Chapter 1 The Role of Accounting © Cambridge University Press 2012

The Purpose of Accounting 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

The Accounting Process 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

Accounting Principles © Cambridge University Press 2012 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

Accounting Principles © 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

Accounting Principles © 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

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

Qualitative Characteristics © 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?

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

The Elements of Financial Statements © 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

The Elements of Financial Statements © 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