ACCG6011 Topic 1

An Overview of Accounting

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 What is accounting in the
business world?

• How to make your business grow?

Goal
• Where do you get money to finance the expansion?

• Success in business requires countless

Decision decisions

• Decisions require financial and other types

Financial
information
of information

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The accounting process

• Accounting is the process of “ identifying, measuring, recording and

communicating” the economic transactions and events of a business
operation.
• Transactions are economic activities relevant to a particular business.
• For example:
o Sale of item to customer
o Purchase of office stationery from supplier.

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 The accounting process

• Transactions are the basic inputs into the accounting process.

Identifying Measuring Recording Communication

Taking into Quantifying in Analysing, Preparing
consideration monetary recording, accounting
all transactions terms classifying and reports,
which affect summarising analysing and
business entity transactions interpreting

Commonly referred to as ‘bookkeeping’

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Diverse roles of accountants
• Commercial accountants:
o Work in industry and commerce, such as management accounting and

financial accounting. [Link]

• Public accountants:
o Provide their professional services to the public and work in a range of offices

from small to multi-national. Auditing is a primary service, and also taxation

and advisory services. [Link]
• Government accountants:
o Employed by local councils, state government and federal government. Variety

of roles such as financial accounting and auditing.

[Link]
• Not-for-profit accountants:
o Work in the not-for-profit sector. Engage in planning, decision making,

preparing financial and management reports for both internal and external
users. [Link]
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Introduction to the
Conceptual Framework

• The Conceptual Framework consists of a set of concepts to be followed by

preparers of financial statements and standard setters.
• The 1st element and foundation of the conceptual framework - objective
of general purpose financial reporting (GPFR):
o to provide financial information about the reporting entity to the
resource providers.
o emphasises that primary users of GPFR are existing and potential
shareholders, lenders and other creditors.

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The reporting entity

• This section is under development by the IASB. Currently Australian

business entities and standard setters use the existing Australian SAC 1.
• Definition from SAC 1:
o an entity in which it is reasonable to expect the existence of users who

depend on general-purpose financial reports to enable them to make

economic decisions.
• A reporting entity must prepare external general purpose financial reports

that comply with accounting standards.

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The reporting entity

• Indicators to help determine whether an entity is a reporting entity:

o if the entity is managed by individuals who are not owners of the
entity
o if the entity is politically or economically important
o if the entity is considered large in sales, assets, borrowings, customers,
and employees.
• Both reporting entities and non-reporting entities also produce detailed
internal reports.

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Users of financial information

• Primary users of general purpose financial reports are the resource providers:
o Equity investors contribute resources (usually cash) for a return; includes
shareholders (existing and potential), holders of partnership interests.
o Lenders contribute by lending resources for the purpose of receiving a
return in the form of interest; e.g. banks.
o Other creditors provide resources in the form of credit; e.g. suppliers,
employees.
• Other users:
o Recipients of goods and services, e.g. customers, beneficiaries.
o Parties performing a review or oversight function, e.g. regulatory agencies,
media, governments, trade unions, special interest groups.

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Financial statements

• The Conceptual Framework defines the elements of financial statements.

Statement of Statement of Statement of Statement of

Financial Position Profit or Loss Changes in Equity Cash Flows

Reports assets, Reports revenues Reports total Reports

liabilities and less expenses for comprehensive information
equity at a a particular period income for the regarding cash
particular point in of time. period and other receipts and cash
time. changes in equity. payments for a
particular period
of time.

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Statement of profit or loss

• Alternative name: Income Statement

• Purpose is to report the entity’s success or failure over a period time.
• Lists the entity’s income (revenues and gains), and the entity’s expenses.
• Income less expenses = profit (loss).

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Statement of financial position

• Alternative name: Balance Sheet

• Reports assets and claims to those
assets (liabilities and equity) at a specific
point in time.
• Based on the basic accounting equation.

• Assets must balance to the claims on

assets.

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Statement of changes in equity
• Reports total comprehensive income for the period and other changes in equity
such as adjustments to retained earnings for:
o changes in accounting standards
o changes in accounting policies
o correction of errors
o gains recognised directly in equity accounts.
• Also reports details of transactions with the owners of the company.
• Retained earnings refers to accumulated profit which has not been distributed to
shareholders.
MINH’s TV REPAIRS
Statement of Changes in Owner’s Equity
For the year ending 30 June 2016

Retained earnings_1/7/15   101,665

Add: profit   47,175

Less: dividends   (5,500)

Retained earnings_30/6/16   143,340

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Statement of cash flows

• Main purpose is to provide

financial information about cash
receipts and cash payments of
an entity for a specific time
period.
• Informs users about what is
happening to entity’s most
important resource – cash.

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Real life example of financial
statements

• JB HI-Fi [Link]
• Annual report 2016 (which contains the General Purpose Financial Statements):
o Corporate governance statements (pgs 5-11)
o Environmental and social statements (pgs 13-15)
o Directors report (pgs 16-20)
o The audit report (pgs 52-53)
o Directors declaration (pg 54)
o Financial reports (pgs 55-59)
o Notes to the accounts (from pg 61- brief overview)
o Ignore the word ‘consolidated’ and focus instead on the accounts reported and the
use of comparative information.

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Adoption of International
Financial Reporting Standards

• The globalisation of accounting means that since 2005 International

Accounting Standards are mandatory for preparing financial reports.
• The financial reporting accounting standards are prepared by the
International Accounting Standards Board (IASB) and adopted for use by the
Australian Accounting Standards Board (AASB). (Prior to 1 January 2005,
Australia used their own standards developed by the AASB.)
• International Accounting Standards Board:
[Link]
IASB standards are called International Financial Reporting Standards (IFRS)

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Adoption of International
Financial Reporting Standards

• Australian Accounting Standards Board (AASB)

o Develops accounting standards consistent international accounting
standards [Link]
• The operations of the AASB are overseen by the Financial Reporting Council
(FRC) [Link]
• Use of the AASB standards to prepare financial statements in Australia is
mandated by the Corporations Act (2001), i.e., AASB standards have the ‘force
of law’ and corporations are required to lodge general purpose financial reports.
• Compliance with the AASB standards (and other requirements) is overseen by
the Australian Securities and Investment Commission (ASIC) [Link]

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 What is Ethics?

“Ethics in its broader sense, deals with human conduct in relation

to what is morally good and bad, right and wrong. It is the
application of values to decision making. These values include
honesty, fairness, responsibility, respect and compassion”

Institute of Global Ethics

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Ethics vs. Morality
Ethics Morals

What are they? Principles of right Principles with respect

conduct to right or wrong
conduct
Where do they come Social system – External Individual – Internal
from?
Why we do it? Because society says it is Because we believe in
the right thing to do something being right or
wrong

Ethics: focuses on what is ‘right’ and ‘wrong’, and ‘how ‘and ‘why’ people
act in a certain manner.

Morality: focuses on the ‘good’ and ‘bad’ of human behaviour.

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Ethics vs. Morality…

Let’s consider the following case:

Andrew, who is a bank robber, has sought out yourself, a criminal defense
lawyer, to defend his case. You are somehow aware that Andrew is guilty of
robbing a bank.

Question: What would you do?

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What is professional ethics and
fundamental principles?
• IESBA Code/APES 110
• Accounting Professional and Ethics Standards Board (APESB)
[Link]
• APES 110 Code of Ethics for Professional Accountants (S. 100.4) states that all
members of the professional Accounting Bodies MUST comply with (the spirit as well as
the letter of) the code.

• The fundamental ethical principles are:

o Integrity
o Objectivity
o Professional Competence and Due Care
o Confidentiality
o Professional Behaviour

• For each principal, a conceptual framework is used to identify possible threats and
safeguards.

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The role of sustainability in
accounting

• Definition of stakeholders: “those groups in society that affect the organisation

or are affected by the organisation” (Trotman et al., 2016, pg., 661).
o Employees, shareholders, customers, communities, government bodies.
• Different stakeholders have different and often conflicting interests, e.g.,
shareholders may have different views than management and communities
regarding the number of staff required for effective operation.
• Stakeholders between organisations are different in terms of the number, the
type and the level of involvement.

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Sustainability reporting

• Sustainability: making sure the social, economic and environmental needs

of our community are met and kept healthy for future generations.
• Concerned with 3 main areas:
o economic
o environmental
o social.
• Currently social and environmental disclosures are voluntary.

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What is sustainability
reporting?
• The concept of sustainability has changed over time:
o Originated in the1970s and 1980s. Referred to as social accounting, corporate

social responsibility accounting and social responsibility accounting. The

purpose was to consider the impact of the organisation on people.
o Next, environmental reporting. The purpose was to explain the impact of an

organisations operations on the environment, e.g., pollution.

o Next, triple bottom line reporting. The purpose was to describe the economic,

social and environmental impact of the organisation.

o Mid-2000’s. The concept changed to sustainability reporting.

o Recently, the concept has now changed to ‘environmental, social and

governance’ (ESG) reporting.

• Importantly, different terminology is used:
o between different countries and

o between different organisations in the same country.

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What sustainability information
is being reported?
• Sustainability reporting is VOLUNTARY and the content reported depends on the:
o industry involved
o needs of the stakeholders
o views of management.
• A sustainability report provides DISCLOSURES (information) about the organisations
impact on the:
o Environment (concerns natural capital),
o Society (concerns human, intellectual, and social and relationship capital) and
o Economy (concerns manufactured and financial capital).
o These disclosures are related to key performance indicators the most common
benchmark being the Global Reporting Initiative (GRI) discussed in subsequent
slides.
• Where are the sustainability disclosures?
o annual reports and separate sustainability reports.
• Who does sustainability information assist?
o management, i.e., enables organisations to set goals, measure performance and
make changes to improve the sustainability of their operations.
o users, i.e., enables understanding about the effects of sustainable development on
an organisations activities.
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The GRI Framework

• The GRI provides reporting principles, standard disclosures and an implementation manual
for the preparation of sustainability reports by organisations.
• The standard disclosures are both general and specific.
• The specific disclosures comprise three categories of non-financial performance indicators:
o Economic
o Environmental
o Social ,which is further broken down into:
- labour practices and decent work,
- human rights,
- society and product responsibility.
• Climate change impacts on all aspects of sustainable development. See the United Nations
Kyoto Protocol [Link]

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The GRI Framework

Source: Global Reporting Initiative (2013): G4

Sustainability Reporting Guideline, The Netherlands, pg. 9.
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Forms of business organisation
• Sole proprietorship (sole trader):
o Owned by one person, e.g. restaurants, dentist, panel beaters.

• Partnership:
o Owned by more than one individual, e.g. accountants, solicitors, doctors.

• Company:
o Organised as a separate legal entity and owned by shareholders, e.g. BHP, CSR,

Westpac, RM Williams.
o Most companies have limited liability.

• Other forms:
• A trust is a relationship or association between 2 or more parties whereby one party
holds property in trust for the other.
o Corporate trust is a popular business structure for small business.

• A cooperative is member-owned, controlled and used, and must consist of 5 or more

people:
o e.g. Australian Forest Growers, Ballina Fishermen’s Co-operative Ltd.
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Examples

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Not-for-profit organisations

• Associations:
o Generally formed by small, non-profit, community-based groups.
o May be incorporated, e.g. Australian Medical Association, Epilepsy
Association of Australia.
• Government (Public Sector):
o Organisations are owned by government: federal, state or local.
o Departments or segments are operated as business enterprises.

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