FINANCIAL ACCOUNTING

APPLICATIONS

Review of Accounting
Basics
&
Accounting
Environment

Financial Accounting
Applications
Unit Coordinator:

Mamun Billah

Campbelltown :
Building 11.13
Phone :
(02) 4620 3230
Email for unit : [email protected]

Parramatta day
Lecturer : Mamun Billah
Parramatta : Vernon Building
Phone : (02) 4620 3230
Email (preferred) : [email protected]

Parramatta evening
Lecturer

Email (Preferred)

: Rina Datt
:

[email protected]

Bankstown evening
Lecturer
Email (Preferred)

: HemayetUddin
:

[email protected]

Campbelltown day
Lecturer
Email (preferred)

: Mamun Billah
:

[email protected]
3

Presentation of this
unit
Full lecture slides posted on vUWS as an aid
for summaries, reference and to prepare for
homework
These lecture slides are examinable (their content will
be on the exams)

Online workshops will be conducted each

week in the posted lecture times

These will be focusing on working out problems and not

on discussing content of lecture slides

Homework set each week

Will be assessed through online submission each week

In class tutorial workshop will be attempted &

submitted in tutorial time
Workshop slides and homework solutions
will be posted on vUWs at the end of the week
Friday, there will be no in class tutorial solutions 4
posted.

FAA Passing grade

essentials
To ensure your success in this unit you will need
to : Attend 80% of your classes
Pass the threshold mark in the final exam and
achieve an overall mark over 50
Sit for Mid semester exam in week 7
Submit your practice set assignment in week
12
SUBMIT HOMEWORK ONLINE AND
TUTORIALS!!!!!
And enjoy success!!!!!

What is Accounting
Nature of Accounting
Accounting is a service activity. Its function is to
provide and interpret financial information
that is intended to be useful in making
economic decision
Accounting is used by all organisations including
Business (Woolworths Ltd, JB Hi Fi Ltd etc)
Government (ATO, Dept of Immigration,
CityRail etc.)
Charities (Salvos, St Vincents De Paul, World
Vision etc.)
6

What is Accounting
Accounting Defined
As a PROCESS of identifying,
measuring, recording and
communicating economic information
to permit informed judgements and
economic decisions by users of
accounting information

ACCOUNTING
PROCESS
Identification

Transactions (internal/external)

Measurement

Quantification in monetary terms ($)

Recording

Recording; classification; summarisation

Communication
Accounting reports

Analysis and
interpretation

BASIC FINANCIAL
STATEMENTS
Accounting is an information
system
Designed to communicate financial
information
To interested users
For making economic decisions

Financial statements
Are the outcome of the accounting process
Are a primary information source for users
Are useful for many decisions

3 PRIMARY
INFORMATION TYPES
Financial Performance
The ability of the entity to utilise its assets effectively
and efficiently.
What are the business goals (i.e. profit/nor for profit)?

Financial Position
The financial resources controlled by the entity
Financial structure
Measure of liquidity and solvency

Cash Movements
The ability of the entity to generate cash flow, focussing
on three areas: Operating, Investing and Financing
activities

Financial Accountants use these

Basic Financial Statements
Income statement (Financial Performance)
Operating efficiency over a period of time
Week ended, month ended year ended etc.

Balance Sheet (Financial Position)

Economic condition at a point in time (as at , freeze
frame it now!)

Cash flows
(inflows and outflows of cash over a period of time)

USERS OF ACCOUNTING
INFORMATION
Internal Users
How much profit?
What should be
produced?
What resources are
available?
How much does it
cost?
How much do we
owe?
What would happen
if?

External
Users
Should
I invest?
Can the business
pay?
Wages? Loans?

Will they make a

profit?
Are they behaving
ethically?
Is the business
socially and
environmentally
friendly?

FINANCIAL REPORTS
AND USERS

ASSUMPTIONS MADE AND

CHARACTERISTICS OF INFORMATION
Assumptions
Accounting entity assumption
Identify clearly the boundaries of the entity being accounted for
Personal transactions of the owner must remain separate from
the transactions of the entity
Accrual basis assumption
Transactions and events recorded when they occur

Going concern assumption

Unless we have evidence to the contrary, we assume an entity
will continue to operate in the future
Period assumption
The life of the entity can be broken up into equal time
intervals
Profit is determined for particular periods of time in order to be
comparable.
14

QUALITATIVE CHARACTERISTICS
OF FINANCIAL STATEMENTS
Relevance
Information is useful for decision making
Can influence economic decisions by users

Faithful Representation
Information presented faithfully, without bias or
undue error
Economic substance over form

Comparability and Consistency

Users can identify similarities and differences
between two sets of economic data

QUALITATIVE CHARACTERISTICS
OF FINANCIAL STATEMENTS
Verifiability
Different, independent observers can reach consensus that
information faithfully represents what it claims to

Understandability
Expect a reasonable knowledge of business and economic
activity and financial accounting
Study the information with reasonable diligence

Materiality
The extent to which omission or misstatement would be
misleading to users

Benefits and Costs

Benefits of providing information must justify cost of providing

TYPES OF BUSINESS
ENTITIES
Single proprietorship or sole
trader
Owned by one person

Partnership
Owned by two or more partners

Company or corporation
Owned by shareholders
Separate legal entity
Limited liability

What are Accounts ?

The account is the basic summary
device of accounting.
Each account provides a record of
increases and decreases in that
specific item.
Accounts are grouped into five
categories:
Reported on the Balance

Sheet (Statement of Fin

Assets
Position)
Liabilities
Reported on the Income
Owners Equity
Statement (Statement of
Revenues Comprehensive Income)
Expenses
18

Accounts
Assets are the economic resources controlled by an
entity that will provide a future economic benefit.
Liabilities represent the debts of an entity. They
reflect a current obligation to sacrifice economic
benefits at some given time in the future.
Owners Equity is the net assets of a firm (ie Assets
liabilities)
Revenue: inflows of economic benefits, ie income
earned from performing services or selling goods
Expenses: outflows of economic benefits, ie the costs
incurred in operating a business
Current and Non Current

Examples of Accounts
Account Type

Account Name (some examples only, not

the complete list)

Assets

Current Assets: Cash, A/c receivable, Inventory,

Supplies Non-current Assets: Furniture, Motor
vehicles, Building

Liabilities

Current Liabilities: A/c payable, Rent payable

Non-current Liabilities: Bank Loan, Mortgage

Owners
equity

Share capital, Retained earnings: which is reduced

by Dividends (for a company) ORCapital
which is reduced by Drawings (for a sole
trader or partnership)

Revenue

Sales revenue, Service revenue, Interest

revenue, Rental revenue, Advertising
revenue etc

Expense

Wages expense, Electricity expense, Supplies

expense, Rent expense, Bank charges, Fuel
expense, Telephone expense etc

DOUBLE-ENTRY
ACCOUNTING
Each transaction must be analysed
to determine:
What type of accounts are affected
Assets; Liabilities; Equity; Income; Expense

By how much each item must be increased

or decreased

The accounting equation must

always remain in balance

Analysing a transaction
Business transactions need to be analysed to

identify which accounts they affect so we can

record them.
Remember: The basic accounting equation, is

Assets = Liabilities + Owners Equity

Following the principles of double entry book-keeping
transactions will cause CHANGES in at least TWO
accounts.

Extending the accounting equation

The basic accounting equation can be extended by recognising the
following relationships:
Assets = Liabilities + Owners Equity
Owners Equity is made up of:
Capital
And Profit/(Loss)
(Revenues Expenses)
Less drawings
Or for a company:
Share Capital
And Retained profits
Less dividends

Effects of Transactions on
Accounting Equation and
Financial Statements
Assets
Assets == Liabilities
Liabilities ++ Equity
Equity
Transactions result in changes
in assets, liabilities and equity
Every transaction affects at
least
2 components of the
accounting equation
After each transaction is
recorded the equation is still in

24

Debits and Credits

Assets = Liabilities + OE
If we expand this
Assets = Liabilities + [Capital - Drawings+
Revenues Expenses]
If we put like signs on the one side
Assets + Drawings + Expenses = Liabilities
+Capital + Revenues
Dr Dr
Dr= Cr Cr Cr

DEBITS AND CREDITS

Rules
Assets are debit in nature
Debits = Credits
Accounting equation: A = L + Eq
Therefore, Liabilities and Equity must be credit in
nature

Income increases Equity; credit increases

Equity
Therefore Income must be credit in nature

Expenses decreases Equity; debit decreases

Equity
Therefore Expenses must be debit in nature

DEBIT AND CREDIT

RULES
Accounts: Balance Sheet
Assets
= Liabilities +
Equity
Debit to
Credit to Debit toCredit to Debit toCredit to
increase
decrease decrease
increase decrease
increase

Normal
balance

Normal
balance

Normal
balance

DEBIT AND CREDIT

RULES
Accounts: Income Statement
Income (incl. revenues)
Debit to Credit to
decreaseincrease

Normal
balance

Expenses

Debit to Credit to
increase decrease

Normal
balance

DEBIT AND CREDIT

RULES
All assets accounts = All liability accounts +
All equity accounts
DrCredit
Cr to Debit Dr
Cr to Debit toDr
CreditCr
to
Debit to
to Credit
increase decrease decreaseincrease decreaseincrease
Normal
Normal
Normal
balance
balance
balance
Expense
Income
accounts
accounts
Drto Credit to DebitDr
to Credit to
Debit
Cr
Cr
decrease decrease
increase
increase
Normal
Normal
balance
balance

Debits and Credits

Normal balances
Assets are debits A
Drawings are debits D
Expenses are debits E
Liabilities are credits L
Capital are credits
C
Revenue are credits R

NORMAL ACCOUNT
BALANCES

Account
Assets
Liabilities

Normal Increases
balance recorded on
Dr
?

Owners equity
Capital (Investment in entity)
Drawings (from the entity)
Revenues
Expenses

?
?

LHS side
? side
? ? side
? ? side
? side
? side
31

Try this
Identifying type of account, debit/credit analysis and normal
Tsz Yeung Printers ledger accounts are listed below:
For each account listed below, complete a solution form as shown
below by placing a tick in the proper columns to indicate the type of
account, the side of a T account on which increases are recorded,
and the side on which normal balances are recorded
Accounts Payable
Accounts Receivable
Rent Revenue
Tsz Yeung , Capital
Cash at bank
Tsz Yeung ,
Drawings
Interest expense
Unearned Revenue
Prepaid
Insurance

Account

1. Accounts Payable
2. Accounts Receivable
3. Buildings

Type of Account

Normal
balance

Debit Credi Debi Credi

t
t
t

Asset Liabilit Equity

y
(includ
es
income
and
expens
es)

Increases

Things to do this
week
Attend your registered tutorial
class
Participate in the discussion and
work in groups and submit your
workshop attempt in the tutorial
Submit you homework online
through Wiley Plus link on vUWS
34