Summary Accounting 1B Revision Notes ACCT1511

Accounting 1B Revision Notes Week 1: Financial Reporting Principles & Accounting Standards Accounting is the process of i endt i f i y ng, m aesuri g, n recor ding and c omm n ui at c ing financial information to relevant users. These include shareholders, creditors, regulators and other stakeholders. This is achieved through financial statements, including the Balance Sheet, Income Statement, Cash Flow Statement and Statement of Changes in Equity. The objective of these reports is to assist users in making economi c c de i i nss oby providing information about the f i n nac i l aos p i t on, p i e r or f ance and m cash f ow ls of an entity. Useful information requires the evaluation of the a bi l t i ofy an en t t i t ygo ener t acas e h / a sc h e q u i a lvnt e s . Reporting is regulated by the A ust r l an i c Se ur i i t es &I nv e st ent m om Cm i sis ons (ASIC) by the administration and enforcement of the C orpora ti nso c tA 200( 1 ):  s 297 – Financial statements must give a true and fair view  s 296 – Financial reports must comply with accounting standards such as: o GAAP – G eneral l A y c cept ed A ccoun t i ngPri c inl ps e. This provides the fame r w ork for presentation and preparation through a c om m on se t of t sd ana r s da d pn r c edu o r es . o AASB – The A us t r l ia anA ccount i ngSta d a n r sBo d a r d develops A us t al ri an Ac coun t i ngSta a nd r ds (AAS) which must be followed by Australian Companies. o I ASB – The I nt r ea tn i aon l ccou A n ti ng Sta nd a r ds Bo a r d develops international standards by providing general guidelines rather than specific rules. The R epo r i t ngEnti t y can consist of an i d ni va du l nti et y or a g r oup o f nt e t es usually controlled by a p i i a r nt eent it y. The principles underlying accounting are: Conventions Assumptions  Understandability – Readily understandable  Accrual Basis – Matching principle  Relevance – Potential to influence economic decisions (materiality)  Going Concern  Reliability – Free from material error/bias. Creates asymmetry. o Faithful Representation – Truthful recording - substance over form, neutrality, prudence/conservatism, completeness o Profits must never be overstated  Accounting Period  Accounting Entity  Economic Entity  Monetary Unit  Comparability – Must be consistent to allow for cross-comparison.  Historical Cost There is often a t ader - f o f between R e l e vance and R e l i bi a it l y. Relevance focuses on importance to users and the use of estimations to adjust for a f uture outlook. However, Reliability focuses on accuracy and asymmetrical accounting (eg. different standards for recording revaluations) and thus a h i s t r ioal cfocus. The effect on the financial statements can be conflicting. Week 2: Application of Financial Reporting Principles – Assets (1) Assets can be subdivided into Current Assets, Non-current Assets and Intangible Assets. The definition and recognition criteria of an asset is as follows: Definition Recognition Criteria  Potential to contribute to FEB  FEB are probable (ie. more likely than not)  Controlled by the entity (not necessarily owned)  The cost (eg. transaction price) or value (eg.  A result of a past event or transaction market price) can be measured reliably An item must f r i st satisfy the definitions. Then it must also satisfy the recognition criteria to be classified an Asset. It is not essential for an asset to be acquired at a cost, have tangibility, and be legally enforced. (NB: To gain marks in the exam, you must explain how each definition/recognition criteria is satisfied