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2.  Accounting always existed in some form throughout time. E.g. The Parable of the Talents.  Really took off in the Renaissance Period in Venice when Venice was the trading capital of the western world.  The Italians developed the first banking system that the Roman Catholic Church allowed.  A mathematician and monk Luca Pacioli published the first book on double entry accounting in 1494.  His methods spread as the influence of Venice spread. 2

3.  Overtime double entry accounting became the standard.  There are, of course, many ways to record the same transaction but as time passed time, generally accepted ways of recording were developed.  They are known as Accounting Principles.  In the 20th Century, as business became more advanced, Accounting Standards were developed to govern the recording of entries in each country.  This also led to the International Accounting Standards. Contained in the standards are the Qualitative Characteristics. 3

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5. 5  The purpose of accounting is to provide business owners with financial information that will assist them in making decisions about the activities of their firm © Cambridge University Press 2012

6. 6  The accounting process involves collecting source documents, recording financial data and then reporting financial information, and subsequently advising the owner on an appropriate course of action © Cambridge University Press 2012

7. 7 Entity – the business is assumed to be separate from the owner and other businesses, and its records should be kept on that basis Going Concern – the life of the business is assumed to be continuous, and its records are kept on that basis

8.  BHP Billiton – the biggest mining company in the world, is Australian and has been doing business since 1860.  Lloyd’s of London – an insurance began in business in 1688.  The oldest continuous business in the world is Kongo Gumi – a Japanese construction company which began business in 578. 8

9. 9 © Cambridge University Press 2012 Reporting Period – the life of the business must be divided into periods of time to allow reports to be prepared Historical Cost – the recording of a transaction at its original cost or value, as this value is verifiable by reference to the source document

10. 10 © Cambridge University Press 2012 Conservatism – losses should be recorded when probable but gains should only be recorded when certain, so that liabilities and expenses are not understated and assets and revenues are not overstated Consistency – accounting methods should be applied in a consistent manner to ensure that reports are comparable between periods

11. 11 © Cambridge University Press 2012 Monetary Unit – all items must be recorded and reported in a common unit of measurement; that is, Australian dollars

12. 12 © Cambridge University Press 2012 Relevance – is the information in the report useful for decision-making? Reliability – is it accurate, and free from bias or error? Comparability – can the reports be compared over time? Understandability – is the information presented in an easy-to-understand manner?

13. Qualitative Characteristics  Com › Comparability  Rel › Relevance › Reliability  U › Understandability Accounting Principles  Cricket Consistency @  H Historical Cost  E Entity  R Reporting Period  M Monetary Unit  C Conservatism  G Going Concern 13

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15.  The following three-step approach may help you to earn the maximum marks for theory questions. 15

16.  Identify › Identify the important term, concept, accounting principle or qualitative characteristic  Define › Define the term using a glossary definition  Link › Link the definition back t the intent of the question, that is, answer the question 16

17. IDENTIFYEntity Principle DEFINE The entity principle states that the personal affairs of the owner should be kept separate from the affairs of the business. LINKIn this case, Jessica’s use of business finances should be treated as drawings, as the family holiday in not an expense of the business. 17

18.  1 mark for the correct accounting principle  1 mark for a correct definition  1 mark for linking back to the questions accurately Remember to always link the explanation back to the question or scenario. 18

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20. IDENTIFY DEFINE LINK 20 The purchase price is verifiable by the cheque whereas it is difficult to verify an inflation increase of 4%. Non current assets are valued at Historical Cost or at the price for which they were purchased. Historical Cost

21. IDENTIFY DEFINE LINK 21 Monetary All transactions are to be valued in the monetary terms of the country in which they are located. Valuing the petrol in litres means that profit or loss cannot be calculated and this also means that the reports could not be compared one reporting period to the next.

22. IDENTIFY DEFINE LINK 22 Going Concern The life of a business is considered to go on forever. The time and effort that Roger puts into the festival is wasted if he winds the business up at the end of the festival. Presumable he will run it next year and he would have to start the business up again. And what does he do with the money left over from the first festival.

23. IDENTIFY DEFINE LINK 23 Consistency The same accounting methods must be used from one reporting period to the next. This makes it easier to see if the changes in finance are due to business performance rather than changes to methods.

24. IDENTIFY DEFINE LINK 24 Conservatism Losses must be recognised as soon as the business becomes aware of them so that assets and expenses are not overstated. If the bait was not written off then Stock would $20,000 too high or $20,000 overstated.

25. IDENTIFY DEFINE LINK 25 Entity The private transactions of the owner must be kept separately from those of the business. If Rachael write the clothing and jewellery off as expenses it will increase expenses, reduce profit and reduce the tax bill. She should record these as drawings which will reduce capital.

26. STATE DEFINE LINK 26 Reporting Period The continuous life of a business is divided up into arbitrary periods of time for profit calculation. Bill can compare a report over a number of reporting periods and see the favourable or unfavourable trends. He can then make decisions about improving his business.

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28. IDENTIFY DEFINE LINK 28 Reliability All transaction should be free from bias and be able to be verified by source documents. How can Cassandra prove that a transaction took place if she has not recorded it on a source document? And how easy would it be for her to forget the amount or details of any transaction?

29. IDENTIFY DEFINE LINK 29 Comparability Reports should be prepared using the same accounting method so that they can be compared over time. Changing the depreciation rate gives an unrealistically high profit one year compared to a lower one the year before.

30. IDENTIFY DEFINE LINK 30 Understandability Reports should be prepared in a way that people outside the business can easily understand them. Charts and graphs are easy to read and understand.

31. IDENTIFY DEFINE LINK 31 Relevance All information that is useful for decision making should be included in the reports. Jason needs accurate information so that he can make accurate decisions.

32. 32 © Cambridge University Press 2012 The three general-purpose financial reports are the: Cash Flow Statement Income Statement Balance Sheet

33. 33 © Cambridge University Press 2012 Asset – a resource controlled by an entity, as a result of past events, from which future economic benefits are expected to flow to the entity Liability – a present obligation of the entity as a result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

34. 34 © Cambridge University Press 2012 Owner’s equity – the residual interest in the assets of the entity after the deduction of its liabilities Revenue – an increase in assets (or decrease in liabilities) that increases owner’s equity, except for capital contributions by the owner Expense – the decrease in owner’s equity that occurs through business activities

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