22107 Lecture Notes - Lecture 2: Liquid Oxygen, Disclose, Comprehensive Income
Lecture 2 (2nd March)
Introduction to Accounting & Financial Statements
LO1 Beginning Assumptions
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgements and decisions.
Four Accounting Assumptions
▫ Going Concern: Accountants assume that a company will continue to operate in the foreseeable
future.
▫ Economic Entity: Financial activities of a business can be separated from the financial activities
of the business' owner(s)
▫ Monetary Unit: Accountants assume that the dollar is the most effect means to communication
economic activity
▫ Time Period: Economic information can be meaningfully captured and communicated over short
periods of time.
Generally Accepted Accounting Principles (GAAP)
In Australia, accountants are regulated by the Australian Accounting Standards Board (AASB), but the
term GAAP covers the standards and the general body of rules accountants understand and observe.
Accounting standards, rules, principles and procedures that comprise authoritative practice for financial
accounting. (presented fairly, true view)
LO2 Reporting Profitability: The Income Statement (Y/S)
An income statement (profit and loss statement) reports a company's expenses and revenues over a
specific period of time
Expense: a decrease in resources resulting from the sale of goods or provision of services
Revenues: increase in resources resulting from the sale of goods and provision of services.
Terms
• Matching Principle: expenses should be recorded in the period resources are used to generate
revenues.
• Revenue Recognition Principle: A revenue should be recorded when a resource has been
earned. A resource is earned when either the sale of good or the provision of the service is
substantially complete and collection is reasonably assured.
• Revenues – Expenses = Profit or Loss or Total Comp. Income or Net income/profit
• Reported for a specific period, e.g the year ended June 30, 2017.
• Total Comprehensive income (Net Profit) includes other revenues, expenses, gains and losses
that are considered to provide more complete picture of a business's increase (or decrease) in
economic benefits.
Single-Step Statement: calculates total revenues and total expenses, then determines net profits in one
step by subtracting total expenses from total revenues.
Multi-step Statement: Calculates income by grouping certain revenues and expenses together and
calculating several subtotals of income. These subtotals provide information on the profitability of
various aspects of the company’s operations.
Income Subtotals
Most companies prepare multi-step statements, even though there are some slight variations in how
they are prepared, most include some or all of the following subtotals of income:
• Gross profit
• Profits before and after tax
• Comprehensive income net of tax
• Total Comprehensive income
LO3 Reporting Financial Position: Balance Sheet (B/S)
Asset: an economic resource that is objectively measurable, that results from a prior transaction, and
that will provide future economic benefit.
• Cost Principle: assets should be recorded and reported at the cost paid to acquire them.
• Intangible assets: no physical form, such as trademarks/copyright.
Liability: an obligation of a business that results from a past transaction and will require the sacrifice of
economic resources at some future date.
Equity: The difference between a company's assets and liabilities, representing the share of assets that
is claimed by the company's owners.
• Contributed capital: the resources that investors contribute to a business in exchange for
ownership interest.
Document Summary
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions. Going concern: accountants assume that a company will continue to operate in the foreseeable future. Economic entity: financial activities of a business can be separated from the financial activities of the business" owner(s) Monetary unit: accountants assume that the dollar is the most effect means to communication economic activity. Time period: economic information can be meaningfully captured and communicated over short periods of time. In australia, accountants are regulated by the australian accounting standards board (aasb), but the term gaap covers the standards and the general body of rules accountants understand and observe. Accounting standards, rules, principles and procedures that comprise authoritative practice for financial accounting. (presented fairly, true view) An income statement (profit and loss statement) reports a company"s expenses and revenues over a specific period of time.
