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Accounting always existed in some form throughout
time. E.g. The Parable of the Talents.
Really took off in the Renaissance Period in Venice
when Venice was the trading capital of the western
world.
The Italians developed the first banking system that
the Roman Catholic Church allowed.
A mathematician and monk Luca Pacioli published
the first book on double entry accounting in 1494.
His methods spread as the influence of Venice
spread.
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Overtime double entry accounting
became the standard.
There are, of course, many ways to record
the same transaction but as time passed
time, generally accepted ways of
recording were developed.
They are known as Accounting Principles.
In the 20th Century, as business became
more advanced, Accounting Standards
were developed to govern the recording of
entries in each country.
This also led to the International Accounting
Standards. Contained in the standards are
the Qualitative Characteristics.
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© Cambridge University Press 2012
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The purpose of accounting is to provide
business owners with financial
information that will assist them in
making decisions about the activities of
their firm
© Cambridge University Press 2012
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The accounting process involves collecting
source documents, recording financial
data and then reporting financial
information, and subsequently advising the
owner on an appropriate course of action
© Cambridge University Press 2012
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• Entity – the business is assumed to be separate
from the owner and other businesses, and its
records should be kept on that basis
• Going Concern – the life of the business is
assumed to be continuous, and its records are
kept on that basis
© Cambridge University Press 2012
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BHP Billiton – the biggest mining
company in the world, is Australian and
has been doing business since 1860.
 Lloyd’s of London – an insurance began
in business in 1688.
 The oldest continuous business in the
world is Kongo Gumi – a Japanese
construction company which began
business in 578.
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• Reporting Period – the life of the business must
be divided into periods of time to allow reports to
be prepared
• Historical Cost – the recording of a transaction at
its original cost or value, as this value is verifiable by
reference to the source document
© Cambridge University Press 2012
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• Conservatism – losses should be recorded when
probable but gains should only be recorded when
certain, so that liabilities and expenses are not
understated and assets and revenues are not
overstated
• Consistency – accounting methods should be applied
in a consistent manner to ensure that reports are
comparable between periods
© Cambridge University Press 2012
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Monetary Unit –
all items must be
recorded and
reported in a
common unit of
measurement; that
is, Australian dollars
© Cambridge University Press 2012
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• Relevance – is the information in the report useful for
decision-making?
• Reliability – is it accurate, and free from bias or error?
• Comparability – can the reports be compared over time?
• Understandability – is the information presented in an
easy-to-understand manner?
© Cambridge University Press 2012
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
Qualitative
Characteristics
Com
› Comparability

Rel
› Relevance
› Reliability

U
› Understandability
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Accounting Principles
Cricket Consistency
@
H
Historical Cost
E
Entity
R
Reporting Period
M
C
G
Monetary Unit
Conservatism
Going Concern
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The following three-step approach may
help you to earn the maximum marks for
theory questions.
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
Identify
› Identify the important term, concept, accounting
principle or qualitative characteristic

Define
› Define the term using a glossary definition

Link
› Link the definition back t the intent of the
question, that is, answer the question
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IDENTIFY Entity Principle
DEFINE
LINK
The entity principle states that the personal affairs of
the owner should be kept separate from the affairs of
the business.
In this case, Jessica’s use of business finances should
be treated as drawings, as the family holiday in not an
expense of the business.
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1 mark for the correct accounting
principle
 1 mark for a correct definition
 1 mark for linking back to the questions
accurately

Remember to always link the
explanation back to the question or
scenario.
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1.1Mornington General Store has just revalued
their non-current assets upwards by 4% to
reflect the rate of inflation. Referring to an
accounting principle, explain why the noncurrent assets should not be revalued.
IDENTIFY
Historical Cost
DEFINE
Non current assets are valued at Historical Cost or at
the price for which they were purchased.
LINK
The purchase price is verifiable by the cheque whereas
it is difficult to verify an inflation increase of 4%.
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1.2 Frankston Petrol Station has decided that it is going to
record the stock of petrol on hand in litres rather than
dollars in the Balance Sheet. Referring to one
accounting principle, explain why the stock of petrol
should be recorded in dollars rather than in litres. Hint: It
two or more accounting principles are relevant, use the
principle that is MOST appropriate to the scenario.
IDENTIFY
DEFINE
LINK
Monetary
All transactions are to be valued in the monetary terms
of the country in which they are located.
Valuing the petrol in litres means that profit or loss cannot
be calculated and this also means that the reports could
not be compared one reporting period to the next.
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1.3 Roger Moore plans to start up a business to
organise a music festival on the Mornington
Peninsula over the summer. He plans to wind up
the business the day after the music festival is
finished. Referring to an accounting principle,
explain why, as accountants, we must assume the
business will continue indefinitely.
IDENTIFY
Going Concern
DEFINE
The life of a business is considered to go on forever.
LINK
The time and effort that Roger puts into the festival is wasted
if he winds the business up at the end of the festival.
Presumable he will run it next year and he would have to
start the business up again. And what does he do with the
money left over from the first festival.
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1.4 Hasting Hardware currently depreciates all its
non-current assets using the straight-line method
of depreciation. Next year they are planning to
change the way they calculate depreciation on
their assets. Referring to an accounting
principle, explain why the business should use the
same method of calculating depreciation each
year.
IDENTIFY
DEFINE
LINK
Consistency
The same accounting methods must be used from one
reporting period to the next.
This makes it easier to see if the changes in finance are
due to business performance rather than changes to
methods.
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1.5 Portsea Bait Shop recently discovered that half its
stock of bait had become rotten, so they threw it all
away. The value of the rotten stock lost was $20,000
and has to be written off as a loss. Referring to an
accounting principle, explain why Portsea Bait Shop
should write off the lost bait as an expense.
IDENTIFY
Conservatism
DEFINE
Losses must be recognised as soon as the business
becomes aware of them so that assets and expenses
are not overstated.
LINK
If the bait was not written off then Stock would $20,000
too high or $20,000 overstated.
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1.6 Rachael owns and operates a small shop in Red Hill
selling clothing and jewellery. Most weeks Rachael
takes home clothing to keep for her personal use. She
claims this clothing is an expense of the business.
Referring to an accounting principle, explain why the
clothing should not be treated as a business expense.
IDENTIFY
Entity
DEFINE
The private transactions of the owner must be kept
separately from those of the business.
LINK
If Rachael write the clothing and jewellery off as expenses it
will increase expenses, reduce profit and reduce the tax bill.
She should record these as drawings which will reduce
capital.
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1.7 Bill operates Sorrento Computer Repairs. At the end
of each month he prepares a Profit and Loss
Statement and a Balance Sheet. He believes this
helps him better understand and analyse the
performance of his business. Referring to an
accounting principle, explain why it is important that
Bill has broken down the life of the business into
amounts of time.
STATE
Reporting Period
DEFINE
The continuous life of a business is divided up into
arbitrary periods of time for profit calculation.
LINK
Bill can compare a report over a number of reporting
periods and see the favourable or unfavourable trends. He
can then make decisions about improving his business.
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2.1Cassandra recently opened a restaurant in Arthurs
Seat. She handles all the cash receipts and
payments for the business. Recently she decided
not to give customers receipts ... “as they don’t
want them”. Using a qualitative characteristic,
explain why it is important that all transactions
need to have a source document to prove that
the transaction occurred.
IDENTIFY
Reliability
DEFINE
All transaction should be free from bias and be able
to be verified by source documents.
LINK
How can Cassandra prove that a transaction took place if she
has not recorded it on a source document? And how easy
would it be for her to forget the amount or details of any
transaction?
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2.2 David owns and operates a boat hire business at
Mornington pier. Until recently he has been using straightline method of calculating depreciation for non-current
assets, but he has now decided to use a different method
which means depreciation expense will be less and
therefore his net profit will be much higher, and this will
mean his business is performing much better. Referring to
a qualitative characteristic, explain why it may not be the
case that David’s business has performed better.
IDENTIFY
DEFINE
LINK
Comparability
Reports should be prepared using the same accounting
method so that they can be compared over time.
Changing the depreciation rate gives an unrealistically
high profit one year compared to a lower one the year
before.
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2.3 When preparing the financial reports for profit and
cash position for her business, Aisha decided to
simplify the accounting reports and convert some
financial information into charts. Referring to a
qualitative characteristic, explain why simplifying
the accounting reports and using charts can be an
advantage in accounting.
IDENTIFY
Understandability
DEFINE
Reports should be prepared in a way that people outside
the business can easily understand them.
LINK
Charts and graphs are easy to read and understand.
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2.4 When preparing the Profit & Loss Statement for Rye
Fish and Chip Shop, Jason made an error. He
forgot to include $5,000 paid in wages throughout
the year to one of his workers. This resulted in the
net profit being overstated by $5,000. Referring to
a qualitative characteristic, explain why it is
important that all information that is useful be
included in the Profit & Loss Statement.
IDENTIFY
Relevance
DEFINE
All information that is useful for decision making should
be included in the reports.
LINK
Jason needs accurate information so that he can
make accurate decisions.
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The three general-purpose
financial reports are the:
• Cash Flow Statement
• Income Statement
• Balance Sheet
© Cambridge University Press 2012
32
• Asset – a resource controlled by an entity, as a
result of past events, from which future economic
benefits are expected to flow to the entity
• Liability – a present obligation of the entity as a
result of past events, the settlement of which is
expected to result in an outflow from the entity of
resources embodying economic benefits
© Cambridge University Press 2012
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• Owner’s equity – the residual interest in the
assets of the entity after the deduction of its
liabilities
• Revenue – an increase in assets (or decrease in
liabilities) that increases owner’s equity, except
for capital contributions by the owner
• Expense – the decrease in owner’s equity that
occurs through business activities
© Cambridge University Press 2012
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