Essay on Generally Accepted Accounting Principles and Income Summary Account

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ACCOUNTING

Week 1:

Define the main types of accounting
Accounting encompasses information system that measures business activity, processes the data into reports, communicates the results to decision makers
Two types:
1. Financial accounting
2. Managerial accounting

Describe how decision makers use accounting information
Decision makers: individuals, businesses, investors, creditors, government regulatory agencies, tax authorities, NPO, other users such as employees and labour unions

Describe professional career opportunities in accounting
Lucrative career with many opportunities
Professionally qualified accountants pass the educational and experience requirements of a professional body
Professional bodies recognised in Australia include
Institute of Chartered Accountants in Australia
CPA Australia
Institute of Public Accountants
Chartered Institute of Management Accountants

Describe how accounting is regulated in Australia
Explain the role of ethics and sustainability in accounting
Financial reports prepared by accountants play a central part in informing financial decisions
The ICAA and CPAA have a joint code of ethics for professional accountants as part of their professional standards
It includes the following principles
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour

Identify the three main types of business organisations

Describe the basic accounting principles and their applications in business
The primary objective of external financial reporting is to provide useful information for making investment and lending decisions
Useful information must be relevant, valid and reliable
Basic measurement concepts and principles include
Entity concept
Accounting period concept
Cost principle
Matching principle
Profit recognition principle
Conservatism principle
Going concern assumption
The entity concept defines the entity for which accounting data is collected
The accounting period concept defines the unit of time for which accounting data is collected
The cost principle states that accounting measures are based upon transaction costs
The matching principle relates inputs and outputs of goods and services to one another
The profit recognition principle states that profit should be recognised when the sales and any other revenues or gains relating to the relevant activity are earned and can be reliably measured
The conservatism principle constrains management’s natural optimism
The going concern assumption assumes that the business as a whole will continue operating for the foreseeable future

Recall the accounting equation and its function
ASSETS = LIABILITIES + EQUITY
Assets are 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 are debts that are payable to outsiders called creditors
Equity is the residual interest in the assets of the entity after deducting all of its liabilities
Income refers to all increases in equity other than investments by owners
Revenue is that part of income arising from ordinary activities
Expenses decrease equity by using up assets or increasing liabilities in order to deliver goods or services to customers

Apply the accounting equation to analyse transactions
Accounts record the impact of events that are considered to affect the value of entities’ assets and liabilities
A transaction is an event that involves at least two parties exchanging resources
Each transaction affects at least two accounts
Some transactions affect only one side of the equation; some affect both sides
Accounts record the impact of events that are considered to affect the value of entities’ assets and liabilities
A transaction is an event that involves at least two parties exchanging resources
Each transaction affects at least two accounts
Some transactions affect only one side of the equation; some affect both sides
Transaction 1: Starting the business
Transaction
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