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ACCOUNTING FOR DECISION MAKERS – LECTURES 5 & 6

ACCOUNTING FOR DECISION MAKERS – LECTURES 5 & 6

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ACCOUNTING FOR DECISION MAKERS – LECTURES 5 & 6 (DRAFT 1) FINANCIAL POSITION PART 1 – BASIC PRINCIPLES AND COMPONENTS OF THE BALANCE SHEET In this week’s two lectures we will consider: Underlying assumptions/conventions of financial accounting. Key questions about how to identify, record, and report upon transactions which reflects upon the process of accounting. We have to develop policies (rules and choices) on how to account for different items and transactions, which includes having to make choices on how to display such information. Qualitative characteristics of accounting information (What sort of attribute should our accounting report have). Provide an overview of the accounting elements in the balance sheet (assets, liability, owners’ equity). Provide an overview of different business structures. Use the balance sheet to learn about the solvency/leverage of an entity. Week 2 Interested in financial characteristics like resources and claims on those resources, performance over a period of time and the ability to pay its debts (liquidity). In economic term, wealth (capital) represents our net resources at a point in time; how do changes in wealth due to operations represent income. Accountants represent these financial characteristics in financial statements (eg: like the balance sheet where asset = liabilities + owners’ equity). Our liquidity looks at how cash changes from one point of time to another. Now that we understand the economics of organisations Time to formalise our understanding of how accounting captures and reports upon the economic resources flows of an entity. Identify some underlying principles and assumptions of accounting practice and introduce components of the balance sheet. Such assumptions can be keys to how the accounting system works. Week 2’s example Some underlying conventions and assumptions of accounting practice:
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o The entity principle : The organisation’s affairs are kept separate from the owners’ affairs, as the owner is outside of the business and the business is getting the cash from the equity section. Our accounting system is forced with a particular business only, not the affair of owners. o Any transaction outside of a business is not mentioned in a balance sheet. Our accounting system is focused on the business only. Related notion of ‘reporting entities’ – Many entities prepare general purpose financial statements (GPFS). So a company listed on the stock exchange will release a balance sheet. Such entities that prepare these statements are known as reporting entities. Underlying principles/assumptions A reporting entity can be a single entity (Eg: A partnership, a company) or a collection of entities that operate together (an economic entity – Eg: a group of companies produce consolidated financial statements.) o A and B in a business are not separate business, but are considered as one ‘reporting entity’, so gradually a balance sheet made for such an entity is put into
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