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BUSINESS SCHOOL
Recap
Business Transactions
Chapter 4 Pages 162-179; 183-187; 195-203; Skim Read Pages 179-183
- Provide an overview of the recording process (LO1)
- Explain how the use of double-entry bookkeeping mirrors the first-
principles approach (LO2)
- Explain the importance of a trial balance (LO3)
- (Skim Read Only) Close off a simple set of accounts (LO4)
- Record a series of period-end adjustments in the accounts (LO5) – Only
up to an including depreciation
- Use an adjusted trial balance and a worksheet to complete a final set of
accounts (LO7)
- Describe a chart of accounts and its importance (LO8)
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Learning Objectives
When you have completed your study of this chapter, you should be able to:
1) Explain the nature and purpose of the statement of financial position
(balance sheet) and its component parts.
2) Explain the accounting equation, and use it to build up a statement of
financial position at the end of a period.
3) Classify assets and claims.
4) Apply the different possible formats for the statement of financial position.
5) Identify the main factors that influence the content and values in a
statement of financial position.
6) Explain the main ways in which the statement of financial position can be
useful for users of accounting information.
7) Identify the main deficiencies or limitations in the statement of financial
position.
Economic Claims to
Resources Economic Resources
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US Central Bank
After pushing rates nearly to zero to fight the 2007-2009 financial crisis and
recession, the Fed pumped over $US3 trillion into the economy in a bond-buying
spree to further reduce rates. Its balance sheet has grown to $US4.5 trillion.
Unwinding the balance sheet will mark the end of a controversial tool that drew
criticism from Republican lawmakers in Congress. While Fed researchers have
concluded the bond buying only modestly boosted the economy, Fed chair Janet
Yellen has said the central bank could use asset purchases again if the economy
fell into a deep rut.
Read more: http://www.smh.com.au/business/markets/fed-flags-relatively-soon-
cut-to-balance-sheet-20170726-gxjiq1.html accessed on 9th Feb 2018
Accounting Processes
Journal Week 3
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Assets
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Assets
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Liabilities
Liabilities
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• Reserves represent ownership interests in the assets, not the assets themselves.
Reserves are not separate deposits of cash available for other purposes
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• This equation will always hold true, as total claims are always the same as
total assets, ensuring that the balance sheet always ‘balances’
• Trading introduces additional transactions to the statement of financial
position
• To cover the effect of trading, the statement of financial position equation is
extended:
Classification of assets
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Classification of assets
Classification of liabilities
• Current liabilities
• Amounts due for repayment to outside parties within 12 months or one
operating cycle of the statement of financial position date
• AASB 101 ‘Presentation of Financial Statements’ requires a liability to be
classified as current when it satisfies the following criteria:
a) The liability is expected to be settled in the entity’s normal operating cycle;
b) The liability is held primarily for the purpose of being traded;
c) The liability is due to be settled within twelve months after the reporting date;
or
d) The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date
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Classification of liabilities
• Non-Current liabilities:
• Those amounts due to other parties which are not liable for repayment within
the next 12 months
• Only the period for which the liability is outstanding matters - not the purpose
it is held for
• The alternative liquidity classification may be used for liabilities if it provides more
relevant and reliable information
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Lecture Example
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Valuing assets
› Non-current assets have lives that are either finite or indefinite
› Non-current assets with finite lives are used up over time, and their
cost is recognised as an expense in each period (depreciation or
amortisation)
› Non-current assets with indefinite lives may, or may not, be used up
over time, and are not subject to routine annual depreciation over
time.
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› Conceptual framework
• Represents a logical theoretical structure to support and direct accounting
practice
• Major implications:
• SAC1: Definition of the Reporting Entity
• SAC2: Objective of General Purpose Financial Reporting
• AASB Framework: Qualitative Characteristics of Financial Information
• AASB Framework: Definition and Recognition of the Elements of Financial
Statements
• Conceptual Framework for Financial Reporting 2010
• Adopted in 2010
• Lists two fundamental qualitative characteristics of useful financial
information:
• Relevance and faithful representation
• Comparability, verifiability, timeliness and understandability
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› It provides insights about how the business is financed and how its
funds are deployed
› It provides insights into the liquidity of the business
› It can provide a basis for assessing the value of the business
› It provides a means of assessing relationships between assets and
claims
› It provides insights into the ‘mix’ of assets held by the business
› It can help users in assessing performance.
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Summary
When you have completed your study of this chapter, you should be able to:
1) Explain the nature and purpose of the statement of financial position
(balance sheet) and its component parts.
2) Explain the accounting equation, and use it to build up a statement of
financial position at the end of a period.
3) Classify assets and claims.
4) Apply the different possible formats for the statement of financial position.
5) Identify the main factors that influence the content and values in a
statement of financial position.
6) Explain the main ways in which the statement of financial position can be
useful for users of accounting information.
7) Identify the main deficiencies or limitations in the statement of financial
position.
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