Introduction: Accounting & Governance

Course Materials
Regularly
check the unit’s iLearn site for all information
about the unit, including assessment details, tutorial
solutions, staff consultation hours, announcements,
discussion forum etc
Please
note that you should be familiar with content in
the Unit Guide throughout the session Please
consult the teaching staff if you have any doubts
Active
Learning Platform ALP Echo 360
3
Textbook
Textbook
Financial Accounting, 6
Financial Accounting, 6ththEdition, by Edition, by CarlonCarlonet al.et al.
Purchase Options via Wiley Direct:
Purchase Options via Wiley Direct:
4 https://www.wileydirect.com.au/buy/financialhttps://www.wileydirect.com.au/buy/financial–accountingaccounting–reportingreporting–analysisanalysis–andand–decisiondecision–makingmaking–6th6th–edition/edition/
Interactive E
Interactive E–TextText
Textbook + Interactive E
Textbook + Interactive E–Text Text CodeCode
5
“Begin with the end in mind”
“Begin with the end in mind” ––Steven R. CoveySteven R. Covey
Assessments
Assessments
To pass this unit, your overall performance must be satisfactory.
To pass this unit, your overall performance must be satisfactory.
6
Weight
Weight
Due date
Due date
Weight
Weight

1. Assessed Coursework
2. Assessed Coursework ––TutorialTutorialHomeworkHomework
   Weekly from Week 2
   Weekly from Week 2
   8%
   8%
3. Class Tests
4. Class Tests
   Week 8
   Week 8
   17%
   17%
5. Assignment
6. Assignment
   a)
   a)Individual report Individual report
   Week 10
   Week 10
   10%
   10%
   b)
   b)Group componentGroup component
   Week 10
   Week 10
   10%
   10%
7. Final Exam
8. Final Exam
   Examination
   Examination periodperiod
   55%
   55%
   Total
   Total
   100%
   100%
   Let’s begin with the end in mind!
   Let’s begin with the end in mind!
   7
   PART ONE:
   PART ONE:ACCOUNTING AND GOVERNANCEACCOUNTING AND GOVERNANCE
   Learning objectives
   Learning objectives
   1.
   1.Role of accountingRole of accounting
   2.
   2.Use of accounting informationUse of accounting information
   3.
   3.Management Accounting vs. Financial AccountingManagement Accounting vs. Financial Accounting
   4.
   4.Diverse roles of accountantsDiverse roles of accountants
   5.
   5.Forms of business organisationForms of business organisation
   6.
   6.Accounting and GovernanceAccounting and Governance
   LO1: Role of accounting
   LO1: Role of accounting
   Primary function of accounting is to provide financial
   Primary function of accounting is to provide financial informationinformationfor decision making.for decision making.
   Accounting is regarded as the language business.
   Accounting is regarded as the language business.
   8
   LO2: Use of accounting information
   LO2: Use of accounting information
   9
   INTERNAL USERS
   INTERNAL USERS
   EXTERNAL USERS
   EXTERNAL USERS
   Investors, customers, suppliers
   Investors, customers, suppliers and banks, government and banks, government authorities (e.g., ATO, ASIC), etc.authorities (e.g., ATO, ASIC), etc.
   Should I invest?
   Should I invest?
   How solvent
   How solventis the business?is the business?
   Can
   Canthey repay?they repay?
   Will
   Willthey make a profit?they make a profit?
   Is
   Isthe business producing products the business producing products that are socially and that are socially and environmentally friendly?environmentally friendly?
   Is the business performing better this
   Is the business performing better this year?year?
   Managers: e.g. production
   Managers: e.g. production supervisors, marketing supervisors, marketing managers, and directorsmanagers, and directors
   What should be produced?
   What should be produced?
   What resources are available?
   What resources are available?
   How much does it cost?
   How much does it cost?
   How much do we owe?
   How much do we owe?
   Do we have
   Do we haveenough cash?enough cash?
   Are we meeting the budget?
   Are we meeting the budget?
   Management accounting provides information for
   Management accounting provides information for decision making within the business.decision making within the business.
   Financial accounting provides information to assist
   Financial accounting provides information to assist external users’ decision making.external users’ decision making.
   10
   LO3: Management Accounting vs. Financial Accounting
   LO3: Management Accounting vs. Financial Accounting
   Financial accounting
   Financial accounting
   Management accounting
   Management accounting
   External users, who include
   External users, who include shareholders and creditorsshareholders and creditors
   Main users
   Main users
   Internal users, who are officers,
   Internal users, who are officers, department heads, managers in department heads, managers in the businessthe business
   Classified financial statements
   Classified financial statements
   Delayed, historical
   Delayed, historical
   Issued quarterly, half
   Issued quarterly, half–yearly and yearly and annuallyannually
   Types and
   Types and frequency of frequency of reportsreports
   Internal reports
   Internal reports
   Current, future
   Current, future–orientedoriented
   Issued as frequently as need
   Issued as frequently as need arisesarises
   To provide general purpose
   To provide general purpose information for all usersinformation for all users
   Purpose of
   Purpose of reportsreports
   To provide special purpose
   To provide special purpose information for a particular user information for a particular user for a specific reasonfor a specific reason
   LO3: Management Accounting vs. Financial Accounting
   LO3: Management Accounting vs. Financial Accounting
   11
   LO3: Management Accounting vs. Financial Accounting
   LO3: Management Accounting vs. Financial Accounting
   Financial accounting
   Financial accounting
   Management accounting
   Management accounting
   Pertains to entity as a whole and
   Pertains to entity as a whole and is highly aggregatedis highly aggregated
   Limited to double
   Limited to double–entry entry accounting system and cost dataaccounting system and cost data
   Reporting standard is GAAP
   Reporting standard is GAAP
   Contents of
   Contents of reportsreports
   Pertains to subunits of entity and
   Pertains to subunits of entity and may be very detailedmay be very detailed
   May extend beyond double
   May extend beyond double–entry entry accounting system to any type of accounting system to any type of relevant datarelevant data
   Reporting standard is relevance to
   Reporting standard is relevance to decision being made decision being made
   Annual independent audit by
   Annual independent audit by external auditorexternal auditor
   Verification
   Verification processprocess
   No independent audit
   No independent audit
   12
   LO4:Diverse roles of accountants
   LO4:Diverse roles of accountants
   Commercial accountants:
   Commercial accountants:
   •
   •Work in industry and commerce.Work in industry and commerce.
   •
   •Undertake roles such as management accounting and financial accounting.Undertake roles such as management accounting and financial accounting.
   Public accountants:
   Public accountants:
   •
   •Provide their professional services to the public and work in a range of Provide their professional services to the public and work in a range of offices from small to multioffices from small to multi–national.national.
   •
   •Services provided include auditing, taxation and advisory services.Services provided include auditing, taxation and advisory services.
   Government accountants:
   Government accountants:
   •
   •Employed by local councils, state government and federal government.Employed by local councils, state government and federal government.
   •
   •Variety of roles such as financial accounting and auditing.Variety of roles such as financial accounting and auditing.
   Not
   Not–forfor–profit accountants: profit accountants:
   •
   •Work in the notWork in the not–forfor–profit sector.profit sector.
   •
   •Engage in planning, decision making, preparing financial and management Engage in planning, decision making, preparing financial and management reports for both internal and external users.reports for both internal and external users.
   13
   LO5: Major forms of business organisation
   LO5: Major forms of business organisation
   Sole proprietorship (sole trader):
   Sole proprietorship (sole trader):
   Owned by one person:
   Owned by one person:
   E.G. RESTAURANTS, PANEL BEATERS.
   E.G. RESTAURANTS, PANEL BEATERS.
   Partnership:
   Partnership:
   Owned by more than one individual:
   Owned by more than one individual:
   E.G. ACCOUNTANTS, SOLICITORS, DOCTORS.
   E.G. ACCOUNTANTS, SOLICITORS, DOCTORS.
   Company:
   Company:
   Organised as a separate legal entity and owned by
   Organised as a separate legal entity and owned by shareholders:shareholders:
   Most companies have limited liability.
   Most companies have limited liability.
   E.G. BHP, CSR, WESTPAC, RM WILLIAMS.
   E.G. BHP, CSR, WESTPAC, RM WILLIAMS. 14
   15
   In
   In–class Review class Review
   LO6: Accounting and Governance
   LO6: Accounting and Governance
   “
   “AccountingAccountingplaysplaysaapotentiallypotentiallycrucialcrucialroleroleinincorporatecorporategovernancegovernance””(La(LaPortaPortaetetal,al,19981998))..
   “
   “AccountingAccountingprovidesprovidesthetheinformationinformationrequiredrequiredforformostmostgovernancegovernancemechanismsmechanismstotooperateoperateefficientlyefficiently(Sloan,(Sloan,RR..,,20012001))..
   16
   LO6: What is corporate governance?
   LO6: What is corporate governance?
   Corporate governance
   Corporate governance –““the the system of checks and system of checks and balances, both internal and external to companiesbalances, both internal and external to companies, , which ensures that companies which ensures that companies discharge their discharge their accountabilityaccountabilityto all their to all their stakeholdersstakeholdersand act in a and act in a socially responsible way in all areas of their business socially responsible way in all areas of their business activity” (Solomon, 2013, p.7)activity” (Solomon, 2013, p.7)
   17
   Internal systems of checks and balances:
   Internal systems of checks and balances: e.g. e.g. internal control, risk management, independent internal control, risk management, independent board of directors. board of directors.
   External systems of checks and balances:
   External systems of checks and balances: e.g. e.g. codes and principles of good corporate codes and principles of good corporate governances, industry guidelines. governances, industry guidelines.
   Accountability:
   Accountability: The readiness or The readiness or preparedness of an organization to give preparedness of an organization to give an explanation and a justification for its an explanation and a justification for its judgments and/or actions when judgments and/or actions when appropriately called upon to do so appropriately called upon to do so ((RascheRasche& & EsserEsser, 2006, p.252), 2006, p.252)
   Stakeholder
   Stakeholder––“any“anygroupgroupororindividualindividualwhowhocancanaffectaffectororisisaffectedaffectedbybythetheachievementachievementofofthetheorganization’sorganization’sobjectives”objectives”(Freeman,(Freeman,19841984,,pp..4646))..
   18
   LO6: Accounting for Governance
   LO6: Accounting for Governance
   Accounting is an instrument of governance:
   Accounting is an instrument of governance:
   1.
   1.It helps managers discharge accountability to It helps managers discharge accountability to stakeholders (especially shareholders).stakeholders (especially shareholders).
   STEWARDSHIP
   STEWARDSHIP––FINANCIAL STATEMENTS SHOW HOW FINANCIAL STATEMENTS SHOW HOW THE MANAGERS HAVE ACCOUNTED FOR THE THE MANAGERS HAVE ACCOUNTED FOR THE RESOURCES ENTRUSTED TO THEM BY THE RESOURCES ENTRUSTED TO THEM BY THE SHAREHOLDERSSHAREHOLDERS
   2.
   2.Accounting information is the basis for decisionAccounting information is the basis for decision–making.making.
   3.
   3.Accounting Accounting has a direct role in providing information to has a direct role in providing information to facilitate the various mechanisms of corporate facilitate the various mechanisms of corporate governance. governance.
   19
   LO6: Why is governance important?
   LO6: Why is governance important?
   •
   •Prevent organizational fraud and Prevent organizational fraud and scandalsscandals
   •
   •Protect investors’ interest and promote Protect investors’ interest and promote investors’ confidenceinvestors’ confidence
   •
   •Enhance organizational reputationEnhance organizational reputation
   •
   •Lower cost of capitalLower cost of capital
   20
   21
   In
   In–class Reviewclass Review
   22
   PART TWO:
   PART TWO:BRIEF REVISION BRIEF REVISION
   Learning objectives
   Learning objectives
   1.
   1.Accounting concepts and principlesAccounting concepts and principles
   2.
   2.Accounting cycleAccounting cycle
   LO1: Accounting concepts and principles
   LO1: Accounting concepts and principles
   Monetary principle:
   Monetary principle:
   •
   •Items included in accounting records must be able to be expressed in Items included in accounting records must be able to be expressed in monetary terms (e.g. $).monetary terms (e.g. $).
   Cost principle:
   Cost principle:
   •
   •All assets are initially recorded in the accounts at their purchase price or All assets are initially recorded in the accounts at their purchase price or cost.cost.
   •
   •To provide useful information, sometimes entities need to deviate from cost To provide useful information, sometimes entities need to deviate from cost principle (e.g. revaluation of nonprinciple (e.g. revaluation of non–current assets).current assets).
   Accounting entity concept:
   Accounting entity concept:
   •
   •Every entity can be separately identified and accounted for.Every entity can be separately identified and accounted for.
   •
   •Owner’s transactions are separate from entity’s transactions.Owner’s transactions are separate from entity’s transactions.
   Going concern principle:
   Going concern principle:
   •
   •Business will remain in operation for the foreseeable future.Business will remain in operation for the foreseeable future.
   23
   LO1: Accounting concepts and principles
   LO1: Accounting concepts and principles
   Accounting period concept:
   Accounting period concept:
   •
   •The life of a business entity can be divided into artificial periods.The life of a business entity can be divided into artificial periods.
   •
   •Useful reports covering those periods can be prepared for the entity.Useful reports covering those periods can be prepared for the entity.
   Full disclosure principle:
   Full disclosure principle:
   •
   •All circumstances and events that could make a difference to decisionAll circumstances and events that could make a difference to decision–making process should be disclosed in the financial statements.making process should be disclosed in the financial statements.
   24
   Transaction
   Transaction
   analysis
   analysis
   Journalise
   Journalise
   transactions
   transactions
   Post to
   Post to
   ledger accounts
   ledger accounts
   Journalise & post
   Journalise & post
   adjusting entries
   adjusting entries
   Prepare adjusted
   Prepare adjusted
   trial balance
   trial balance
   Prepare post
   Prepare post–closingclosing
   trial balance
   trial balance
   LO2:
   LO2: ACCOUNTING CYCLE ACCOUNTING CYCLE
   Prepare
   Prepare
   financial statements
   financial statements
   Journalise & post
   Journalise & post
   closing entries
   closing entries
   Prepare
   Prepare
   trial balance
   trial balance
   Debit to
   Debit to
   decrease
   decrease
   Credit to
   Credit to
   increase
   increase
   Normal
   Normal
   balance
   balance
   Debit to
   Debit to
   increase
   increase
   Credit to
   Credit to
   decrease
   decrease
   Normal
   Normal
   balance
   balance
   Debit to
   Debit to
   decrease
   decrease
   Credit to
   Credit to
   increase
   increase
   Normal
   Normal
   balance
   balance
   Debit to
   Debit to
   increase
   increase
   Credit to
   Credit to
   decrease
   decrease
   Normal
   Normal
   balance
   balance
   Debit to
   Debit to
   decrease
   decrease
   Credit to
   Credit to
   increase
   increase
   Normal
   Normal
   balance
   balance
   *
   *Expense accountsExpense accounts
   Dr Cr
   Dr Cr
   *
   *Income accountsIncome accounts
   Dr
   DrCrCr
   All assets accounts = All liability accounts + All equity accounts
   All assets accounts = All liability accounts + All equity accounts
   Accounting Equation
   Accounting Equation
   Asset accounts
   Asset accounts
   Dr Cr
   Dr Cr
   Liability accounts
   Liability accounts
   Dr Cr
   Dr Cr
   Equity accounts
   Equity accounts
   Dr Cr
   Dr Cr

• Expanded Accounting Equation:
• Expanded Accounting Equation: Assets = Liability + [Capital + Income Assets = Liability + [Capital + Income ––Expenses] Expenses]

1. T
2. Transactionransactionanalysis analysis
3. Adjusting entries
4. Adjusting entries
   •
   •In many cases the period in which cash is paid or In many cases the period in which cash is paid or received received does not coincide does not coincide with period in which with period in which expense and income are recognised.expense and income are recognised.
   •
   •Therefore, in order for our statements to reflect Therefore, in order for our statements to reflect what has actually happened, some accounts must what has actually happened, some accounts must be adjusted on the last day of the accounting be adjusted on the last day of the accounting period to correctly recognise income and period to correctly recognise income and expenses not reflected in cash receipts or expenses not reflected in cash receipts or payments.payments.
   29
   Classifications
   Classifications
   Prepaid expenses
   Prepaid expenses
   Unearned revenue
   Unearned revenue
   Accrued expenses
   Accrued expenses
   Accrued revenues
   Accrued revenues
   Classification
   Classification
   (paid but not yet incurred)
   (paid but not yet incurred)
   (received but not yet delivered)
   (received but not yet delivered)
   (incurred but not yet paid)
   (incurred but not yet paid)
   (earned but not yet received)
   (earned but not yet received)
   Each entry affects the income statement (revenue or expense)
   Each entry affects the income statement (revenue or expense)
   and the balance sheet (asset or liability)
   and the balance sheet (asset or liability)
   30
   PREPAID EXPENSES
   PREPAID EXPENSES
   T
   T
   ASSET
   ASSETACCOUNTACCOUNT
   T
   T
   EXPENSE
   EXPENSEACCOUNTACCOUNT
   Initial cost
   Initial cost
   Debit
   Debit
   Adjusting entry
   Adjusting entry
   Credit
   Credit
   Adjusting entry
   Adjusting entry
   Debit
   Debit
   Costs consumed or expired
   Costs consumed or expired
   Example
   Example: 1 March, 2018: Insurance premium of $2400 has been paid for the next 12 : 1 March, 2018: Insurance premium of $2400 has been paid for the next 12 months in advance. Assume the Company uses prepayment accounts.months in advance. Assume the Company uses prepayment accounts.
   Dr Prepaid Insurance $2400
   Dr Prepaid Insurance $2400
   Cr Cash at bank $2400
   Cr Cash at bank $2400
   30 June 2018 adjusting entry:
   30 June 2018 adjusting entry:
   Dr Insurance expense $800
   Dr Insurance expense $800
   Cr Prepaid insurance $800
   Cr Prepaid insurance $800
   31
   UNEARNED REVENUE
   UNEARNED REVENUE
   T
   T
   INCOME
   INCOMEACCOUNTACCOUNT
   T
   T
   LIABILITY
   LIABILITYACCOUNTACCOUNT
   Cash receipt
   Cash receipt
   Adjusting entry
   Adjusting entry
   Credit
   Credit
   Adjusting entry
   Adjusting entry
   Debit
   Debit
   Revenue
   Revenueearned during the periodearned during the period
   Example
   Example: 1 May, 2018. Clients have paid accounting fees of $3000 in advance for services : 1 May, 2018. Clients have paid accounting fees of $3000 in advance for services to be rendered in preparing their financial statements in June. to be rendered in preparing their financial statements in June.
   Dr Cash at Bank $3000
   Dr Cash at Bank $3000
   Cr Unearned Revenue $3000
   Cr Unearned Revenue $3000
   30 June 2018 adjusting entry:
   30 June 2018 adjusting entry:
   Dr Unearned Revenue $3000
   Dr Unearned Revenue $3000
   Cr Service Revenue $3000
   Cr Service Revenue $3000 32
   ACCRUED EXPENSES
   ACCRUED EXPENSES
   T
   T
   LIABILITY
   LIABILITYACCOUNTACCOUNT
   T
   T
   EXPENSE
   EXPENSEACCOUNTACCOUNT
   Adjusting entry
   Adjusting entry
   Credit
   Credit
   Adjusting entry
   Adjusting entry
   Debit
   Debit
   Expenses incurred
   Expenses incurred
   Example
   Example: B Ltd has a 20 year mortgage of $300 000, at 8% pa with an annual payment of : B Ltd has a 20 year mortgage of $300 000, at 8% pa with an annual payment of $15000 plus interest payable on February 28, 2014. Prepare the journal entry to record the $15000 plus interest payable on February 28, 2014. Prepare the journal entry to record the accrued interest for this transaction for the month of accrued interest for this transaction for the month of March 2013.March 2013.
   Dr Interest Expense $2000
   Dr Interest Expense $2000
   Cr Interest Payable $2000
   Cr Interest Payable $2000
   33
   ACCRUED REVENUES
   ACCRUED REVENUES
   T
   T
   INCOME
   INCOMEACCOUNTACCOUNT
   T
   T
   ASSET
   ASSETACCOUNTACCOUNT
   Adjusting entry
   Adjusting entry
   Credit
   Credit
   Adjusting entry
   Adjusting entry
   Debit
   Debit
   Revenue earned but not yet received
   Revenue earned but not yet received
   Example
   Example: Z Ltd signed an agreement on 1 June to provide accounting services : Z Ltd signed an agreement on 1 June to provide accounting services for a monthly fee of $1200 to one of their clients. The agreement provides for the for a monthly fee of $1200 to one of their clients. The agreement provides for the client’s fee to be paid on the 5 day of the following month. No journal entry was client’s fee to be paid on the 5 day of the following month. No journal entry was made on 1 June as no services had been provided. Prepare the journal entry to made on 1 June as no services had been provided. Prepare the journal entry to record this transaction for the month of June 2013.record this transaction for the month of June 2013.
   Dr Accounts Receivable $1200
   Dr Accounts Receivable $1200
   Cr Revenue $1200
   Cr Revenue $1200
   34
5. Closing Entries
6. Closing Entries
   Permanent and temporary accounts
   Permanent and temporary accounts
   35
   Closing Entries
   Closing Entries
   
   Income and expense accounts must be closed at the end Income and expense accounts must be closed at the end of each period to determine the profit and loss for the of each period to determine the profit and loss for the period.period.
   
   They begin and end each accounting period with a zero They begin and end each accounting period with a zero balance.balance.
   
   Profit and loss summary account is used to facilitate Profit and loss summary account is used to facilitate closing process and determination of profit.closing process and determination of profit.