1.1

1.1

1. Purposes of Accounting

   • Balance Sheet
     • Discloses values of all ASSETS, LIABILITIES and OWNER'S EQUITY at a SPECIFIC POINT IN TIME
       • - Does ____ has enough assets as security to cover loans? - Can _____ take out another loan and pay it pack?
       • LIMITATIONS: 1. Accumulated depreciation is an estimate = unreliable. 2. PPE is recorded at historical cost = different to current market value. 3. No non-financial information
   • Income Statement
     • Discloses INCOME and EXPENSES to determine the NET PROFIT/LOSS and PROFITABILITY for an ACCOUNTING PERIOD
       • LIMITATIONS: 1. Depreciation is an estimate = unreliable. 2. No non-financial information
       • - Should ____ decrease expenses/increase sales? - Compare this years expenses/income/profit to help decide why they have improved/worsened?
   • Cash Budget
     • Discloses all ESTIMATED CASH RECEIPTS and ESTIMATED CASH PAYMENTS and ESTIMATED CHANGE IN CASH OVER A CERTAIN PERIOD OF TIME (PER MONTH)
       • LIMITATIONS: 1. All estimate figures. 2. No non-cash items or credit transactions
       • - Provides guidelines for future spending - Will _____ have an estimated surplus to advertise more
   • Policy Statement
     • Discloses ASSUMPTIONS (RULES) used to prepare FINANCIAL STATEMENTS to understand what MEASUREMENT BASES were used
       • e.g Historical Cost, Name and Nature of the business, Depreciation
       • LIMITATIONS: 1. Terminology may be difficult to understand
   • 1. Assess POSITION, PROFITABILITY and CASHFLOW
   • 2. Set FUTURE GOALS, PREPARE BUDGETS
   • 3. Ensures business stays SOLVENT
   • 4. Assists in FINANCIAL DECISION MAKING, e.g whether to purchase a new asset
   • 5. Whether to LEND MONEY or OFFER CREDIT to the business

2. Users

   • Bank
     • Are there sufficient assets to provide security for a loan? / What other liabilities does the business already have?
       • BALANCE SHEET
     • Can the business meet it's debts? / Whether to extend further credit to business
       • INCOME STATEMENT
   • Creditors/ Suppliers
     • What other liabilities does the business already have?
       • BALANCE SHEET
     • Can the business meet its debts? / Whether to extend further credit to business
       • INCOME STATEMENT
   • IRD
     • What amount of GST is owed?
       • BALANCE SHEET
   • Staff
     • If the business can pay out wages next month
   • Owner
     • Is the business making a profit? / What can be done to cut expenses?
   • Future Potential Investors/owners
     • Does the amount net assets justify the business' selling price?

3. Capital Expenditure - DOESN'T AFFECT OWNER'S EQUITY

   • 1. Purchase of assets
   • 2. Improvements to assets which increase their usefulness or extend their useful life
   • 3. Expenditure incurred in getting an asset to the place and into the condition where it can be used by the business
   • Any expenditure which creates an asset that will be used BEYOND THIS ACCOUNTING PERIOD. This is usually a ONE-OFF PURCHASE and will PROVIDE FUTURE ECONOMIC BENEFIT for the business. Classified as a NON-CURRENT ASSET
   • e.g Insurance for an asset in transport, Staff training

4. Revenue Expenditure - DECREASES OWNER'S EQUITY

   • Revenue Expenditure INCREASES EXPENDITURE which is incurred in the normal DAY-TO-DAY OPERATIONS of a business. Classified as n EXPENSE
   • Any costs incurred so the business can produce revenue from its operations
   • e.g Annual Insurance, Repairs

5. Types of Accounting

   • Financial Accounting: PREPARATION, PRESENTATION, ANALYSING and INTERPERTING of FINANCIAL STATEMENTS to show CASHFLOW, PERFORMANCE and POSITION of the business so oswenrs and managers can make INFORMED DECISIONS
   • Management Accounting: DAY TO DAY OPERATIONS of the business. Providning information on particular activities, e.g PREPARE REPORTS to use WITHIN a firm, PERPARE BUDGETS
   • Auditors: CHECKING the ACCURACY of ACCOUNTING RECORDS of a business to insure that FINANCIAL STATEMENTS present a TRUE and FAIR VIEW of the state of affairs
   • Tax Accountants (For large firms): SPECIALISE IN GIVING TAXATION ADVICE to clients and send information to IRD
   • Cost Accountant: Calculates the COST OF PRODUCTION and how it can be reduced. Helps to CONTROL business COSTS
   • Accounting Technician: Support ACCOUNTANT by ENTERING DATA into the computer. Prepares STATEMENTS, GST RETURNS and PAYE