The 10 Commandments Rules Which are?

Our laws are based on the 10 Commandments Why do we need laws? – So that everyone does the same thing.

Think about sport and games They all have rules! – So that everyone does the same thing

Imagine if there were no Road Rules! What would happen if everyone did what ever they liked!

Accounting has rules! These are called – Accounting Principles – Qualitative Characteristics

And accounting rules... Aim to achieve consistent methods in accounting. Provide definitions of basic terms and… …fundamental rules that outline the acceptable accounting procedures carried out in the day-to-day operations of all businesses. Everything we do in Accounting is governed by these rules.

To avoid confusion Statements of Accounting Concepts – Commonly referred to as SAC1or SAC2 and not be confused with School Assessed Coursework or SACs which you complete and I correct.

Accounting Principles These have mainly to do with records – Conservatism – Historical Cost – Entity – Reporting Reports – Monetary Unit – Consistency – Going Concern

Conservatism The effects of buying and selling are recorded in journals carefully. If a loss is likely to happen, it is recorded straight away. If a gain might happen, it is not recorded until it is sure to happen in case it turns into a loss in the mean time.

Historical Cost Items purchased for the business are recorded in journals at the value at which they were purchased. A vehicle loses value once it is purchased but it is recorded at its purchase price. A building may gain value as the years go by but it is recorded at its purchase price.

Entity The owner of a business must keep their private affairs separate from the business. When the business buys and sells items it is recorded in the businesses journals. When the owner buys things for his private use it is not recorded in the businesses journals.

Reporting Reports If a business can exist forever, when is profit calculated? – When it is sold? – When is closed down? Records are used to prepared the reports once a year.

Monetary Unit All sales or purchases are recorded in the journals in Australian dollars if the business is dealing in Australia. If a business is operating in America then the records would be made in American dollars.

Consistency Every time a purchase or sale is made it is recorded in the same manner. If it is not recorded in the same way, then the records cannot be compared over time.

Going Concern The owner records the business transactions in the journals for as long as the business exists. A business exists until it is closed down which could be many years. – E.g. Broken Hill Proprietary or BHP Billiton began as a mining company in the 1850’s. – The oldest continually running business is in Japan and began business in the 900’s.

Qualitative Characteristics These have mainly to do with reports – Comparability – Relevance – Reliability – Understandability

Comparability Reports must be prepared consistently so they can be compared one year to the next.

Relevance Only information that will affect any decision making should be included in the reports. If the information is not relevant to decision making then it should not be included in the businesses reports.

Reliability The reports must be based on information from the journals which have been recorded accurately. The information in the journals must come from source documents (cheque butts, receipts) which provide verifiable evidence.

Understandability Reports need to be readable and easily understood by any one with an interest in the business.

Links between the principles and qualitative characteristics Relevance is achieved by following the Entity and Reporting Period principles. The accounting information will be relevant 1)if it does not include the owner’s private transactions, 2) if the live of the business is divided up into easily understood reporting periods and 3) if all immaterial (small value) items are excluded.

Links between the principles and qualitative characteristics Comparability is achieved by being consistent. If the same accounting methods are not used consistency, the Statements cannot be compared. The information is not accurate.

If the rules are followed then the records and reports of the business will be accurate. The Accounting Principles and Qualitative Characteristics will be referred to through out the course.

The other Standard Accounting Concepts

SAC1: Definition of the reporting entity Explains how to identify a business as a reporting entity. – Selling goods or services in exchange for money

SAC2 Objective of general-purpose financial reporting Cash Flow Statement, Profit & Loss Statement or Balance Sheet – States who needs the reports. – What information do the users need? – What types of information do the users need? – Information must be relevant and reliable so that the users can make financial decisions. – They must be useful to a wide variety of users.

SAC4 Definition and recognition of the elements of financial statements Assets Liabilities Owner’s Equity Expenses Revenue

ASSETS Will provide a future economic benefits (money received in this or the next reporting period). Controlled (owned) by the business. Is money or something purchased by the business that can be evidenced by source documents e.g. cheque butts or the businesses invoice.

LIABILITIES A future sacrifice (payments) of economic benefits (money). An commitment to pay a debt in this or the next reporting period. Evidenced by a supplier’s invoice or loan documents.

OWNER’S EQUITY Assets - Liabilities = Owner’s Equity. Owner’s Equity = Assets – Liabilities If the owner puts in more money both the Assets (Bank) and Owner’s Equity (Capital) increase. If the owner takes out a loan, then Liabilities will increase and Owner’s Equity will decrease.

REVENUE Inflows of future economic benefits (money) Which increase Assets (Bank) Or decrease Liabilities (repay Loans) Which results in an increase in Owner’s Equity. Sales of goods or provisions of services. Must be verifiable by receipts.

EXPENSES Consumptions of future economic benefits (spending money). Decreases Assets (Bank goes down). Increase Liabilities (buying advertising on credit) Selling stock to earn revenue will incur other costs. These are expenses. They are the “bits used up” to make money and they are verified by cheque butts.

The end