LECTURE ONE: Double-Entry Accounting System
Readings: Chapter 3 and 4, AASB 101 Presentation of Financial Statements, AASB Framework
Basis of Financial Reports: Accrual Accounting
Accrual accounting records income and expenses at the time they occur, not necessarily when cash is received or paid.
Profit = Income – Expenses (99% of firms use accrual)
Cash Accounting records income and expenses at the time cash is received or paid
Cash Profit = cash inflows – cash outflows
* Understand definition and recognition criteria for assets, liabilities, equity, income and expenses.
5 Account Types in Accounting: 1. Asset
Definition: An asset is 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. (i) A resource controlled by an entity (ii) Future economic benefits (iii) The event giving rise to control has occurred
Recognition Criteria: an item is recognized in the accounting books as an asset if: (1) it is probable that any future economic benefit associated with the item will flow to the entity and, (2) The item has a cost or value that can be measured with reliability.
Examples of assets: cash, trade receivables (i.e. accounts receivables), other receivables, inventories, PPE, Intangibles.
A liability is a present obligation of the entity arising form past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (i) Present obligation (owe money) (ii) Outflows of economic benefits (iii) The event giving rise to the obligation has occurred
e.g. buy inventory on credit accounts payable
Recognition Criteria: an item is recognized (i.e. recorded) in the accounting books as a liability if: (1) It is probable that any future economic benefit associated with the item will flow from the entity; (that you have to pay back) and (2) The item has a cost or value that can be measured with reliability.