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, Chapter 1 ACCT1501 Notes Introduction to Accounting
● Accounting is the process of identifying, measuring, recording and communicating
economic information to assist users in making decisions.
● There are two main forms of accounting systems
○ Financial Accounting System: this is where periodic financial statements are
provided to external decision-makers such as investors, creditors or customers
○ Financial accounting measures an enterprise’s financial performance over time
and its financial position at a point in time
○ Management Accounting System: this is where planning and performance
reports are provided to internal decision-makers such as managers
● Financial Performance: this is the generation of new resources from day-to-day
operations over a period of time
● Financial Position: this refers to the enterprise’s set of financial resources and
obligations at a point in time
● Financial Statement: these are reports that describe the financial performance and
position
Users of Accounting Information
● Banks: To decide whether or not they should lend
● ASIC: Financial position and performance of a company issuing shares to the
public for the first time
● ATO: Profitability of company based on tax law
● Management in making business decisions
● Management and unions in wage negotiations
● Board of directors in takeover battles
Accrual & Cash Accounting
, Accrual Accounting includes the impact of transactions on financial statements in the time
periods where revenues and expenses occur rather than when the cash is received or paid.
Cash Accounting involves recording revenues and expenses at the time when cash is actually
received or paid
● The key advantage of using accrual accounting is that it simplifies complex
financial transactions, such as selling inventory on credit (cash will only be received
at a later date)
○ Accrual accounting incorporates future cash receipts and payments that
are expected
Key Financial Statements
● Balance Sheet: This reports the financial position of an entity at a point in time
● Income Statement: This reports the financial performance of an enterprise over a
period of time
● Cash Flow Statement: Reports the enterprise’s cash outflows and inflows over a
period of time
Balance Sheet
● Assets: Resources that will benefit the company this year (current assets) or in future
years (non-current assets)
● Liabilities: What the company owes to other organisations or individuals
● Shareholder’s Equity: Shareholder’s equity is the excess of assets over liabilities.
This consists of two main elements
○ Share Capital: This is the amounts that owners have directly invested in the
company
○ Retained Profits: This represents the total cumulative amount of profits that the
company has retained in the business rather than distribute it as dividends
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