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Introduction to Financial Accounting: Week 8 Topic Overview - ACCT2105, Summaries of Finance

RMIT INternational University Vietnam (RMITUV)Finance

Introduction to financial market

Typology: Summaries

2020/2021

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ACCT2105 - Week 8 Topic Overview
Introduction to Financial Accounting
This topic provides you with an introduction to financial accounting – which is very much focused on
providing an account of a business’s financial performance and financial position through the
provision of external financial statements. If you recall, financial accounting was discussed in some
detail in Topic 1, so you may like to revisit that section of the Topic 1 slides.
Section 1: Introduction to financial accounting
Remember financial accounting is;
The practice of financial accounting relates to the preparation and presentation of financial
information, in the form of financial statements, for a variety of users so as to enable them to
make decisions about where they shall allocate their resources.
Financial Statements
There are 5 elements of ‘financial statements’
1. Balance sheet (known as statement of financial position)
2. Income statement (known as a statement of comprehensive income)
3. The statement of changes in equity
4. The statement of cash flows
5. Notes to Financial statements
Financial accounting and the need for regulation
Financial accounting information is geared towards external (not internal) stakeholders
As a result, organisations have an obligation to provide reliable, objective, unbiased
information
Information therefore needs to be regulated (controlled)
There are “rules” to be followed in the provision and preparation of financial statement
Sources of financial accounting regulation in Australia
Corporations Act
Australian Securities Exchange (ASX) – outlines disclosure requirements for financial
statements
The Australian Taxation Office (ATO)
Australian Accounting Standards Board (AASB)
2 Types of financial statements
1. General purpose Financial Reports (GPFR)
2. Special Purpose Financial Reports (SPFR)
Accounting principles (concepts) used in financial accounting
Financial accounting follows a strict set of accounting principles to ensure the information contained
in financial statements is reliable and consistent. These principles are as follows;
oAccounting entity
oAccounting period
oMonetary unit assumption
oGoing concern
oAccrual Accounting – it’s critical that you understand this principle
oConservatism
Accounting in Organisations and Society
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ACCT2105 - Week 8 Topic Overview

Introduction to Financial Accounting

This topic provides you with an introduction to financial accounting – which is very much focused on providing an account of a business’s financial performance and financial position through the provision of external financial statements. If you recall, financial accounting was discussed in some detail in Topic 1, so you may like to revisit that section of the Topic 1 slides.

Section 1: Introduction to financial accounting

Remember financial accounting is; The practice of financial accounting relates to the preparation and presentation of financial information, in the form of financial statements, for a variety of users so as to enable them to make decisions about where they shall allocate their resources.

Financial Statements

There are 5 elements of ‘financial statements’

  1. Balance sheet (known as statement of financial position)
  2. Income statement (known as a statement of comprehensive income)
  3. The statement of changes in equity
  4. The statement of cash flows
  5. Notes to Financial statements

Financial accounting and the need for regulation

Financial accounting information is geared towards external (not internal) stakeholders  As a result, organisations have an obligation to provide reliable, objective, unbiased information  Information therefore needs to be regulated (controlled)  There are “rules” to be followed in the provision and preparation of financial statement

Sources of financial accounting regulation in Australia

 Corporations Act  Australian Securities Exchange (ASX) – outlines disclosure requirements for financial statements  The Australian Taxation Office (ATO)  Australian Accounting Standards Board (AASB)

2 Types of financial statements

  1. General purpose Financial Reports (GPFR)
  2. Special Purpose Financial Reports (SPFR)

Accounting principles (concepts) used in financial accounting

Financial accounting follows a strict set of accounting principles to ensure the information contained in financial statements is reliable and consistent. These principles are as follows; o Accounting entity o Accounting period o Monetary unit assumption o Going concern o Accrual Accounting – it’s critical that you understand this principle o Conservatism Accounting in Organisations and Society

Section 2: the Australian Accounting Standards Board conceptual framework and the elements of financial accounting

AASB conceptual framework

The AASB’s conceptual framework provides us with the underlying framework for general purpose financial reporting It is a ‘frame of reference’ for:  The scope and objective of financial reporting;  The qualitative characteristics that financial information should possess;  What are the elements of financial reporting? The conceptual framework provides definitions for the 5 elements of financial statements

  1. Assets (Generate future economic benefits)
  2. Liabilities (Result in a future outflow)
  3. Equity (Assets - liability)
  4. Income (Result in increases in equity)
  5. Expenses (Result in decreases in equity) The conceptual framework also provides recognition criteria for these 5 elements Accrual accounting is important as it tells us when we can recognise these elements in the financial statements
  1. Be able to identify the 3 primary components of Owner’s Equity a. Capital b. Retained earnings c. Reserves Section 3: The three (3) elements of Balance Sheets - Assets, Liabilities and Owner’s Equity This section introduces you to the three (3) elements that are reported in the Balance Sheet – Assets, Liabilities and Owner’s Equity

Assets

Definition A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Liabilities

Definition A present obligation of the entity arising from past events , the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Owner’s Equity

Definition The residual interest in the assets of the entity after deducting all its liabilities (will be increased by contributions and income, and reduced by drawings and expenses)

The Balance Sheet

A balance sheet is a statement of the financial position of a business which states the assets, liabilities and owner's equity at a particular point in time. Accounting in Organisations and Society

  1. decreases of liabilities that result in increases in equity, (other than those relating to contributions to equity)

Expense

Definition Decreases in economic benefits during the accounting period in the form of

  1. outflows or depletions of assets or
  2. incurrences of liabilities that result in decreases in equity (other than those relating to distributions of equity)

The Income Statement

The income statement provides details of the income * ( revenue ) and expenses of an organisation.

The key point to note about the income statement

The difference between income (revenue) and expenses is profit (or loss ).

  • Profit ( loss ) increases (decreases) owners’ equity , as follows: Accounting in Organisations and Society OE = OE + (Income – Expenses) + C - D (beginning (end of period) of period)