ACCT5930 Introduction to Financial Accounting
Creation date:2024-06-22 16:30:48
Introduction to Financial Accounting
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ACCT5930 - Student Notes
Topic 1 – Introduction to Financial Accounting
Balance Sheet
Learning Objectives - Introduction
Understand the distinction between financial and management
accounting.
Identify the three key financial statements.
Understand the accounting equation and how it relates to the Balance
Sheet and Income Statement.
Explain the limitations of cash accounting.
Explain the advantages of accrual accounting.
Appreciate the uncertainties inherent in financial accounting practice.
State and explain the financial statement assumptions.
State and explain the qualitative characteristics of accounting
information.
Identify users of financial accounting and how they use the information.
Learning Objectives – Balance Sheet
Describe the purpose and contents of a Balance Sheet.
Understand and be able to apply the definition of assets and
liabilities.
Understand the distinction between current and non-current assets
and liabilities.
Be able to prepare a simple Balance Sheet.
What is Accounting?
Some definitions:
1. Accounting is the recording and reporting of an
enterprise’s performance and position in monetary
terms.
2. Accounting is the process of identifying, measuring,
recording, and communicating economic information
to assist users to make decisions.
The text book has a glossary starting on page 660 – it’s very useful!
Accounting empowers business decisions
Strategic decisions
Operational decisions
Commercial decisions
Accounting empowers you to evaluate
market trends, opportunities, risks, and
stakeholder implications, so you can decide
the most promising course for long-term
and sustainable business growth.
Accounting empowers you to assess
business performance, so you can decide
how to improve business processes.
Accounting empowers you to evaluate
business deals (e.g., sales, purchases,
business transactions), so you can decide
on terms that improve their business value.
What is Financial Accounting?
• Financial accounting will be the focus of this course.
• Financial accounting focuses on the provision of
information to users external to the enterprise.
• The focus is on reporting financial position and
financial performance.
What is Management Accounting?
• Management accounting will be the focus of later
courses.
• Management accounting focuses on the provision of
information to users within the enterprise (to aid in
operational and control decisions) - non-standardised
formats, not regulated by accounting standards.
Financial Accounting
The main participants in the art of financial accounting are:
• The information users (the decision makers);
• The information preparers, who put together the
information to facilitate the users’ decision making;
• The auditors, who assist the users by enhancing the
credibility of the information.
Balance Sheet
• Concerned with financial position as at a particular date
• Resources (Assets)
• Sources of financing (Liabilities and Equity)
• Financial structure (mix of Liabilities & Equity)
• Liquidity and solvency (can company pay its debts and
continue operations?)
Balance Sheet
• The balance sheet is structured around the accounting
equation:
Assets = Liabilities + Equity
Assets - Liabilities = Equity
Remember: the accounting equation always balances!
Balance Sheet
Assets
Cash 2,000
Accounts Receivable 16,000
Inventory 12,000
Property, Plant, and Equipment 90,000
Total Assets $120,000
Liabilities & shareholders’ equity
Liabilities
Accounts payable 17 000
Wages payable 2 000
Provision for employee entitlements 4 000
Long-term loans 30 000
Total liabilities 53 000
Shareholders’ Equity
Share Capital 40,000
Retained Profits 27,000
Total Shareholders’ Equity 67,000
Total Liabilities and
Shareholders’ Equity $120,000
What’s missing?
Balance Sheet Identifying Information
• Name of the reporting entity
• Type of statement: Balance Sheet
• Date – what point in time it refers to
• Currency used – e.g., $
Balance Sheet – further detail
Assets Liabilities
Current assets $ $ Current liabilities $ $
Cash 60 Accounts payable 90
Accounts receivable 80 Wages payable 20 110
Inventory 120 260 Noncurrent liabilities
Loan 90
Total Liabilities 200
Noncurrent assets Shareholders’ equity
Land 100 Share capital 130
Equipment (net) 150 250 Retained profits 180 310
Total assets 510 Total Liabilities & SE 510
JIL Ltd
Balance Sheet
As at June 30, 20XX
Assets
Assets are present economic resources controlled by an
entity as a result of past events.
An economic resource is a right that has the potential to
produce future economic benefits.
• Potential to produce economic benefits because the assets are used with the
objective of generating net cash flows (e.g. through the sale of the asset or
the sale of the output produced) or avoiding cash outflow.
Examples include:
Cash, Accounts Receivable, Machinery, Motor Vehicles,
Buildings, Computers, Inventory, Goodwill.
Liabilities
Liability is a present obligation of the entity to transfer an
economic resource as a result of past events.
Essential characteristics of liabilities:
1. There is no practical ability to avoid the duties or responsibilities.
2. There is an obligation to transfer an economic resource.
3. The present obligation exists as a result of a past event.
Examples include:
Accounts Payable, Taxes Payable, Wages Payable,
Provision for Warranty Expense, Loans.
Recognition of assets and liabilities
• Recognition is the process of incorporating assets and
liabilities that meet the definitions into the balance sheet.
• Not all assets and liabilities are recognised in the
financial statements (human capital?).
• An asset or liability will be recognised only if it provides
users of financial statements with information that is
useful, i.e: if it results in both relevant information about
the element being recognised, and faithful representation
of that element.