ACCT1006 Lecture 1

What is accounting?
Accounting is the process of identifying, measuring, recording and
communicating financial information
The primary function of accounting is to provide financial
information for decision making
The primary users are resource providers (investors, lenders, etc.)
The Conceptual Framework
The Conceptual Framework describes the objective of and
concepts for financial reporting.
The purpose of the Conceptual Framework is to:
1. Assist the IASB to develop Standards that are based on
consistent concepts
2. Assist preparers to develop consistent accounting policies
when no Standard applies to a particular transaction or event
3. Assist all parties to understand and interpret the Standards
The Conceptual Framework is important because it shapes the
decision that the IASB makes when developing future Standards.
However, it is not a Standard and does not override any Standard.
The Conceptual Framework is:
A set of concepts defining the nature, purpose and content of
general purpose of financial reporting
Used by preparers and standard setters
Elements of the Conceptual Framework:
1. Objective (1st element and foundation of the conceptual
framework)
a. To provide financial information about the reporting
entity useful to existing and potential equity investors,
lenders and other creditors for making decisions about
providing resources to the entity

2. Reporting Entity: (This section is still under development by

the IASB use Australian SAC 1)
a. An entity for which it is reasonable to expect the
existence of users who depend on general purpose
financial reports (GPFR) to make economic decisions.
3. Qualitative characteristics attributes that make the
information more useful for decision making
a. Relevance (Fundamental)
b. Faithful representation (Fundamental)
c. Comparability (Enhancing)
d. Verifiability (Enhancing)
e. Timeliness (Enhancing)
f. Understand ability (Enhancing)
g. Constraint cost versus benefit
4. Definition of elements of financial statements
a. Income Statement
i. Reports PROFIT/(LOSS) = revenue less
expenses for a particular period of time
ii. Purpose is to report success or failure of the
entitys operations for a period of time
iii. Main elements
1. Income (revenues & gains)
2. Expenses (expenses and losses
b. Statement of Financial Position
i. Reports assets and claims on those assets at a
specific point in time
ii. Based on the basic accounting equation
1. Assets = Liabilities + Equity
iii. Main elements
1. Assets Resource controlled by the
business that will result in future economic
benefit
2. Liabilities Present obligation as a result of
a past transaction or event that will result in
outflow of economic benefit
3. Equity
c. Statement of Changes in Equity
i. Reports total comprehensive income for the
period and the changes in equity

ii. Elements: profit, retained earnings, dividends,

capital contributions, reserves
d. Statement of Cash Flows
i. Reports net cash provided/used during period
ii. Elements: cash receipts and cash payments
Accounting concepts and principles
1. The accounting period concept states that the life of a
business can be divided into periods and that useful reports
covering those periods can be prepared for the entity.
Seasonal fluctuations are unimportant.
2. The full disclosure principle requires that any information that
could impact decisions of users should be disclosed in the
financial statements. Does not need to include anything of
interest.
3. The going concern principle states that financial statements
should be prepared on a going concern basis unless the
entity will cease trading or go into liquidation. Implication is
that in the case that the business were to go into liquidation,
assets will not be recorded at liquidation value but rather
historical value as per cost concept.
4. The accounting entity concept states that owners personal
transactions should not be accounted for in business
records.

When balancing an account, you usually expect the normal

balance to be higher. The normal balance is the side where
increases are shown (e.g. asset increases are shown as debits,
hence debits are the normal balance).
Closing balance is the amount thats needed for the debits to equal
the credits. That amount carries over to the other side the following
month look at lecture slides for example.