Download NCEA Level 1 Accounting Notes

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CEA Level 1 Accounting
Notes
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1.1 Demonstrate an understanding of the conceptual basis of
accounting
A majority of these notes were straight from my head, as I’m basically
revision. So please don’t expect perfection. Correct me when errors are
sighted. I’ll do the rest later. I’ve got to study for Mathematics .
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How to obtain higher grades in this Standard.
Apply your answer, by stating the business/owner and the context of the
question. This should be done for every Achievement Standard. An
important skill is applying Financial Concepts as well as Financial
Elements, this is crucial in obtaining Achievement with Excellence. This
cannot be over emphasized.
Learn key definitions.
View past Exam papers:
http://nzqa.govt.nz/ncea/assessment/search.do?query=accounting&view=
achievements&level=01 – Click on ‘View all Documents’ in order to view
that particular standard.
Look at the Assessment Specification in order to get an idea of what to
expect this year.
http://nzqa.govt.nz/ncea/assessment/search.do?query=Acco&view=achie
vements&level=01
Schedules are vital in order to gain insight on what the Markers are
seeking. Assessment Reports gives you information based on past years
examinations. These are comments from Examiners, who report on what
people have done. Assessment reports from 2004-2002 give Assessment
Schedules as well.
http://nzqa.govt.nz/ncea/assessment/search.do?query=Acco&view=report
s&level=01
http://www.tki.org.nz/r/ncea/accountingappendix1_7dec07.pdf
Formats of Financial Statements as well as clarifications on other
aspects.
Purpose of Accounting:
To communicate financial information to interested users/parties so they
can make informed decisions relating to the business
Users of Accounting:
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Government/IRD – Paying correct amount of GST and other taxes.
Employees – To see if their job is secure, or capable of a pay rise.
Owner – To see his/her return on investment if the business is profitable
Suppliers – To see if the business has the ability to repay their debts.
Banks – To see the amount of security they can provide, ability to repay
their debts, any other obligations i.e. other loans.
Types of Accountants:
Cost Accountant - Calculates and controls the costs of producing goods
and services.
Managements Accountant - Provides financial information from within
the business’s operations. Preparing internal budgets etc.
Accounting Technician - Helps to record, process and prepare accounts
and statements.
Financial Accountant - Prepares, analyses and interprets financial
reports.
Taxation Accountant - Prepares tax returns and provides taxation
advice.
Auditor - Checking financial statements to ensure they show accuracy
and a true and fair view of the entity’s financial results.
Types of Ownerships
o Soles Proprietor/Trader – A single owner who owns and runs their
own business (Though may employ employees).
o He/she is not a separate legal entity from the business, therefore
has Unlimited Liability. However for accounting purposes, they’re
separate from the business. See Accounting Entity Concept.
o Advantages – 1) The owners keeps all the profits to himself after
being taxed, so can take drawings out from the business whenever
he feels. 2) Complete freedom in decision making, as they’re their
own boss. 3) Not much legal formalities to comply with, so is faster
and more convenient to set up. No auditing required.
o Disadvantages – 1) Unlimited Liability, results in Owner’s personal
assets being sold i.e. house, car in order to pay back the debts of
the business if it gets into financial difficulty. 2) Limited access to
finance, as all the finances basically come from the owner, thus is
harder to expand beyond the Owner’s limited means. 3) If the
Owner is sick/dies, then the business may seize to operate. 4) Not
much people to discuss business matters with.
o Source of Finance – 1) Owner’s own capital 2) Personal Loan from
family or Banks.
o Partnership – A type of ownership consisting of 2-25 members.
o They are not a separate legal entity from the business, thus they
have Unlimited Liability. However for accounting purposes, they’re
a separate entity from the business.
o Advantages 1) More access to finance, as members contribute a
proportion of the business’s finance. Sleeping/Silent Partners are
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those that don’t take part to the day to day operating of the
business, but still contribute, via cash. 2) If losses occur, losses will
be shared, based on agreements or equally. 3) Specialisation (I
think this may be too economic – Got marked wrong) 4) If a
partner is sick/absent then the business will still be able to function
and operate.
o Disadvantages 1) Unlimited Liability exists in the business. Failure
to repay debts results in Joint and Several Liability. 2) Conflicts can
arise as partners may feel as though the business should operate in
a different manner. 3) Profits will be shared among partners, if
there were no agreements beforehand.
o Source of Finance – 1) Each member contributes; whether silent or
not. 2) Loans from financial institutions such as Banks.
o Company – A type of ownership that is a legal separate entity from
its Shareholders who are the owners. Must have a name registered
with Ltd. (A signal to suppliers.)
o Advantages – 1) Has the ability to issue unlimited
shares/debentures to the general public (if listed) in the Stock
Exchange, therefore can accumulate large sums of capital. 2)
Limited Liability means that debts will not extend to shareholder’s
(owners) person assets, because they are a separate legal entity,
only their amount invested (shares) in the company will be used.
o Disadvantages – 1) A lot of legal formalities that have to be
followed, such as Auditing 2) Shareholders get no say in the normal
day-to-day operating of the business.
o Source of Finance – Debentures, issuing shares via Stock
Exchange, loans from financial institutions.
o Community Organisation – Societies or clubs. Can be incorporated,
if there are 15 or more members.
o Advantages – If the business is incorporated (Inc.) they will have
limited liability.
o Disadvantages – Unlimited Liability if unincorporated. Can be a
difficult task raising finance.
o Source of Finance – Subscriptions from members, donations,
legacies, sponsors etc.
o …. And at Level 1, do we do Co-operatives?
Financial Statements
Income Statement – To calculate the profit/loss of the year by showing
income and expenses.
Statement of Accounting Policies – To outline the concepts and
assumptions used in preparing the Financial Statements and how financial
elements have been followed. (See Appendix, for Statement)
Balance Sheet – To show the financial position of an entity at a particular
point in time, by showing Assets less liabilities and Equity.
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Statement of Cash Flows – To show the movements of cash receipts and
payments. And also the changes in Bank Balances.
Limitations to Statements – Estimates (Depreciation and some Intangible
Assets), Non-monetary things like location, customer base or market
share, economic situation are not included. Financial Statements uses
Historical Cost, which may not end up being relevant to the end user or
may not accurately reflect the business.
Financial Elements
Assets – Future economic benefits controlled by the entity that resulted
from a past transaction. E.g. Property, Plant and Equipment, Inventory,
Bank, Petty Cash, Accrued Income, Accounts Receivable, Prepayments,
Goodwill, Shares, Term Deposit.
Liabilities – Future sacrifices of assets that the entity is presently obliged
to make that resulted from a past transaction. E.g. Bank (Overdraft),
Loan, Mortgage, Income in Advance, Accounts Payable,
Income – An increase in assets or decrease in liabilities that results in an
increase in Equity, but not through the owner’s contributions (Capitlal).
E.g. Sales, Fees, Interest Received
Expenses – A decrease in assets or increase in liabilities that results in a
decrease in Equity, but not through Drawings. E.g. Interest, Wages,
Commission, Advertising etc.
Equity – The residual value of assets less liabilities.
Capital + Revenue Expenditure
Capital Expenditure – Purchasing Non-Current Assets that will keep
beyond the next accounting period. I.e. Property, Plant and Equipment.
Includes costs such as upgrading, or getting the Non-Current ready for
use. Does not affect the Income Statement, only Balance Sheet.
Payments include paying off mortgage, loans etc.
Revenue Expenditure – Payments spent on maintaining an asset so it can
operate i.e. Petrol, rent. – Day to day expenses. Does not affect the
Balance Sheet, only Income Statement.
Depreciation ( STRAIGHT-LINE DEPRECIATION)
The systematic allocation of historical cost less residual value over its
estimated useful life. HISTORICAL COST – RESIDUAL
ESTIMATED USEFUL LIFE
Why use the Straight-Line Depreciation method? Because it better reflects
the consumption of future economic benefits of an asset over it’s
estimated useful life.
Depreciation on (Name Property, Plant or Equipment) is a decrease in
future economic benefits by decreasing the (Name Property, Plant or
Equipment). The depreciation on (Name Property, Plant or Equipment)
decreases Net Profit, which decreases Equity, and is not drawings from
(owner)
Conceptual Accounting (These are notes from my classroom)
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Accounting Entity – Financial transactions of a business are kept separate
and distinct from personal financial transactions of the owner, for
accounting purposes. E.g. Drawings
Going Concern – Financial reports are prepared on the assumption that
the business is expected to continue in the foreseeable future.
Period Reporting – The continuing business life is divided into nominated
time periods in order to measure the entity’s financial performance,
financial position and cash flow on a regular basis, usually one year.
E.g.: Income Statement for the year ended 31st March 2009.
Accrual Basis – The effects of transactions and other events are
recognized to when they occur and are reported in the financial
statements to which they relate. E.g.: Accounts Payable, Receivable,
Prepayments, Accrued Expenses, Accrued Income, Income in Advance,
Depreciation – BALANCE DAY ADJUSTMENTS
Monetary Measurement – All transactions are recorded in a common dollar
unit such as the $NZ Dollar. To allow for accuracy and consistency.
Historical Cost – Transactions are recorded at their original amount to
purchase or payable.
SOME EXAMPLES OF APPLIED CONCEPTS AND ELEMENTS
NCEA SCHEDULES
The financial affairs of the members of
the Aronui Marae are kept separate to
the financial affairs of the Aronui Marae.
Eg, the amount of insurance prepaid
reduces the insurance expense for the
current period in the Income
statement, OR is reported as a (current)
asset on balance day in the Balance
Sheet at the end of the period, OR is
Reported in the period it relates.
Vehicle / Motor Vehicle is recorded /
written / shown at its original cost /
purchase cost $30 000.
The life of Aronui Marae is divided into
nominated periods so that financial
statements can be prepared to measure
performance / position to provide timely
information for marae members for
decision making and comparisons.
Depreciation on a (delivery) van is a
decrease in economic benefits in the
form of a decrease / depletion of the
asset (delivery) van, and decreases
equity (by less profit / increased
expenses OR is not owner’s drawings)
Increased equity due to increase in car
park / rent income / revenue / fees
Requires Increase in equity and car
park/rent income
Tiny Tots can use the display cabinet /
Tiny Tots can use the cabinet so no
one else can / Tiny Tots restricts others
from using display cabinet.
The display cabinet is used to display
the inventory in order to make sales /
earn income.
interest received increases equity /
accumulated fund by increasing net
surplus / profit from an increase
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in the (organisation / marae) bank
account asset (but not from members’
contributions).
the loan was raised by Aronui Marae in
the past
To assess Aronui Marae’s (accept
Marae’s) ability to repay
a loan / security for the loan / meet
their weekly repayments
Magazine sales for cash increases equity
by more profit and increases the asset
bank (and are not from the owner).
The donation increases the accumulated
fund / equity (by increasing net surplus
/ profit)/ from (because of) an increase
in the club’s bank account (but not from
members’ contributions).
The barbecue is depreciated to
recognise use of the asset each year
you have it / or the barbecue is
depreciated to recognise consumption /
use of the future economic benefit of
the barbecue.
The shop fittings (will provide future
economic benefit as they) display the
inventory /goods / books / magazines
etc and attract customers (who buy
them) and Books 4 U /this earns
revenue (from the sale).
The clubrooms are the result of a past
transaction (a transaction such as
payment for building would have been
made and recorded) they are under the
control of the club – only
the club can benefit, and will lead to an
increase in future benefit as members
continue to make use of the building.
(Not can be sold in the future.)
Shop electricity is an expense because it
decreases the asset bank (when paid
for),and decreases equity by less profit,
and is not drawings.
The barbecue repairs decrease the
accumulated fund from a decrease in
the club’s bank
account.
the insurance expense is reduced (by $1
200) in the statement of financial
performance as some of it belongs to
next period, OR so we only have the
expense that relates to this period
reported in this period, OR the $1 200
of prepaid insurance will be reported
as an expense in the next period as it
belongs to that period
The prepayment (of $1 200) is reported
as a (current) asset in the statement of
financial position / on balance day (as it
represents a future benefit of insurance
cover to be received).
Sam records the cost of magazines
taken home / for personal use as
drawings to keep his personal expenses
separate from his business expenses.
because it is too difficult to put a dollar
value on the talents of players.
Only Whatipu Lodge can use the diesel
generator to generate power for the use
of its guests.
The generator provides future economic
benefit as it provides electricity for
guests
who are paying to stay at the lodge and
want some electricity
or the generator helps
Whatipu Lodge must repay the loan
or Whatipu Lodge owes money for
the loan.
Whatipu Lodge will need to use
some of its money in the future to
repay the loan.
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Repairs to the generator is an expense
because it is a
reduction in equity other than drawings
The generators are recorded in New
Zealand currency in the accounting
records.
Ali will record the lodge supplies as a
business expense and her family
groceries as drawings to keep
the business expenses/transactions
separate from her personal
expenses/transactions.