1 Learning Objectives Define accounting and describe the accounting process Identify users of accounting information Explain the characteristics of the main forms of business organisations Identify the elements of the financial statements Describe the financial reporting environment in NZ

Learning Objectives Analyse transactions using the accounting equation Prepare a journal entry and ledger account Apply the rules of debit and credit Identify the basic steps in the accounting process Understand Goods and Services Tax (GST) as it applies to accounting in NZ 2

3 Definition of ‘Accounting’ The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. American Accounting Association

4 The Accounting Process recording classifying reporting and interpreting

5 Users of Accounting Information owners/shareholders creditors customers prospective investors taxing agencies regulatory agencies labour union employees general public

6 Forms of Business Organisation Sole proprietorship (sole traders) Partnership Company

7 The Accounting Equation ASSETS = OWNERS’ EQUITY + LIABILITIES

8 Assets For an asset to exist there must be: service potential or future economic benefits control by the entity a past event or transaction

9 Current Assets An entity shall classify an asset as current when: a)It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; b)It holds the asset primarily for the purpose of trading; c)It expects to realise the asset within twelve months after the reporting period; or d)The asset is cash or a cash equivalent... The entity shall classify all other assets as non-current. [NZ IAS 1 para 66]

10 Liabilities a present obligation to pay the amount owed future sacrifice of cash or service for the entity a past transaction or event For a liability to exist there must be :

11 Current Liabilities An entity shall classify a liability as current when: a)It expects to settle the liability in its normal operating cycle; b)It holds the liability primarily for the purpose of trading; c)The liability is due to be settled within twelve months after the reporting period; or d)It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. An entity shall classify all other liabilities as non-current. [NZ IAS 1 para 69]

12 Owners’ Equity This represents the owners’ claim on assets of the firm. It is a residual claim (that is a claim to assets remaining after debts to creditors have been discharged) A - L = Owners Equity

13 Components of Owners’ Equity OE = C + P – D OE = Owners’ Equity C = CapitalP = Profit D = Drawings P = R – E R= Revenue E = Expense

14 OE = C + (R – E) – D OE = Owners’ Equity C = CapitalD = Drawings R= RevenueE = Expense Substituting for P, the expanded equation can be written as:

15 Alternatively, the expanded accounting equation can also be written as: A + E + D = L + C + R A = AssetsL = Liabilities E = ExpenseC = Capital D = DrawingsR = Revenue

16 Revenue A business firm earns revenue by providing goods or services – owners’ equity increases It is measured by the assets received in exchange, e.g. cash, or by a reduction in liabilities

17 Expenses Expenses are payments incurred by the business in an accounting period in producing income, the benefits of which accrues to one accounting period only

18 The General Ledger Accounts Present the accounts in T-form A separate account for each item

19 Double Entry System Debit (DR) always on the left side of any account Credit (CR) always refers to the right side Increases in assets and expenses are debit entries Increase in liabilities, owner’s equity and revenue are credit entries

20 Golden Rules Whenever there is a debit(s), there must be a corresponding credit(s) Total debits must equal total credits.

21 Double Entry System Debit entry Dr for any increases in assets increases in expenses decreases in liabilities decreases in owners’ equity decreases in revenue Credit entry Cr for any decreases in assets decreases in expenses increases in liabilities increases in owners’ equity increases in revenue

22 Normal balance of accounts Debit balances Credit balances AssetsLiabilities ExpensesRevenue DrawingsCapital