Accounting—Present and Past CHAPTER 1 Accounting—Present and Past

Overview What is accounting? Who uses accounting? What do accountants do? How has accounting developed? Accounting standards Ethics and the accounting profession The conceptual framework Objective of financial reporting for businesses PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Accounting is the process of: What is accounting? Accounting is the process of: identifying measuring communicating economic information about an entity for decisions and informed judgements. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Users and uses of accounting information PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

What do accountants do? Financial Accounting Financial accounting generally refers to the process that results in the preparation and reporting of financial statements for an entity. Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

What do accountants do? Management / Cost Accounting Management accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process. Cost accounting relates to the determination and accumulation of product, process or service costs. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

What do accountants do? Auditing / Public Accounting Public accounting firms and individual Certified Practising Accountants (CPAs) and Chartered Accountants (CAs) provide auditing services and issue an independent auditor’s report. This report states whether the financial statements are prepared in conformity with Australian Accounting Standards and the Corporations Act. An auditor’s report can be unqualified or qualified. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

What do accountants do? Internal Auditing Internal auditors are professional accountants who perform functions much like those of an external auditor. However, internal auditors are employed in industry rather than public accounting, and often their functions are more comprehensive. Internal Auditing PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Governmental units (e.g., local, state, and federal levels) What do accountants do? Governmental & Not-for-Profit Accounting Governmental units (e.g., local, state, and federal levels) Not-for-profit entities (e.g., schools, hospitals, and religious organisations) require the same accounting functions to be performed as do other accounting entities. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

What do accountants do? Income Tax Accounting Tax practitioners deal with Federal, State and Foreign income tax laws. They often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? Mesopotamians record tax receipts on clay tablets. 3000 B.C. 1494 1494 - Luca Pacioli published the first textbook describing a comprehensive double-entry bookkeeping system. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? The industrial revolution of the 19th century generated the need for large amounts of capital to finance the enterprises that supplanted individual craftsmen. 3000 B.C. 1494 1800s This need resulted in the corporate form of organisation and the need to provide investors with reports showing the financial position and the results of operations. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? Accounting professionals in Australia organised themselves in the early 1900s and worked hard to establish certification laws, standardised audit procedures and other attributes of a profession. 3000 B.C. 1494 1800’s 1900s 1928 1928 – The Institute of Chartered Accountants in Australia (ICAA) was constituted by Royal Charter. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? 1946 – The ICAA issued the first attempt at codified standards: five recommendations of accounting principles. 3000 B.C. 1494 1800s 1900s 1928 1946 1952 1952 – The Australian Society of Accountants (ACA) was established. Forerunner to CPA Australia. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How Has Accounting Developed? 1966 – The Australian Accounting Research Foundation (AARF) was established by the two professional accounting bodies, to conduct research and issue accounting standards. 3000 B.C. 1494 1800s 1900s 1928 1946 1952 1966 1984 1984 – The Accounting Standards Review Board (ASRB) was established. Accounting standards given legal backing. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? 1991 – The Australian Accounting Standards Board (AASB) replaced ASRB. Accountable to Australian Securities Commission, later to become Australian Securities and Investment Commission (ASIC). 3000 B.C. 1991 1494 1800s 1900s 1928 1946 1952 1966 1984 1994 1994 – The Urgent Issues Group (UIG) was established – an interpretive committee for issues arising from existing accounting standards and SACs . PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? Late 1900s – Corporate Law Economic Reform Program (CLERP) and creation of Financial Reporting Council (FRC) with members appointed by the Treasurer to oversee AASB. 3000 B.C. 1991 2000 1494 1800s 1900s 1928 1946 1952 1966 1984 1994 2000 – Creation of new AASB with merging of Public Sector Accounting Standards Board (PSASB) and old AASB. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

How has accounting developed? 3000 B.C. 1494 1800s 1900s 1946 1952 1966 2003 2000 1994 1991 1984 1928 By 2003 – AASB had issued 44 accounting standards and UIG had issued 50 abstracts. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Accounting standards AASB – responsible for setting standards Financial Accounting and Reporting In consultation with: ICAA and CPA Australia ASIC ASX Institute of Directors Group 100 academics others. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Accounting standards Financial Accounting and Reporting GAAPs GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Principles that have developed over time to guide financial accounting and reporting. They are not codified in a set of rules. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Accounting standards Other types of accounting: Management/Cost Accounting Companies self- regulate Auditing/Public Accounting Auditing Standards Board Government and Not-for-Profit AASB Income Tax Accounting Income Tax Assessment Act PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

International Accounting Standards The International Accounting Standards Board (IASB) seeks methods of providing comparability between financial statements prepared according to the differing accounting standards of its member nations. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Accounting standards International Accounting Standards Australia will adopt the standards of the IASB from 1/1/05. As at the end of 2002, there were 41 international accounting standards. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Ethics and the accounting profession Joint Code of Professional Conduct CPA Australia ICAA Integrity Independence Objectivity Competence Obligation to serve employer, client and public PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

The conceptual framework (CF) Statements of Accounting Concepts (SACs) describe concepts and relationships that underlie financial accounting standards. SAC1 Definition of the Reporting Entity SAC2 Objective of General Purpose Financial Reporting SAC3 Qualitative Characteristics of Accounting Information SAC4 Definition and Recognition of Elements of Financial Statements Less focus on CF with adoption of International accounting standards. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Objective of financial reporting Information about: Earnings and Cash Flow Profitability Dividends Cash to pay debt Financial position What does the firm own? How much does the firm owe? PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd

Objective of financial reporting FINANCIAL ACCOUNTING AND REPORTING STANDARDS Modified to mirror developments in the business world Modified to reflect current views and theories of financial reporting PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides prepared by Sandra Chapple Copyright  2005 McGraw-Hill Australia Pty Ltd