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Learning Objectives

• Define accounting and describe the accounting process

• Identify users of accounting information

• Explain the characteristics of the main forms of business organisations

• Identify the elements of the financial statements

• Describe the financial reporting environment in NZ

Learning Objectives

• Analyse transactions using the accounting equation

• Prepare a journal entry and ledger account

• Apply the rules of debit and credit

• Identify the basic steps in the accounting process

• Understand Goods and Services Tax (GST) as it applies to accounting in NZ

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Definition of ‘Accounting’

The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

American Accounting Association

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The Accounting Process

• recording

• classifying

• reporting and interpreting

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Users of Accounting Information

• owners/shareholders

• creditors

• customers

• prospective investors

• taxing agencies

• regulatory agencies

• labour union

• employees

• general public

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Forms of Business Organisation

• Sole proprietorship (sole traders)

• Partnership

• Company

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The Accounting Equation

ASSETS = OWNERS’ EQUITY + LIABILITIES

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Assets

For an asset to exist there must be:

• service potential or future economic benefits

• control by the entity

• a past event or transaction

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Current Assets

An entity shall classify an asset as current when:

a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;

b) It holds the asset primarily for the purpose of trading;

c) It expects to realise the asset within twelve months after the reporting period; or

d) The asset is cash or a cash equivalent ...

The entity shall classify all other assets as non-current.[NZ IAS 1 para 66]

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Liabilities

• a present obligation to pay the amount owed

• future sacrifice of cash or service for the entity

• a past transaction or event

For a liability to exist there must be :

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Current LiabilitiesAn entity shall classify a liability as current when:

a) It expects to settle the liability in its normal operating cycle;

b) It holds the liability primarily for the purpose of trading;

c) The liability is due to be settled within twelve months after the reporting period; or

d) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

An entity shall classify all other liabilities as non-current.[NZ IAS 1 para 69]

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Owners’ Equity

• This represents the owners’ claim on assets of the firm.

• It is a residual claim (that is a claim to assets remaining after debts to creditors have been discharged)

• A - L = Owners Equity

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Components of Owners’ Equity

OE = C + P – DOE = Owners’ Equity

C = Capital P = Profit D = Drawings

P = R – ER= Revenue E = Expense

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Alternatively, the expanded accounting equation can also be written as:

A + E + D = L + C + R

A = Assets L = LiabilitiesE = Expense C = CapitalD = Drawings R = Revenue

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Revenue

• A business firm earns revenue by providing goods or services – owners’ equity increases

• It is measured by the assets received in exchange, e.g. cash, or by a reduction in liabilities

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Expenses

• Expenses are payments incurred by the business in an accounting period in producing income, the benefits of which accrues to one accounting period only

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The General Ledger Accounts

• Present the accounts in T-form

• A separate account for each item

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Double Entry System

• Debit (DR) always on the left side of any account

• Credit (CR) always refers to the right side

• Increases in assets and expenses are debit entries

• Increase in liabilities, owner’s equity and revenue are credit entries

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Golden Rules

• Whenever there is a debit(s), there must be a corresponding credit(s)

• Total debits must equal total credits.

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Normal balance of accounts

Debit balancesDebit balances Credit balancesCredit balances

Assets Liabilities

Expenses Revenue

Drawings Capital