ACCT5930 - Student Notes
Topic 1 – Introduction to Financial Accounting
Balance Sheet
Learning Objectives - Introduction
 Understand the distinction between financial and management
accounting.
 Identify the three key financial statements.
 Understand the accounting equation and how it relates to the Balance
Sheet and Income Statement.
 Explain the limitations of cash accounting.
 Explain the advantages of accrual accounting.
 Appreciate the uncertainties inherent in financial accounting practice.
 State and explain the financial statement assumptions.
 State and explain the qualitative characteristics of accounting
information.
 Identify users of financial accounting and how they use the information.
Learning Objectives – Balance Sheet
 Describe the purpose and contents of a Balance Sheet.
 Understand and be able to apply the definition of assets and
liabilities.
 Understand the distinction between current and non-current assets
and liabilities.
 Be able to prepare a simple Balance Sheet.
What is Accounting?
Some definitions:
1. Accounting is the recording and reporting of an
enterprise’s performance and position in monetary
terms.
2. Accounting is the process of identifying, measuring,
recording, and communicating economic information
to assist users to make decisions.
The text book has a glossary starting on page 660 – it’s very useful!
Accounting empowers business decisions
Strategic decisions
Operational decisions
Commercial decisions
Accounting empowers you to evaluate
market trends, opportunities, risks, and
stakeholder implications, so you can decide
the most promising course for long-term
and sustainable business growth.
Accounting empowers you to assess
business performance, so you can decide
how to improve business processes.
Accounting empowers you to evaluate
business deals (e.g., sales, purchases,
business transactions), so you can decide
on terms that improve their business value.
What is Financial Accounting?
• Financial accounting will be the focus of this course.
• Financial accounting focuses on the provision of
information to users external to the enterprise.
• The focus is on reporting financial position and
financial performance.
What is Management Accounting?
• Management accounting will be the focus of later
courses.
• Management accounting focuses on the provision of
information to users within the enterprise (to aid in
operational and control decisions) - non-standardised
formats, not regulated by accounting standards.
Financial Accounting
The main participants in the art of financial accounting are:
• The information users (the decision makers);
• The information preparers, who put together the
information to facilitate the users’ decision making;
• The auditors, who assist the users by enhancing the
credibility of the information.
Balance Sheet
• Concerned with financial position as at a particular date
• Resources (Assets)
• Sources of financing (Liabilities and Equity)
• Financial structure (mix of Liabilities & Equity)
• Liquidity and solvency (can company pay its debts and
continue operations?)
Balance Sheet
• The balance sheet is structured around the accounting
equation:
Assets = Liabilities + Equity
Assets - Liabilities = Equity
Remember: the accounting equation always balances!
Balance Sheet

Assets
Cash 2,000
Accounts Receivable 16,000
Inventory 12,000
Property, Plant, and Equipment 90,000
Total Assets $120,000

Liabilities & shareholders’ equity

Liabilities
Accounts payable 17 000
Wages payable 2 000
Provision for employee entitlements 4 000
Long-term loans 30 000
Total liabilities 53 000
Shareholders’ Equity
Share Capital 40,000
Retained Profits 27,000
Total Shareholders’ Equity 67,000

Total Liabilities and
Shareholders’ Equity $120,000

What’s missing?
Balance Sheet Identifying Information
• Name of the reporting entity
• Type of statement: Balance Sheet
• Date – what point in time it refers to
• Currency used – e.g., $
Balance Sheet – further detail
Assets Liabilities
Current assets $ $ Current liabilities $ $
Cash 60 Accounts payable 90
Accounts receivable 80 Wages payable 20 110
Inventory 120 260 Noncurrent liabilities
Loan 90
Total Liabilities 200

Noncurrent assets Shareholders’ equity
Land 100 Share capital 130
Equipment (net) 150 250 Retained profits 180 310
Total assets 510 Total Liabilities & SE 510
JIL Ltd
Balance Sheet
As at June 30, 20XX
Assets
Assets are present economic resources controlled by an
entity as a result of past events.
An economic resource is a right that has the potential to
produce future economic benefits.
• Potential to produce economic benefits because the assets are used with the
objective of generating net cash flows (e.g. through the sale of the asset or
the sale of the output produced) or avoiding cash outflow.
Examples include:
Cash, Accounts Receivable, Machinery, Motor Vehicles,
Buildings, Computers, Inventory, Goodwill.
Liabilities
Liability is a present obligation of the entity to transfer an
economic resource as a result of past events.
Essential characteristics of liabilities:
1. There is no practical ability to avoid the duties or responsibilities.
2. There is an obligation to transfer an economic resource.
3. The present obligation exists as a result of a past event.
Examples include:
Accounts Payable, Taxes Payable, Wages Payable,
Provision for Warranty Expense, Loans.
Recognition of assets and liabilities
• Recognition is the process of incorporating assets and
liabilities that meet the definitions into the balance sheet.
• Not all assets and liabilities are recognised in the
financial statements (human capital?).
• An asset or liability will be recognised only if it provides
users of financial statements with information that is
useful, i.e: if it results in both relevant information about
the element being recognised, and faithful representation
of that element.
Questions
• A loan obtained from the bank to be repaid in 5 years. Is
this a liability on the balance sheet?
• A company places an order to buy 10 TVs at $600 each
on 1 April and receives them on 1 May with an
agreement to pay 1 June. When would the liability of
$6000 be recorded?
Current vs Non-Current
• Current assets and liabilities will be converted to cash,
paid off, or used up within one year of the balance sheet
date.
• Non-current assets and liabilities will remain assets or
liabilities for at least the next year.
Reason for distinction:To help the financial statement user
assess short-term financial position.
Examples of Assets
Current or non-current?
• Cash
• Intangible Assets - patents, brand names, mastheads, goodwill
• Accounts Receivable
• Inventory
• Fixed assets/Equipment - held for use, not for resale
• Prepayments (< 12 months)
Contra Assets
Taken away from an asset to yield net book value (can be
done in a note).
Allowance for Doubtful Debts – linked to Accounts receivable
Accumulated Depreciation – linked to a non-current asset
(e.g. PPE or machinery)
Examples of Liabilities
Current or non-current?
• Overdrafts
• Accounts Payable (a) < 12 months
(b) > 12 months
• Income Tax Payable
• Provision for employee entitlements (Portion that is < 12 months)
• Provision for employee entitlements (Portion that is > 12 months)
• Loans/borrowings (Portion that is < 12 months)
• Loans/borrowings (Portion that is > 12 months)
Working Capital
• WC ($) = Current Assets - Current Liabilities
Low or negative working capital can be an indication of
short-term financial difficulties.
Equity
• “Equity is the residual interest in the assets of the entity
after deducting all its liabilities”
• The accounting equation
• Assets - Liabilities = Equity or
• Assets = Liabilities + Equity
• Common accounts: Share capital, Retained Profits and
Reserves
Income Statement
Summary – more detail in topic 2
• Reports the revenues earned during a period of time
with expenses incurred during that period.
– Revenue: inflows of economic benefits that increase
shareholders’ equity e.g., sales
– Expenses: use or loss of economic benefits that decrease
shareholders’ equity e.g., electricity, rent, salaries,
advertising
• The Income Statement provides information which is
linked to the Equity section of the Balance Sheet.
Income Statement
Sales revenue 21 000
less Cost of goods sold 8 000
Gross profit 13 000
less Operating expenses
Salaries 2 500
Depreciation 500
Electricity 300
Travel 300
Postage 400 4 000
Net profit before tax 9 000
less tax 3 000
Net profit after tax 6 000
Class question:
Consider the list of accounts given and categorise them as an asset, liability
or shareholders’ equity item that would appear on the balance sheet or a
revenue or expense that would appear on the income statement by ticking
the appropriate column.
Asset Liability Shareholders’ Equity Revenue Expense
Share capital
Sales
Cost of goods sold
Loan to your business
Equipment
Wages expense
Wages payable
Retained profits
Accounts receivable
Accounts payable
Cash Flow Statement
• Provides details of movements in the cash balance.
• The cash flows are normally categorised into:
- Operating Activities
- Investing Activities
- Financing Activities
Cash Flow Statement
Cash flows from operating activities
Receipts from customers 17 000
Payments to suppliers (7 700)
Payment to employees (2 500)
Cash operating costs (4 300) 2 500
Cash flows from investing activities
Purchase of machinery (2 300)
Cash flows from financing activities
Issue of shares 4 000
Bank loan repayment (3 600) 400
Total net cash flows 600
Cash: 1/7/2021 (o/bal.) 1 400
Cash: 30/6/2022 (c/bal.) 2 000
Relationship between financial statements
Balance Sheet 2021 2022 Cash Flow Statement
Cash 1,400 2,000 From operating activities 2,500
Other assets 114,000 118,000 From investing activities (2,300)
Total assets 115,400 120,000 From financing activities 400
Liabilities 51,400 53,000 Total net cash flows 600
Share capital` 40,000 40,000 Opening balance 1,400
Retained profits 24,000 27,000 Closing balance 2,000
Total liabilities and
shareholders’ equity
115,400
120,000
Retained Profits Note Income Statement
2021 balance 24,000 Revenues 21,000
+ Net profit 6,000 Expenses* 15,000
30,000 Net profit 6,000
- Dividends 3,000
2022 balance 27,000
Annual Report
The three key financial statements are often found in the
company’s Annual Report, together with a wide range of
additional information about the company.
The Balance Sheet, in particular, is likely to show aggregated
figures with additional details provided in the notes.
Woolworths Class example
Woolworths Group 2023 Annual Report.pdf
Download the Woolworths Group 2023 Annual report
Save a copy – this will be used in most topics
Find the ‘key financial statements’
Hint: Have a look at the content information
Questions on Woolworths* Annual report
Using the Woolworth 2023 Annual report, answer the
following:
1. What do they call their Income Statement?
2. What do they call their Balance Sheet?
3. What does consolidated mean?
* Woolworths = Woolworths Group
Woolworths Group 2023 Annual Report.pdf
Questions on Woolworths* Annual report
Looking at the Balance Sheet:
4. How many years of data is shown on the Balance Sheet?
5. What do the ‘notes’ reference?
6. What do they call ‘Accounts Receivable’?
7. What do they call ‘Accounts Payable’?
8. What does ‘Net Assets’ represent?
9. What do they call ‘Share Capital’?
10.What do they call ‘Retained Profits’?
* Woolworths = Woolworths Group
Woolworths Group 2023 Annual Report.pdf
Accrual accounting versus cash accounting
• Cash accounting involves recording revenues and
expenses at the time the cash is received or paid.
• This is reasonably precise given that the accountant
knows whether cash has been paid or received, and
the amount is easily determined.
HOWEVER …
Limitations of cash accounting
The complexity of business means that financial
position and financial performance are affected by many
transactions that involved a cash flow in the past or will
involve a cash flow in the future.
Examples of events where the timing of cash flows is
different from the substance of the transaction:
• Selling merchandise on credit
• Using services that will be paid for in a later period
• Receiving money in advance for services to be provided
in the future (e.g. subscriptions)
Accrual accounting
To cope with these complexities, most businesses use
accrual accounting.
Accrual accounting involves recognising economic events
regardless of when cash transactions happen.
Therefore, revenues and expenses (and related assets
and liabilities) are recorded at the time they occur, which
may not match up with cash receipt or payment.
Accrual versus Cash Accounting – Examples
In June, a company makes cash sales of $10,000 and
credit sales of $20,000 (all to be collected in July)
1. Revenue using accrual accounting in June?
2. Revenue using cash accounting in June?
3. Revenue using accrual accounting in July?
4. Revenue using cash accounting in July?
Revenue Example (Accrual accounting)
$2,000 of merchandise sold to a customer in June. The
customer will pay in July (a credit sale)
When is the:
(a) Cash recorded i.e., when is cash received?
(b) Revenue recorded? i.e., when is the revenue earned?
Expense Example (Accrual Accounting)
$5,000 of cleaning supplies were purchased with cash in
June. They will not be used until July.
When is the:
(a) Cash recorded i.e., when is payment made?
(b) expense recorded? i.e., when is the expense is incurred?
Accrual Accounting
Accrual profit – the result of revenues minus expenses
when both are calculated using accrual accounting.
When using accrual accounting, the accountant must
make many judgments and estimates relating to the
extent to which revenues and expenses have occurred.
Accounting is not as precise as many people
believe.
Class question:
Comparing accrual profit with change in cash for a period.
1. Issued shares for $100 000.
2. Borrowed $50 000 from the bank.
3. Provided services to customers which generated sales revenue of
$80 000, of which $60 000 had been collected by year end.
4. Employees earned $30 000 of wages, of which $10 000 will be paid
next year.
5. Received an invoice for electricity used during the year for $8 000.
The bill will be paid next year.
Required:
What is accrual profit for the period?
What is the change in cash for the period?
What is the “cash profit” for the period?
1 2 3 4 5 Total
Qualitative characteristics
(not discussed in class please read section 1.9 of textbook)
• Fundamental qualitative characteristics:
• Relevance: Materiality
• Faithful representation
• Enhancing qualitative characteristics:
• Comparability
• Verifiability
• Timeliness
• Understandability
Financial Statement Assumptions
(not discussed in class please read section 1.10 of textbook)
• Accrual basis
• Accounting entity
• Accounting period
• Monetary
• Historical cost
• Going concern
It is important that you understand the impact that
each of these assumptions has on the preparation
and interpretation of financial statements.
Who Prepares Financial Information?
• It is management’s responsibility for the preparation and
presentation of financial statements.
• The role of the auditor is to add credibility to this
information (not to prepare it!).
Accounting Standards
• Set out a framework of concepts that underlie the
preparation and presentation of financial statements.
• Australian standards follow those prescribed by the
International Accounting Standards Board.
• However, a lot of what the financial accountant does is
not regulated by accounting standards.
• Therefore, Generally Accepted Accounting Principles
(GAAP) guide much of the work that the accountant
does.
Users of Financial Statements
• Investors
• Employees
• Lenders
• Suppliers and other Trade Creditors
• Customers
• Governments and their Agencies
• Public
General Purpose Financial Statements
• Clearly these users have differing needs! Financial
statements are designed to meet the needs of the widest
range of users.
• May not necessarily provide all the information that users
might desire - focus on past transactions (not the future)
and little non-financial information.
Preparation for Week 2
• See you next week! Don’t forget to refer to the Course
Schedule to see what readings and questions you need to do
for this class and before the next class
• Raise any questions on the weekly discussion boards
• Reminder PASS classes starts Week 2 (details in Moodle)
– In week 2, PASS leader will cover Topic 1 problems
– Great chance for you to make sure you understand the material
– Please see Moodle for details about times etc.