ACC10007 Lecture Notes - Lecture 3: Current Asset, Gross Profit, Gross Margin
Mar 12
Accounting For Decision Making - Lecture 3
Purpose and Importance of Measuring financial performance
- profit or loss is the difference between income and expenses for a reporting period
-it includes profit from the regular activities of the business
PROFIT = REVENUE - EXPENSES
And - other gains or losses
Users rely on periodic profit or loss figures to evaluate past decisions and assist in decision
making
Profit Maximization is the aim of most businesses
Sustainable business practices are decisions that are not necessarily profit maximizing but
are beneficial for the environment or the community.
Triple bottom line reporting reporting on environmental and social performances in addition to
financial.
Income encompasses both:
-Revenue arising in the ordinary course of the business’ day to day activities
-eg. sales and fees
AND
-Gains relates to income other than revenue
-eg. gains on disposal of noncurrent assets
-Revenue relates to income arising from the ordinary course of an entity activities
Accounting Concepts for Financial Reporting
The going concern concept assumes that a business will continue for more than one period.
The life of the entity is divided into district reporting periods
The reporting period (accounting period) is the period of time to which the statements relate
-for external reports, the convention is yearly, and so the entity prepares financial statements
at the end of each 12 months (not always a calendar year)
-Internal reporting is likely to be more frequent
Accounting standards require financial statements to be prepared on the basis of
accrual accounting
Accrual accounting is a system which attributes profit or loss to the period it
relates. Income is recorded in the period it is earned and expenses are
recorded in the period they are incurred
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Cash accounting is a system which determines profit or loss as the difference
between the cash received for income items and cash paid for expenses.
Transactions are recorded in the period the cash is received or paid
Accused Expenses
Accrued Expenses are a Current Liability on the Balance Sheet.
The expense is recognised and recorded in the Profit or Loss Statement in the period it
is incurred, regardless of when it is paid.
Eg phone charges for January are $50 and paid for in February. The phone expense of
$50 is recognised in January. At the end of January the business would still owe
$50. This is shown as a current liability, accrued expense
The worksheet entry for January would be
Liability up Equity down
Accrued Expense $50 Phone Expense $50
In February when it is paid, the entry would be
Asset down Liability down
Bank $50 Accrued Expense $50
PrePaid Expenses
Prepaid Expenses are a Current Asset on the Balance Sheet. It reflects expenses that
are paid for but not yet used up (incurred)
The expense is only recognised and recorded in the Profit or Loss Statement in the
period it is used up (or incurred)
Eg On January 1 paid 3 months’ rent in advance $3,000. At the end of January will have
used up (incurred) 1 month’s rent $1,000, and still have 2 months’ rent prepaid. The
prepaid rent is shown as a current asset, prepaid expense
The worksheet entry for January would be
Asset Equity
down Bank $3,000 down Rent Expense $1,000
up Prepaid Expense $2,000
In February and March, the entries would be
Asset Equity
down Prepaid expense $1,000 down Rent Expense $1,000
Depreciation (Depn)
The allocation of the cost of a tangible non current asset over its estimated
useful life. It recognises that an asset can contribute to earning future economic
benefits for more than one period.
It does NOT represent the loss in the asset’s market value during the
reporting period
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It does NOT involve cash flows – it is a book entry only
Accumulated Depreciation (Acc Depn)
Represents the total depreciation that has been charged to date to the profit or
loss statement in relation to the asset. It is known as a contra account or
negative asset account, as it reduces the book value of the asset
Amortisation is the expense used to allocate the cost of intangible assets over
their estimated useful lives
Effect of accounting policy choices, estimates & judgements on
financial statements
GAAP permit choices when transactions are being recorded that require estimations by
preparers
Depreciation and amortisation involves choices by management. A decision is made on
the method of depreciation to be used. Calculation also involves estimates and
judgements (estimated useful life and salvage value)
Depreciation methods
Straight line
Diminishing (reducing) balance
Units of production
Depreciation
Document Summary
Pro t or loss is the difference between income and expenses for a reporting period. It includes pro t from the regular activities of the business. Users rely on periodic pro t or loss gures to evaluate past decisions and assist in decision making. Pro t maximization is the aim of most businesses. Sustainable business practices are decisions that are not necessarily pro t maximizing but are bene cial for the environment or the community. Triple bottom line reporting reporting on environmental and social performances in addition to. Revenue arising in the ordinary course of the business" day to day activities. Gains relates to income other than revenue. Eg. gains on disposal of noncurrent assets. Revenue relates to income arising from the ordinary course of an entity activities. The going concern concept assumes that a business will continue for more than one period. The life of the entity is divided into district reporting periods.
