Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 1 Accounting For Management Decisions (DBA10AMD) WEEK 3 MEASURING AND REPORTING FINANCIAL TRANSACTIONS TEXT CH 3 READING: TEXT CH 3

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 2 Learning Objectives Explain the nature and purpose of the balance sheet Demonstrate an understanding of assets in terms of definition, recognition and measurement. Demonstrate an understanding of liabilities in terms of definition, recognition and measurement. Discuss the nature of owner’s equity Explain the basic accounting equation Explain the effect of transactions on the balance sheet accounts Discuss the main factors that influence the content and values in a balance sheet

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 3 Nature and Purpose of a Balance Sheet Learning Objective: Explain the nature and purpose of the balance sheet The purpose of the balance sheet is to set out the of a business at a particular in time It contains a photo of the of the entity at that point in time As from January 2009 an accounting standard recommendation is that the balance sheet should be referred to as a ‘ ’

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 4 Assets Learning Objective: Demonstrate and understanding of assets in terms of definition, recognition, measurement and classification Definition: : (AASB Framework) “A resource by the entity as a result of events, and from which are expected to flow to the entity”

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 5 Assets cont’d The main identifying characteristics of assets are: Expected future economic The business has exclusive right to the benefit The benefit must arise from a transaction or event The asset must be capable of in monetary terms Note that these conditions limit the kind of items that may be referred to as ‘ ’ in financial reports

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 6 Assets cont’d Some examples of items that appear as assets in a business balance sheet include: Freehold premises Cash Machinery and equipment Inventory Patents and trademarks Debtors Investments Assets may be either (items with a substance) or ( physical substance eg patents)

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 7 Claims Against the Assets There are essentially types of claims against the assets of an entity: claims: known as (eg money owed to a bank) claims - labelled, equity or capital (eg owner’s investment in the assets of the business)

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 8 Liabilities Learning Objective: Demonstrate an understanding of liabilities in terms of definition, recognition, measurement and classification Definition: : (AASB Framework) “A of the entity arising from events, the settlement of which is expected to result in an from the entity of resources embodying economic ”

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 9 Liabilities cont’d In addition to meeting the definition on the previous slide, there are recognition criteria: (in the case of liabilities, it is more likely than not that a future sacrifice of economic benefits will occur) (in the case of liabilities the amount of the claim can be determined with acceptable precision or accuracy)

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 10 Liabilities cont’d Some examples of items that appear as liabilities in a business balance sheet include: entitlements and other facilities provisions and other social or moral Provision for or owners distribution

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 11 Owners’ Equity (OE, or ‘Equity’) Learning Objective: Discuss the nature and classification of owners’ equity Definition: The of the owners against the AASB Framework defines equity as the “ in the of the entity after all its.”

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 12 Owners Equity cont’d On the balance sheet, there are types of accounts: owners equity – represents the amounts contributed by owners or shareholders profits - represents profits that in the business (ie withdrawn by the owners) ‘ ’ - represent ‘ ’ owners equity accounts eg dividend equalisation reserve Note: Reserves represent ownership interests in the assets, the assets themselves. Reserves are separate deposits of cash available for other purposes.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 13 The Accounting Equation Learning Objective: Explain the basic accounting equation The basic accounting equation is expressed as: ( )( )( ) Assets ( ) = Liabilities ( ) + Owners’ equity ( ) This equation will hold true, as total claims are the same as total assets, ensuring that the balance sheet

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 14 The Accounting Equation

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 15 Effect of Trading Operations on the Balance Sheet Trading introduces to the balance sheet. To include the effects of trading, the balance sheet equation previously described is as follows: A = L + OE But now we can say: OE =

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 16 The Accounting Equation Contributed owners equity Retained profits Retained profits at beginning of period Profit/(- loss)

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 17 A = L + OE The Accounting Equation By substitution from previous page: A = L + OE + where: RP = retained profits

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 18 Accounting Transactions Let’s see how transactions affect the operation of this equation and the financial statements: are between entities that are accounted for and displayed in

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 19 Transaction analysis ACCOUNTS Transactions are in Accounts are then summarised in

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 20 Transaction analysis Explanation of some asset accounts that will appear in the balance sheet

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 21 Balance Sheet Explanation of some liability and owners equity accounts that will appear in the balance sheet

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 22 Transactions 1.The owners contributed $30.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 23 Transactions 2. Motor vehicles costing $25 were purchased for cash.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 24 Transactions 3. The business borrowed $15 from a friend.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 25 Transactions 4. Purchased Inventory costing $20, paid $10 in cash and promised to pay the remaining $10 in 1 month.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 26 Transactions 5. A motor vehicle that cost $7 was sold. $2 was received in cash and $5 will be received later.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 27 Transactions 6. Collected the $5 from the sale of the motor vehicle.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 28 Transactions 7. Sold inventory on account for $22. It originally cost $14.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 29 Transactions 8. Rent of $5 has been recorded as an expense, but not paid.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 30 Transactions

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 31 Transactions Note that the Accounting equation still holds true after all these transactions have been accounted for: If the accounting period was to end after these transactions, the financial statements could be prepared using the totals from the columns.

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 32 Factors Influencing the Form and Content of the Balance Sheet Learning Objective: Discuss the main factors that influence the content and values on a balance sheet There are main influences on the accounts included in the balance sheet: 1. accounting conventions and doctrines 2. More theoretical developments in conceptual framework projects 3. Professional and statutory

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 33 Factors Influencing the Form and Content of the Balance Sheet cont’d Accounting Practices: Made up of and accepted ideas on which accounting rules, records and reports are based These have collectively been known as (Generally Accepted Accounting Principles) Convention: Holds that for accounting purposes, the business and its owner(s) are treated as and distinct

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 34 Factors Influencing the Form and Content of the Balance Sheet cont’d Convention: Holds that accounting should only deal with those items which are capable of being expressed in terms ( ) Convention: Holds that assets should be recorded at their ( ) cost ( ) ( ) Convention: Holds that the business continue operations for the ie no intention or need to the business

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 35 Factors Influencing the Form and Content of the Balance Sheet cont’d Convention: Holds that each transaction has aspects and that each aspect must be recorded in the financial statements Convention: Holds that financial reports should err on the side of vis-à-vis recognition of losses, but only recognising profits they have been

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 36 Factors Influencing the Form and Content of the Balance Sheet cont’d convention: Holds that money, the unit of measurement in accounting, will in value over time convention: Seeks to personal and in financial reports. As far as possible, the financial reports should be based on evidence rather than on matters of convention: The life of the business is divided into specific of time for the purpose of financial information & preparing financial reports

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 37 Factors Influencing the Form and Content of the Balance Sheet cont’d convention: States that revenue will only be recognised and reported when it is, usually when the transaction is complete, can be measured and it is reasonably that the money will be received. convention: Holds that in measuring income, expenses should be to the revenues they helped generate, in the accounting period as those were

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 38 Factors Influencing the Form and Content of the Balance Sheet cont’d The Conceptual Framework ( ): Statements of Accounting Concepts ( ) were current until 2004, known as SACs and have now been by the adoption of the AASB Framework, and have been in their previous form While the CF and statements are they have on new and revised standards being issued

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 39 Factors Influencing the Form and Content of the Balance Sheet cont’d (AASB): Australian Accounting Standards (AASB): The history and significance of accounting standard setting in Aust. is covered in ch 2 affectRegarding the balance sheet, there are many standards that directly affect recording and reporting A, L and OE The implications of the AASBs will continue to be considered

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 40 Basis of Valuation of Assets on the Balance Sheet Learning Objective: Demonstrate an understanding of assets in terms of definition, recognition, measurement and classification While the ‘ ’ convention the conventional accounting system, conventions have led to from it. Examples include: convention period convention

Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia 41 Basis of Valuation of Liabilities on the Balance Sheet cont’d Learning Objective: Demonstrate an understanding of liabilities in terms of definition, recognition, measurement and classification While liabilities in general do have the same range of alternative measures as assets, there are still alternative bases for measurement, both in practice and in the accounting standards. These include: The amount of expected future sacrifice of the future known or expected cash outflows