense. it is an ASSET but it is always CREDITING THE ASSETS * bad and doubtful debts > bad debts represent expenses which need to be written off because it is a debt that cannot be recovered > a doubtful debt is a debt that may become a bad debt at some point in the future * inventory > a prepetual inventory approach is relatviely easily handled using ledger accounts though some modification to the format helps

What is the entity concept? Provide examples

This is when a business or an organisation and its owners are treated as 2 separate identifiable entities. E.g. * Accounting perspective — the business and sole trader are considered to be separate entities * From a legal entity view, they are NOT separate e.g. if you are a sole trader and you sell it, then the business can sue the sole trader because they are the same * Partnership — from an acc POV, the partnership between 4 people and the business in which they own are separate * From a legal POV, they are not separate therefore if you wanted to sue the business, you can sue each individual partner * Company — owned by shareholders * From acc — The company is separate from the shareholders * From legal — they are SEPARATE therefore if you wanted to sue the company, you can't sue the shareholders

Adv and dis of manual vs computerised in relation to manual being adv

Together: Manual systems can have a chance of error however the error are easily spotted. Thus, both systems allow for the better tracking of errors ADV * Computerised systems are not always the solution for all accounting problems e.g. if there is no backup, you will still need manual records for audit purposes, you will still need receipts which may be manual * Software and site licenses of computerised systems may be expensive thus a business should work out cost vs benefits * The computer system may not add more functionality if it is a small business * In MYOB, it is unable to spot mistakes and some of the outputs including financial statements is not easily customisable * Learning manual is important because if you don't, it is easy to mix up Dr and Cr and also how the format is required in MYOB DIS * Computerised systems will take away much of the replication and automate some fo the processes including posting * The computerisation of accounting system Amy expand in the future to include other softwares that perform a multitude of functions including marketing, benchmarking, finance and others * The larger the business, the more complex is accounting and hence higher chance of errors in a manual system

What are the limitations of a trial balance

Totals for the columns which agree may provide some indication that we have not made a bookkeeping error. However we don't have total confidence that errors didn't occur. Errors that the trial balance can't detect: * the transaction missing completely * misreading the value as e.g. 9000 instead of 900 and then posting it correct into both debit and credit * a journal entry posted 2 times * posting on an incorrect journal entry

Accounting time period concept

Unit of time for which accounting data is collected and the financial statements are prepared * In Australia many companies prepare their statement for the financial year from July 1 to June 30 the following year

Classification of liabilities and why

Unlike assets, the purpose for which liabilities are held are not an issue its moreso for how long they are outstanding is mportant * A long term liability will turn into a current liability when the settlement date comes within the next 12 months or one operating cycle of the statement of finanial positino to date E.g. borrowings to be repaid 18 months after the date of a particular balance sheet will appear as non current liability but will appear as current liability in the statement of financial position in the following year Liabilities are normally categorised as either current or non current * The AASB requires that liabilities are classified according to their nature which can be on: * Current/non-current basis or * The order of liquidity (payment) * The alternative liquidity classification may be used for liabilities if it provides more relevant and reliable information * A long term liability will turn into a current liability when the settlement date comes within 12 months or one operating cycle of the statement of financial position date * Classification of liabilities indicates how long term finance is raised and highlights the financial obligations that must be shortly met WHY CLASSIFY? * helps highlight the financial obligations that must be shortly met * allows indication of how long term finances are raised - if they rely on long term borrowings then financial risk is raised. Thus business must balance owner's equity and non current liabilities CURRENT LIABILITIES amounts due for repayment to outside parties within 12 months or one operating cycle of the statement of financial position date * The liability is expected to be settled in the entity's normal operating cycle * The liability is held primarily for the purpose of being traded * The liability is due to be settled within 12 months after the reporting date * The entity does not have an unconditional right to defer the settlement of the liability for at least 12 months after the reporting date Examples: accounts payable, bank overdraft, bank loan repayable within 12 months, revenue received in advance e.g subscriptions NON CURRENT * Those amounts due to other parties which are not liable for repayment within the next 12 months * Only the period for which they are outstanding matters not the purpose for which it is held for * Must be non current if they do not satisfy the criteria for current Examples: mortgage loan, long term loans Contingent and provisonal liabilities * Provisions — estimated liabilities for which there is greater uncertainty regarding the amount or timing of the amount that for a normal liability * E.g. you put money aside just incase the liability occurs e.g. warranty provision * Contingent — a potential liability that might arise in the event of a particular event occurring i.e. a liability that has not happened but the probability of occurrence is 50 percent e.g. being sued for defamation * Will become a liability contingent on that event happening (50 percent chance) * Not recognised in financial statements until the event actually occurs, but often disclosed in a note in the annual report

CLASSIFIED This relates to larger organisations and often called the classified financial report. Income and expenses are grouped into categories * income broken down into sales and 'other revenues' * expesnes are often broken down into 4 categories. These classifications only apply to external reporting: 1. cost of sales 2. selling and distribution 3. Administration and general 4. financial REGULATORY REPORTS These are required to be produced by companies and other entites in accordance to statutory standards * AASB requires that the income statement should classify expenses according to their nature or function * Refer to AASB 101 Presentation of Financial Statements para 82 for a list of requirements: * Revenue * Finance costs * Share of profits or losses of associates/joint ventures * Tax * Discontinued operations TEMPLATE (Company name) 'Income Statement' "for the period ended___" Operating revenue: * sales revenue * less costs of goods sold * gross profit Operating expenses: * deprecaition expense * insurance expense * wages expense * supplies expense * total expenses Net profit before tax Tax at __ percent Net profit after tax * if it 'for the period' because income statements are temporary i.e. once the new period starts, the accounts rae back to 0 * the balance sheet says 'as at' because the accounts are permanent i.e. flows onto the next period. This means that the closing balacne of the permanent accounts in the balacen sheet are the opening balance for the next month

What are classified and regulatory reports General layout of income sheet

The 3 forms of the income statement: 1. simple listing of accounts (small organisations) 2. classified reports (larger organisatinos) 3. regulatory presentations (companies) Simple reports -- for smaller organisations it may just be a listing of income and expenses in alphabetical or financial magnitude GROSS PROFIT -- revenues from sales - cost of sales OPERATING PROFIT -- increase in wealth for a period that is generated from normal operations PROFIT FOR THAT PERIOD -- profit for the year after a reasonable estimate of tax likely for that year COST OF SALES -- costs attributed to the godos that were sold. Each business' approach to cost of sales depends on the size and scale of the business REPORTING PERIOD The particular period for which the accounting information is prepared * for external reporting the reporting cycle is normally one year * for internal functions it is common for profit figures to be prepared on a monthly basis

What are the 3 forms of the income statements and define: * gross profit * operating profit * profit for the period * cost of sales * reporting period

DEFINITIONS Depreciation -- this is for tangible, limited life non current assets. It is a measure of the portion fo the cost (less residual value) of a fixed asset which has been consumed during an accounting period Amortisation -- the equivalent of depreciation for a non current intangible assets THE FACTORS 1. The cost or fair value of the asset This includes the costs incurred by the business to bring the asset to its required location and make it ready for use e.g. delivery, installation, legal title, alterations, improvements etc 2. The useful life of an asset * a non current asset has a physical life, economic life and useful life * physical life = asset exhausted by wear and tear and passage of time however maintenance can help fix this * economic life = determined by the effects of technological progress and commercial reliaties - economic life helps determine the expected uselife life of the asset when calculating depreication - the economic life of an asset ends when the costs of operating or holding the asset exceeds the benefits it derives - economic life may be shorter than physical life 3. The estimated residual life - defined as the likely amount to be received upon the disposal of the asset. It is difficult to predict 4. The depreciation method * once the depreciable amount has been estimated it must be properly allocated over the useful life of the item, property, plant or equipment 3 methods: 1. Straight line -- allocates the amount to be depreciated equally over eahc year of the useful life of the asset Depreciation = cost-residual/useful life 2. Accelerated depreciation — applies a fixed percentage rate of depreciation to the written down value of an asset each year. Higher annual depreciation is charged in earlier years 3. Units of production based depreciation — depreciation based on productive capacity of the asset and its use over time

What is depreication and amortisation and what are the factors taken into consideration when calculating depreciation and the method to use it?

It is important to note that profit and cash (liquidity) are not the same Profit = measure of achievement or productive effort rather than the cash generated Expenses: - prepaid expenses are the expenses paid in advance of having them occur - accrued expenses are the expenses that have been incurred but payment not paid Revenue - unearned revenue is cash received in advance of being earned - accrued revenue is the revenue earned but not received The latter of both is the accrual method of accounting. Alternative is cash accounting where cash receipt or payment triggers income or expense recognition

What is the difference between profit and cash and how does it relate to revenue and expenses

A = L + OE is the basic accounting equation and this will always hold true becasue the claims are always same as the total assets, ensuring that the balance sheet always 'balances' THE EFFECT OF TRADING Trading is an asset that is sold at a price that is different to the cost of acquiring or manufacturing the asset It introduces an additional transaction to the statement of financial position To cover the effects of trading the equation is extended to: Assets = OE beginning + Profit (or - Loss) +/- OE changes + liabilities

What is the effect of trading operations on the balance sheet

Current assets Total current assets Non current assets Total non current assets TOTAL ASSETS/NET ASSETS Current liabilities Total current liabilities Non current liabilities Total non current liabilities TOTAL LIABILITIES TOTAL NET ASSETS Owenrs equity TOTAL OWNERS EQUITY

What is the general layout of the vertical balance sheet

The purpose of the balance sheet is to set out the financial position of the business at a particular point in time * contains a snapshot of the assets, liabilities and equity position of the entity at a particular point in time * sets out other assets of the business on one hand and the claims against it on the other

What is the purpose of the balance sheet

The purpose of the statement of financial position is to set out the financial position of a business at a particular point in time * also referred to as the balance sheet * contains a snapshot of the assets, liabilities and equity position fo the entity at the particular point in time * sets out the assets of the business on the one hand and claims against it on the other

What is the purpose of the statement fo financial position

BUSINESS NAME Statement of Financial position AS AT (date) THERE ARE 2 CHOICES WIHTIN THE VERTICAL FORMAT 1. Entity approach CA + NCA = CL + NCL + OE i.e. A = L + OE 2. Propriety approach CA + NCA - CL - NCL = OE i.e. A - L = OE Ordering the assets * Order the assets in the order of liquidity (how easily it is converted into chas) * if it is not liquid then there is not enough cash to pay liabiliites * usually in the order of cash, then cash equivalents and then accounts receiveables and then inventory Ordering liabilities * arrange by which liability you need to pay first * contingent liabilities have not occurred yet therefore you only put it in the notes of the balance sheet HORIZONTAL (only really used by small businsses) CA + NCA = CL + NCL + OE

What is the vertical and horizontal layout for the balance sheet