Our laws are based on the 10 Commandments Why do we need laws? – So that everyone does the same thing.
Think about sport and games They all have rules! – So that everyone does the same thing
Imagine if there were no Road Rules! What would happen if everyone did what ever they liked!
Accounting has rules! These are called – Accounting Principles – Qualitative Characteristics
Accounting Principles These have mainly to do with records – Conservatism – Historical Cost – Entity – Reporting Reports – Monetary Unit – Consistency – Going Concern
Entity The owner of a business must keep their private affairs separate from the business. When the business buys and sells items it is recorded in the businesses journals. When the owner buys things for his private use it is not recorded in the businesses journals.
Going Concern The owner records the business transactions in the journals for as long as the business exists. A business exists until it is closed down which could be many years. – E.g. Broken Hill Proprietary or BHP Billiton began as a mining company in the 1850s.
Reporting Reports If a business can exist forever, when is profit calculated? – When it is sold? – When is closed down? Records are used to prepared the reports once a year.
Historical Cost Items purchased for the business are recorded in journals at the value at which they were purchased. A vehicle loses value once it is purchased but it is recorded at its purchase price. A building may gain value as the years go by but it is recorded at its purchase price.
Conservatism The effects of buying and selling are recorded in journals carefully. If a loss is likely to happen, it is recorded straight away. If a gain might happen, it is not recorded until it is sure to happen in case it turns into a loss in the mean time.
Consistency Every time a purchase or sale is made it is recorded in the same manner. If it is not recorded in the same way, then the records cannot be compared over time.
Monetary Unit All sales or purchases are recorded in the journals in Australian dollars if the business is dealing in Australia. If a business is operating in America then the records would be made in American dollars.
Qualitative Characteristics These have mainly to do with reports – Comparability – Relevance – Reliability – Understandability
Comparability Reports must be prepared consistently so they can be compared one year to the next.
Relevance Only information that will affect any decision making should be included in the reports. If the information is not relevant to decision making then it should not be included in the businesses reports.
Reliability The reports must be based on information from the journals which have been recorded accurately. The information in the journals must come from source documents (cheque butts, receipts) which provide verifiable evidence.
Understandability Reports need to be readable and easily understood by any one with an interest in the business.
If the rules are followed...... then the records and reports of the business will be accurate. The Accounting Principles and Qualitative Characteristics will be referred to through out the course.
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