1. BUS106 Accounting For Business
Lecture #1
Decision Theory
Trust Account Management
Presented by
Dr Greg Laing

3. Course Outline Review
Homework
Quiz
Assignments
Final Exam

4. Course Assessment Quiz (online - Blackboard) Week 4 20%
(Available all week 4 on Blackboard 12th to 16th August)
2. Business Report (T.B.A.) Week 9 40%
(Case details to be placed on Blackboard)
(Due week 9 Monday 21st September)
3. Final Examination 40%

5. Text book requirement A New Text Book is being used this Semester.
Birt, J., Chalmers, K., Byrne, S., Brooks, A. & Oliver, J. 2014, Accounting: Business Reporting for Decision Making 5th Edn., John Wiley & Sons Australia Ltd: Brisbane
Note: Certain Lectures are not covered by the Text and therefore will be based upon the material covered and presented in the Lecture!

6. DECISIONS IN EVERYDAY LIFE
Decisions involve choices because resources are limited
Each decision has outcomes that will affect future decisions

7. THE NATURE OF ACCOUNTING
Transactions
Identification
The accounting process
Quantification in monetary terms
Measurement
Recording, classification, summarisation
Recording
Accounting reports
Analysis and interpretation
Communication

8. INTRODUCTION continued
Business transactions
External exchange of something of value between 2 or more entities
Affect assets, liabilities and equity
Can be reliably measured and recorded
Relevant information
Information that makes a difference in decision making
It is essential that only business transactions (and not business events e.g. negotiating with a prospective employee) are recognised by the accounting system.
A business transaction is an event that:
affects the financial position of an entity and
can be reliably measured

9. ACCOUNTING INFORMATION AND ITS ROLE IN DECISION MAKING
Accounting information is designed to meet the needs of both:
internal users (management)
external users (stakeholders)
External users include:
Investors – both current and prospective
Suppliers and banks
Employees
Government authorities (e.g., ATO, ASIC)
Accounting info is part of our everyday decision-making process
Accounting information helps internal users (usually managers) to:
make decisions about an entity’s operations
evaluate business success by whether it has achieved its objectives
weighing up various alternative use of resources
External users are called stakeholders because they have a stake or an interest in the performance of the entity.
Teaching tip: Ask students for examples of times when they use accounting information in their day-to-day life.

10. Corporate governance and ethics
Ethics: Moral principles or rules of behaviour that help decide what is good or bad, or right or wrong
Maintaining ethics means
complying with rules and policies of entity
having an awareness of different needs of stakeholders
Corporate governance: specifies rights and responsibilities of stakeholders
Increasing expectations from consumers, shareholders, banks and creditors are forcing entities to address ethics differently.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the entity and spells out rules and procedures for making decisions on entities affairs.

11. USING INFORMATION IN ECONOMIC DECISIONS
Starting a small business
Equipment purchases
Repairs and maintenance
Insurance
Administrative costs
Services to provide
What to charge
Potential customers

12. Forms of Business Organisation
Sole Trader
(Proprietorship)
Partnership
Company 25

13. Communication? Accounting Language - the Language of Business!
DEBITS (DR) & CREDITS (CR)
Double entry accounting to record transactions!
Fra Luca Pacioli 1494
“for every debit there must be an equal and opposite credit’
Two sides to every transaction
a Debit side and a Credit side
The Pacioli Code! 21

14. Financial Reports
The building blocks of the Financial Reports are:

15. Assets = (Liabilities + Owners Equity) (A=L+O)
Accounting Equations
Assets = (Liabilities + Owners Equity) (A=L+O)
Net Asset method
(Assets-Liability) = Owners Equity (A-L=O)

16. Income Statement
Revenue:
Expenses:
Profit $

17. INTRODUCTION The basic forms of business structure are:
Sole trader
Partnership
Company
Trust
They differ in terms of owner liability, equity structure, funding opportunities, decision making responsibilities and taxation
Individuals are regarded as separate business entities from the entities:
in which they invest
with which they trade or
by whom they are employed

18. DEFINITION & FEATURES OF A SOLE TRADER
A sole trader is an individual who controls and manages a business
The business is not a separate legal entity
The individual is fully liable for all debts
The general registration requirements involve applying for an ABN
Common examples are plumbers, electricians, hairdressers and carpenters
A sole trader is the simplest form of business.
It is also known as a sole proprietorship.
The business has a single owner who both manages and controls it.
There are no formal guidelines to follow in terms of business reports.
Teaching tip: Ask students to think of some sole traders they know and use

19. Advantages of a sole trader
Quick, inexpensive and easy to establish Inexpensive to wind down
Not subject to company regulation
Owner has total autonomy over business decisions
Owner claims all the profits of the business and all the after-tax gains if the business is sold
Does not pay separate income tax, but included with owner’s personal tax return.
Not bound by formal requirements such as accounting standards.

20. Disadvantages of a sole trader
Unlimited liability – bears full responsibility for business debts and legal actions such as negligence
Limited by skill, time and investment of owner
Restrictive structure due to non-legal status of the entity
Business will cease to exist if owner leaves, retires or dies
Because the business income is added to the personal income of the owner for tax purposes, the business may pay more tax on business income because individual rates are higher than company rate.
The main disadvantage is that the sole trader is totally responsible for all the debts and legal actions of the business.
This means that the individual’s personal assets are at risk if the business runs into trouble.

21. DEFINITION AND FEATURES OF A PARTNERSHIP
An association between two or more persons who
carry on a business as partners
share profits or losses according to partnership agreement
Enables sharing of ideas, skills and resources
Easy and cheap to establish
No separate taxation payable but does lodge income tax return with ATO
A partnership is a group of people who come together in business with a common goal of making a profit.
A partnership allows the partners to bring different “gifts” to the partnership – one may bring capital, another may bring management expertise, or one may even bring a design they have patented.
Examples are accounting. legal and medical practices.
No formal requirement for partnership financial statements.
Bound by relevant Stage legislation.
Teaching tip: Ask students to think of partnerships they know

22. The partnership agreement
Includes details of the partnership
Name of partnership
Partner contributions of cash and other assets
Profit and loss sharing ratios
Entry and exit information
There is no legal requirement to draw up a partnership agreement.
It may also establish responsibilities such as:
Workload
Positions in the business
Decision making authority

23. Advantages of a partnership
Relatively easy and simple to set up
Informal business structure – not bound by accounting standards
Ability to share capital, skills, talents, knowledge and workload between two or more people
The advantages of a partnership over a sole trader are what makes this form of business so popular.

24. Disadvantages of a partnership
Unlimited liability for business debts and obligations by all partners
Limited life – if one partner dies or withdraws from the business then the partnership must dissolve
Mutual agency – each partner is seen as being an agent for the business and so is bound by any partnership contract
The major disadvantage is unlimited liability (just like for the sole trader).
It is for this reason that many partnerships may actually become incorporated. This may be under:
Corporations law
Associations law
Cooperative society law
Many partnership disputes arise from profit sharing and decision making issues
Teaching tip: Ask students why they think unlimited liability is such a big issue.

25. DEFINITION AND FEATURES OF A COMPANY
Owners of a company are known as shareholders
Independent legal entity (i.e. separate from the people who own, control and manage it)
Shareholders have limited liability – for the purchase price of their shares only (not company debts)
A company has unlimited life – not dissolved when owners die or change
Unlike sole traders and partnerships, companies have a separate identity for tax purposes.
Owners may receive dividends – which are a distribution of profits, but this is determined by the board of directors.
Teaching tip: Ask students to name some companies they know.

26. Forming a company Formed under Corporations Act (2001)
Administered by Australian Securities and Investment Commission (ASIC)
Companies require an ACN and an ABN
Accounting standards must be followed and accounts audited
An ACN is a 9 digit number allocated to a company to ensure that it has adequate identification when transacting business.
An ABN is an 11 digit number allocated to entities by the ATO to assist with transactions that involve:
Goods and services tax (GST) or
Food and beverages tax (FBT)
Companies must lodge an annual company tax return.
Current tax rate for Australian companies is 30%.

27. Types of companies Company structure in Australia: Type
Characteristics
Proprietary companies
Limited by shares
Public companies
Limited by guarantee
No-liability company
Unlimited company
Proprietary companies
Limited by shares (no public offerings)
Includes “Pty Ltd” in name
Limited to 50 shareholders (minimum 1) and may have one or more directors.
Common for small and medium size enterprises (SME’s).
Public companies
Limited by shares (Ltd)
Limited by guarantee
No Liability companies – (e.g. mining companies) – shareholders not responsible to repay any uncalled portion on their shares.
Unlimited Company – shareholders have no limit placed on their liability (very rare these days).

28. Advantages of a company
Limited liability for shareholders
Taxation rate (30%) lower than top personal tax rate
Business expansion networks made easier due to legal structure
Can raise additional equity (capital) through public share offerings
The main advantage is limited liability – something that is not available under the sole trader or partnership forms of business.

29. Disadvantages of a company
More time consuming and costly to set up
Must comply with complex company rules and other legal requirements
Taxed from the first dollar of profit
Limited liability aspect may causes problems
Banks often prefer to have director’s personal guarantees instead
Separation of ownership and control
When a company “goes public”, it will have:
Increased disclosure
To bear the cost of initial public offerings (IPOs)
The potential loss of control
Separation of ownership and control
To meet investor expectations
To comply with listing rules such as ASX.

30. DEFINITION AND FEATURES OF A TRUST
Common form of business structure in Australia
The trustee holds property for others who are intended to benefit from the property or income of that property
A trustee may be:
A person or several people
A proprietary limited company
The trustee is personally liable for all the debts and other liabilities incurred on behalf of the trust.
Family or discretionary trusts are often established for the benefit of one family and its members.
Unit trusts hold collections of assets on behalf of various parties.

31. Advantages of a trust Minimises tax payments Limited liability
Simple to form
Little government regulation (unless listed on ASX)
Again, there is limited liability under this form of business.
A trust does not pay tax. This is the responsibility of the beneficiaries after the trust income is distributed to them.

32. Disadvantages of a trust
Trust law is complex
Should be administered by qualified accountant
Business structure can be exploited for tax minimisation purposes
Person administering a trust requires up-to-date knowledge of tax and legal implications of trusts.

33. COMPARISON OF BUSINESS REPORTS
Sole trader reports
Partnership reports
Company reports
Private company
Public company
This section briefly outlines the main components of the financial statements for these entities.
This is only an overview. We will look at a more in depth discussion when we get to chapters 5 and 6.
The main point to note at the moment is the use of the accounting entity concept.
A business entity funds are not available for personal use, but only for payment of personal expenses.

34. Sole trader reports Income statement shows income less expenses
No taxation is shown
Balance sheet has only one capital account
Profit (or loss) added (or subtracted) to capital account (in balance sheet)
Under the separate entity concept, the owner’s personal finances and business finances are kept separate.
Here we are looking at reports of their business.

35. Sole trader reports continued
GG Coffee – G. Green
Income statement for the period ended 31 December 2010
Income
Sales $12 000
Cost of sales
Gross profit
Operating expenses
Administration expenses $ 600
Rent
Finance expenses
Depreciation of store equipment
Wages and salaries
Profit $
The capital contributed by the owner and all the profit (or loss) belongs to the owner.

36. Balance sheet as at 31 December 2010
GG Coffee – G. Green
Balance sheet as at 31 December 2010
Current assets
Cash on hand $
Cash in bank $
Non-current assets
Store equipment
Less Accumulated depreciation
Total assets
Current liabilities
Accounts payable
Non-current liabilities
Bank loan
Total liabilities
Net assets $
Owner’s equity
Capital – G Green
Profit (loss)
Total equity $

37. Partnership reports
Profit and loss is split according to original capital contributions as shown in agreement
Balance sheet has a capital account (and often a current account) for each partner
No taxation is shown
No taxation is shown because each partnership is individually liable.
- Must show distribution in personal income tax return

38. Peter, Mukesh and Michaela - Accountants
Income statement for the period ended 31 December 2010
Income
Fees $20 000
Expenses
Administration expenses $1 200
Rent
Finance expenses
Depreciation of office furniture
Profit $15 600
Distributions to partners
Salary Peter
Mukesh
Michaela
Distribution of remaining profit to current a/c
Peter (50 000/ x 6600)
Mukesh ( / x 6600)
Michaela (30 000/ x 6600)
$15 600
Main difference between partnership and sole trader’s reports is in the distribution of profit (split).
For a sole trader, all is passed to the owner.
For a partnership, the split of profit (loss) is in accordance with partnership agreement. In this case it is in the same ratio as the original capital contribution.

39. Peter, Mukesh and Michaela - Accountants
Balance sheet as at 31 December 2010
Current assets
Cash on hand $
Cash in bank $
Non-current assets
Office building
Office furniture
Less Accumulated depreciation
Total assets
Current liabilities
Accounts payable
Non-current liabilities
Bank loan
Total liabilities
Net assets $
Partners’ equity
Capital Peter
Mukesh
Michaela
Current Peter
Mukesh
Michaela $
Partners’ equity accounts may be totalled together with original contribution or separated as in this example.
In this example, there are 3 current accounts showing the total received from the business by each partner.
The 3 capital accounts show what each partner contributed.

40. Company reports – private company
The income statement shows
Income tax being deducted directly from company profit
a reconciliation of retained profits (after dividends have been deducted)
The balance sheet shows
share capital as opposed to owner’s or partner’s capital account
retained earnings
Retained earnings represents the sum of profits retained by the entity that have not been distributed as dividends or transferred to other equity accounts (reserve accounts).
So instead of having a current account for each partner, we now have a combined retained earnings account held by the shareholders jointly.

41. Company reports – private company continued
Pascqual Recruitment Pty Ltd
Income statement for the period ended 31 December 2010
Income
Consulting fees $
Operating expenses
Administration expenses $15 000
Rent
Finance expenses
Depreciation of office furniture
Insurance
Advertising
Profit before tax
Taxation expense (30%)
Profit after tax $
The profit after tax can be either:
(1) distributed to shareholders as dividends or
(2) retained in the companies for future growth as retained earnings or retained profits

42. Pascqual Recruitment Pty Ltd Balance sheet as at 31 December 2010
Current assets
Cash on hand $15 550
Accounts receivable $
Non-current assets
Building
Office equipment
Less Accumulated depreciation
Total assets
Current liabilities
Accounts payable
Non-current liabilities
Bank loan – due
Total liabilities
Net assets $
Shareholders’ equity
Share capital
Retained earnings $
In this case, we can see that even though the profit after tax was $53 550, only $ is shown as retained earnings.
The difference has probably been paid out as a dividend.
i.e. shareholders have been paid a total of $5000.
Teaching tip: Ask students:
Why they think dividends are sometimes paid and sometimes not.
What sort of company they would prefer to invest in – one that paid dividends or one that re-invested the dividends so as to grow

43. Company reports – public company
The income statement and balance sheet are prepared in accordance with pronouncements of the Australian Accounting Standards Board (AASBs)
These AASBs include the Australian equivalents of IFRSs
Undistributed profits sit in retained earnings on the balance sheet.

44. Non-Profit Organisations
Does not have as its principal objective the generation of profit
The operating purpose is other than providing goods or services at a profit!
Note – it still has Revenues & Expenses!
Therefore it still produces financial reports !

45. SUMMARY
Each of the financial statements reflects the business entity’s financial performance and financial position separately from those of the owner(s)
The main differences occur in the distribution of profits to respective owners
This in turn has tax implications
Sole trader: owner has sole right to any profits.
Partnerships: partners have rights to profits as outlined in partnership agreement.
Company profit is either:
Distributed to shareholders in the form of dividends, or
Retained in the firm to enable investment and growth

46. Trust Accounting
Trust Accounts are required by Law for a number of Businesses:
Real Estate &/or Property Agents
Travel Agents
Insurance Brokers & Agents
Solicitors

47. Legal Requirements A Separate Bank Account Separate Records to be kept
Keep all client money separate!
Transfer from Trust Account to General Account only when Transaction is Legally completed!
Separate Records to be kept
Specific receipt book
Accounting Records
Specific Audit of Trust Account records

48. Trust Accounting Issues
Must Establish Trust Account Record keeping System
Separate set of books from general business
Must follow the law with regards to disbursements from Trust Account
Authorisation & confirmation of payments
Must supervise staff & monitor Trust Account transactions
Privacy legislation
Bank reconciliations
Must have external Audit of Trust Account

49. Property Agents
Trust accounts for the Management Rights Industry in Queensland is governed by the following Legislation:
Property Occupations Act 2014 (as amended)
Property Occupations Regulation 2014 (as amended)

50. Part 4 Keeping documents
Property Occupations Regulation Act 2014 (as amended)
15 Keeping documents
(1) This section applies subject to the Evidence Act 1977, section 111.
(2) A principal licensee must keep each document the licensee is required to keep under the Act—
(a) in a secure, orderly and accessible way; and
(b) for at least 5 years.
Maximum penalty—10 penalty units.

51. Part 8 Trust accounts 169 Keeping trust accounts
Property Occupations Act 2014 (as amended)
169 Keeping trust accounts
(1) A principal licensee must keep a trust account under the Administration Act if an amount is likely to be received by the licensee for a transaction, or with written direction for its use, when performing the activities of a property agent or resident
letting agent.
Maximum penalty—200 penalty units or 2 years imprisonment.

52. Trust Account Transactions
Cash Book
Journal or
Computer
Money
Received
Issue a Receipt
Bank Deposit
Credits
Client Ledger
Record
Trust Ledger
Control
Debits
Issue a Cheque
Or EFT payment
Money
Paid
Cash Book
Journal or
Computer

53. Homework for Next Week Ch 1: CQ 1.9, 1.14 (note the change of numbers)
Questions for Tutorial
Ch 1: CQ 1.9, 1.14 (note the change of numbers)
Ch 3: PR 3.37; 3.42
Additional Question - Trust Accounts
Refer to questions below:
TA 1. Explain why some businesses operate a Trust Account.
TA 2. Identify at least three types of business that operate a Trust Account.
TA 3. What Part of the Property Occupations Act 2014 requires a Trust Account to be used?
TA 4. Identify the four Trust Accounting Issues that a business must adhere to.
Due date = Tutorial Next week