Australian practical accounting guide

384 Pages·2020·6.252 MB·English

by  Stephen J. Marsden, CCH Australia Limited,

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Cataloguing-in-Publication Data available through the National Library of Australia
ISBN: 978-1-922347-03-9
© 2020 CCH Australia Limited
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Preface
Accounting has often been described as the “language of business”. Every business, regardless of
whether it is a listed public company, a non-profit organisation or a small corner shop, butcher or
newsagent, requires accurate and timely financial information so that the owners or directors of these
businesses can make informed business decisions.
These decisions have financial consequences that impact on a wide range of stakeholders, from the
business owners (or shareholders), customers, suppliers, employees, lenders, creditors and government
regulators. As a result, many people with little knowledge of accounting must interpret financial data.
Thus, accounting plays a significant role in society and, in a broad sense, everyone is affected by
accounting information.
For this reason, a basic understanding of accounting principles is vital not only for those students studying
an accounting degree at university or completing their professional studies, but also for those students
who will perhaps only complete one accountancy unit in their entire course. Accountants are required for
all types of businesses and the financial statements produced by accountants are used by both internal
and external users to make and evaluate important business decisions.
Australian Practical Accounting Guide is not only designed to assist accountancy students gain an
appreciation of key accounting concepts and principles, but is also aimed at those students who do not
necessarily require a detailed or in-depth understanding of accounting and wish to go on to become a
qualified accountant.
A deliberate attempt has been made to write the book in simple-to-understand terms. The book is
practical in nature and contains numerous worked examples, diagrams, checklists and flowcharts for easy
reference. Each chapter also concludes with a list of commonly asked accounting bookkeeping and
taxation questions pertinent to each topic.
What distinguishes this book from many other introductory accounting textbooks on the market is that this
book can also be used as a handbook for practising bookkeepers and accountants. Many of the worked
examples contained in the book are “real” clients of mine (although their names have been changed for
the purposes of anonymity). The reason for doing this is to give the reader a real-world insight into typical
day-to-day accounting issues encountered by Australian businesses. It is also designed to provide the
reader with a greater understanding of the issues faced by accountants when dealing with their clients on
a day-to-day basis.
The other important distinction about this book is the discussion of the GST. Most other introductory
accounting textbooks which span hundreds of pages only tend to devote a handful of pages to the GST.
The GST was introduced in Australia on 1 July 2000 and applies to 2.86 million Australian businesses
that are registered for the GST as at the date of writing. This book deals with the impact of the GST on
businesses in each chapter.
The book provides an overview of the key accounting principles. Chapters 1 and 2 provide an overview of
the types of business entities, the type of accounting information required by businesses and how
transactions flow through the accounting cycle, from source documents to the general journal to the
general ledger and ultimately into the trial balance, which forms the basis of the preparation of the
financial statements.
These financial statements are further explained in Chapter 3 and include the Income Statement (or Profit
and Loss Statement), Statement of Changes in Equity, Balance Sheet and Statement of Cash Flows.
Chapter 3 also discusses the role and importance of adjusting and closing entries in completing the
accounting cycle.
Chapter 4 provides a comprehensive summary of the GST. It explains the various types of supplies for
GST purposes, how GST impacts on businesses and most importantly, how these transactions are
recorded in the accounting system. A standard chart of accounts is provided at the end of the chapter
incorporating “typical” GST tax codes. The chapter also outlines how a Business Activity Statement (or
BAS) is prepared under both the cash and non-cash (accruals) basis of accounting.
Chapter 5 outlines the accounting issues relating to cash, debtors and creditors. This chapter discussed
the types of internal controls that an entity should have over its cash receipts and cash payments and the
importance of preparing a bank reconciliation. The steps necessary to perform a bank reconciliation are
explained in this chapter as is the concept of bad debts. The chapter concludes with an overview of the
importance of an aged debtors’ and aged creditors’ analysis.
Chapter 6 deals with accounting for inventory (also known as trading stock). For many businesses,
particularly those in the retail sector, inventory is one of their most important assets. This chapter outlines
the specific rules relating to accounting for inventory, including what is included in the “cost” of inventory,
the concept of inventory on hand and the various ways that inventory can be valued. The chapter also
discusses the differences between a periodic and perpetual inventory system, with full illustrations of the
journal entries provided under each system.
Chapter 7 deals with accounting for non-current assets. This chapter outlines the various types of non-
current assets (both tangible and intangible) including what is included in the cost of acquisition and the
issue of subsequent expenditure. There are various ways that an asset can be financed. These options
range from the purchase of the asset outright, to leasing, hire purchase and acquiring an asset via a
chattel mortgage arrangement. These options are explained in considerable detail in this chapter with
detailed explanations (and examples) provided dealing with the accounting, income tax and GST
treatments of each option.
The chapter also explains the concept of intangible assets including the difference between goodwill and
other intangible assets such as patents, trademarks, copyrights and license fees. The chapter also covers
the concept of impairment and depreciation (which applies to tangible assets such as property, plant and
equipment) and amortisation (which applies to intangible assets) including the various depreciation
methods permitted. A sample fixed asset register and sample depreciation schedule are also included in
this chapter.
Chapter 8 provides an overview of the most common financial statement analysis techniques used to
analyse and interpret business performance and highlight any trends or “problem areas” that may require
attention, and ultimately, corrective action. A range of typically used financial statement ratios are
discussed in this chapter, including a comprehensive worked example illustrating how these ratios are
calculated and how they should be interpreted.
The book concludes with a comprehensive glossary of commonly used accounting and tax terms.
As a final comment, regardless of whether you are a practising accountant, or whether you are embarking
on an accountancy career or simply a student studying an accounting unit as part of your course, I hope
you find this book, useful, interesting and informative.
Stephen J Marsden
March 2020
Wolters Kluwer Acknowledgments
Wolters Kluwer wishes to thank the following who contributed to and supported this publication:
Director, General Manger, Research & Learning, Wolters Kluwer Asia Pacific:
Lauren Ma
Associate Director, Regional Head of Content, Wolters Kluwer Asia Pacific:
Diana Winfield
Head of Legal Content, Wolters Kluwer Australia:
Carol Louw
Books Coordinator, Wolters Kluwer Asia Pacific:
Jackie White
Editor:
Reshma Korah
About the Author
Stephen Marsden is a full-time lecturer employed in the QUT Business School at the Queensland
University of Technology in Brisbane where he is responsible for lecturing and tutoring a wide range of
undergraduate and postgraduate financial accounting and taxation law subjects.
Stephen has a Master of Business (Accountancy) and is a Member of Chartered Accountants Australia
and New Zealand, CPA Australia, The Australian Institute of Company Directors and the National Tax and
Accountants Association. He is also a Chartered Tax Advisor of The Taxation Institute of Australia.
Stephen has presented hundreds of professional development seminars and workshops over the past 28
years in the areas of financial accounting, taxation, GST and FBT for a range of professional
associations, accounting firms, listed companies, nonprofit organisations and government departments.
Stephen also runs his own accountancy practice where he attends to the accounting and taxation affairs
of a variety of clients in both the public, private and non-profit sectors.
Acknowledgments
I am indebted to several people over the period that it has taken me to write this book. In particular, I
would like to thank my family and friends for their ongoing support, patience and encouragement.
Special mention goes to my partner, Elizabeth Jones, who has been very supportive in allowing me to sit
at my computer early in the mornings, late at night and for large chunks of the weekend when writing this
book. Elizabeth also provided a wonderful sounding board for me over many months and played a vital
role in reviewing key aspects of the book and providing helpful and insightful comments and suggestions.
Thanks also to Summer (now aged 10) for her patience in allowing me to write this book in between
regular arts and crafts sessions and watching Harry Potter movies.
I would also like to thank Shiv Sri-Ramanathan from Wolters Kluwer CCH and Ramesh Karunakaran from
Newgen Knowledge Works for their support and contribution to this book.
Lastly, I would like to sincerely thank my parents, Jack and Colleen Marsden who passed away several
years ago for their love, encouragement and support over many, many years. None of this would have
been possible without them.
INTRODUCTION TO BOOKKEEPING
Purpose of bookkeeping ¶1-000
Brief history of bookkeeping ¶1-050
Users of accounting information ¶1-100
The accounting profession in Australia ¶1-200
The bookkeeping profession in Australia ¶1-250
Types of business entities ¶1-300
Accounting assumption ¶1-400
Content of external financial statements ¶1-500
The reporting entity concept ¶1-600
Reporting entities ¶1-610
Non-reporting entities ¶1-620
Disclosure of status in financial statements ¶1-640
AASB proposals — removal of the reporting entity concept ¶1-650
Introduction to bookkeeping — commonly asked questions ¶1-700
Extract from the 2017 Annual Report of JB Hi-Fi Ltd ¶1-750
¶1-000 Purpose of bookkeeping
Every business is required to keep a record of its business transactions. A bookkeeper is the person who
typically assists in recording financial transactions of a business. This process often involves the use of a
computerised accounting system but it may also be done manually.
Accounting can be defined as the process of:
• identifying
• measuring
• recording, and
• communicating
economic information to permit informed judgments and decisions by users of the information.
Bookkeeping can be viewed as a subset of accounting and is primarily concerned with the first three
phases identified above (ie the processes of identifying, measuring and recording business transactions).
Bookkeepers ensure these transactions are accurately recorded in the accounting system.
The primary purpose of bookkeeping is for the bookkeeper to record, classify and report information about
a business’ financial transactions. The bookkeeper prepares a set of books (usually called the “accounts”)
for the business owner. This is typically done on a weekly, fortnightly, monthly or quarterly basis
depending on the volume of transactions as well as the size and complexity of the business.
Once these accounts have been prepared by the bookkeeper, they are usually passed onto and reviewed
by the external accountant. The external accountant checks these accounts, makes any relevant
adjustments and prepares a set of external financial statements that comply with the Australian
Accounting Standards issued by the Australian Accounting Standards Board (AASB). The external
accountant or tax agent also uses these financial statements as the basis for preparing the annual income
tax return of the business for lodgment with the Australian Taxation Office (ATO).
In reality, the distinction between bookkeeping and accounting is not an important one, as sometimes
bookkeepers perform accounting work and accountants will sometimes perform bookkeeping work. Since
the advent of the goods and services tax (GST) in Australia on 1 July 2000, many bookkeepers prepare
monthly or quarterly Business Activity Statements (BAS) for their clients. The BAS is typically reviewed by
the external accountant before lodgment with the ATO. It should be noted, however, that in the case of a
contracting bookkeeper they are only permitted to assist a client in preparing and lodging a BAS if they
are a “BAS agent” (see ¶4-800 in Chapter 4 for further details).
Despite the formal distinction between bookkeeping and accounting noted above, in reality, bookkeepers
and accountants often work closely together sharing information relating to the financial affairs of the
business.
The overall objective of both bookkeeping and accounting is to ensure that financial transactions of the
business are accurately recorded and the information (in the form of financial statements) is presented to
users (both internal and external) so that these users can make sound and informed decisions.
As bookkeeping and accounting are so closely aligned, it is essential that bookkeepers develop a solid
understanding of accounting doctrines and principles.
Regardless of whether the business is a listed public company, small business, government department,
non-profit organisation, family trust or an individual trading as a sole trader, bookkeeping principles apply
universally across each type of business entity. All of these entities engage in business activities and,
hence, users require financial information that is reliable, relevant, understandable and timely.
Many people who need to interpret financial data have little knowledge of accounting. Thus, bookkeeping
and accounting play a significant role in society and, in a broad sense, everyone is affected by the
financial information. As Jane Gleeson-White stated in her book entitled Double Entry (2011):
“Our world is governed by the numbers generated by the accounts of nations and corporations. We
depend on these numbers to direct our governments, economies and societies often in ways we are
barely aware of”.
¶1-050 Brief history of bookkeeping
Bookkeeping has a long history. Accounting records date back to the ancient civilisations of China,
Babylonia, Greece and Egypt in around 3600 BC. The rulers of these civilisations used accounting
information to keep track of the costs of labour and materials used in building structures such as the
pyramids. The need for accounting information has existed for as long as there has been business
activity.
The first record of a complete accounting system was found in Genoa, Italy in 1340. The Italian
domination of accounting was cemented in 1494 with the publication of the first formal treatise on
bookkeeping by Luca Pacioli (1445–1517), a Franciscan monk, mathematician and university teacher in
Venice. Pacioli learned the Italian method of bookkeeping while working as a tutor in various Italian
universities. In 1494, he wrote these principles in a book entitled Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (Everything about Arithmetic, Geometry and Proportion). In this book, Pacioli
formally explained the concept of double-entry bookkeeping and the basic and fundamental principle of
bookkeeping. For this reason, Pacioli is often referred to as the “grandfather of accounting”.
The great German writer Johann Wolfgang von Goethe (1749–1832) wrote in 1796 that he regarded
double-entry bookkeeping as “among the finest inventions of the human mind”.
The need for accounting increased during the 19th and 20th centuries as a result of the industrial
revolution. The basic form of business organisations shifted from partnerships to companies with
widespread and diverse share ownership. As the separation between ownership and management
spread, the need for greater and more sophisticated accounting information developed.
Responsibility for the company was delegated to management by shareholders. The preparation and
publication of financial statements were seen as an important way of keeping shareholders informed
about the progress of the company and how funds were being spent. This period also witnessed the
growth and development of auditing.
With the advent of economic globalisation and world capital markets, the accounting community has
responded to these changes. The International Accounting Standards Board (IASB) based in London,
which was established on 1 April 2001, has the responsibility for issuing the International Accounting
Standards (termed “International Financial Reporting Standards” or IFRS).
Increasingly around the world, corporate laws require financial statements to be prepared in accordance
with IFRS, at least for companies listed on a stock exchange. Some countries have their own locally
issued accounting standards. As at the date of writing, a total of 144 jurisdictions, including all the G20
jurisdictions either permit or require IFRS for domestic-listed companies.
On its website, the IFRS Foundation has provided an interactive map of the world showing each country
and whether or not that particular country has adopted IFRS. By hovering over any country and clicking
the mouse, the user is taken to that particular country with an overview as to whether that country
requires IFRS Standards for listed domestic companies, foreign companies and small-to-medium
enterprises (SMEs). This interactive map can be accessed at the IFRS Foundations website at:
www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#profiles.
Currently, profiles are completed for 166 jurisdictions, including all the G20 jurisdictions. The G20 brings
together finance ministers and central bank governors from the following 19 countries plus the European
Union: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the
Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom and the
United States of America.
As at the date of writing, 144 jurisdictions (87% of the 166 jurisdictions) require IFRS Standards for all or
most domestic publicly accountable entities (listed companies and financial institutions) in their capital
markets.
Diagram 1.1: IFRS Standards by numbers1
The 144 jurisdictions (87% of the profiles) require IFRS Standards for all or most domestic publicly
accountable entities (listed companies and financial institutions) in their capital markets. All, but one of
those have already begun using IFRS Standards. Bhutan will begin using IFRS Standards in 2021. Some
comments on the remaining 22 jurisdictions that have not adopted include:
• 12 jurisdictions permit, rather than require, IFRS Standards: Bermuda, Cayman Islands, Guatemala,
Honduras, Japan, Madagascar, Nicaragua, Panama, Paraguay, Suriname, Switzerland and Timor-
Leste
• one jurisdiction requires IFRS Standards for financial institutions but not listed companies: Uzbekistan
• one jurisdiction is in process of adopting IFRS Standards in full: Thailand
• one jurisdiction is in process of converging its national standards substantially (but not entirely) with
IFRS Standards: Indonesia, and
• seven jurisdictions use national or regional standards: Bolivia, China, Egypt, India, Macao SAR,
United States of America and Vietnam.
The 166 profiles include all 31 member states of the European Union (EU) and the European Economic
Area, which require all companies whose securities are listed on an EU-regulated stock exchange to
prepare their financial statements in accordance with IFRS.
Of the 49,000 domestic listed companies on the 93 major security exchanges in the world, over 29,000
use IFRS Standards, and only three countries account for almost every company yet to adopt IFRS
Standards.
Fifteen of the G20 jurisdictions have adopted IFRS Standards for all or most companies in their public
capital markets. Of the remaining five G20 jurisdictions:
• one (Japan) permits IFRS Standards on a voluntary basis for domestic companies (as of June 2018,
companies accounting for 33% of the Tokyo Stock Exchange market capitalisation have adopted or
plan to adopt IFRS Standards)
• three (China, India and Indonesia) have adopted national standards that are substantially in line with
IFRS Standards but have not announced a plan or timetable for full adoption, and
• one (the United States) does not permit domestic securities issuers to use IFRS Standards but it does
permit foreign securities issuers to use IFRS Standards as issued by the IASB, and approximately
500 companies do so.
All of the 15 G20 jurisdictions that have adopted IFRS Standards for all or most publicly traded companies
also permit IFRS Standards for all or most non-publicly traded companies.
The 144 jurisdictions that have harmonised with IFRS include several jurisdictions that have adopted
IFRS Standards nearly word-for-word as their national accounting standards (including Australia, Hong
Kong, New Zealand and South Korea).
However, while the Australian Accounting Standards (termed “AASBs”) are essentially word-for-word
equivalents to IFRS, the Australian Accounting Standards setters have retained the right to:
• delete an option, and/or
• add extra disclosure requirements.
For this reason, several AASB Accounting Standards contain Australian-only paragraphs. These
paragraphs are represented with the prefix “Aus”. These paragraphs mainly apply to accounting issues
relevant to not-for-profit entities (see ¶7-050 in Chapter 7 for an example of such). Furthermore, the AASB
has kept or developed specific Accounting Standards relevant to Australian financial reporting
requirements (eg AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 1054
Additional Australian Disclosures).
It is argued that adopting IFRS results in greater comparability and consistency in financial reporting by
entities throughout the world.
The United States of America has yet to adopt IFRS. Instead, the US Securities and Exchange
Commission (SEC) required domestic US companies to report under United States generally accepted
accounting principles (US GAAP), and not IFRS.
However, despite their non-adoption of IFRS for domestic US companies, the US Financial Accounting
Standards Board (FASB) did find substantial support for exploring other methods of incorporating IFRS
that demonstrate a US commitment to the objective of a single set of high-quality, global accounting
standards. As a result, since September 2002, the IASB and the FASB have been working on several
projects designed to achieve the convergence of IFRSs and US GAAP.
In December 2016, the SEC's Chief Accountant, Wes Bricker, indicated that although he does not foresee
the use of IFRS for domestic registrants in the foreseeable future, he encouraged the FASB and IASB to
work together to eliminate differences when in the best interest of capital markets.
Similarly, in a public statement issued in January 2017, the outgoing SEC Chair, Mary Jo White,
expressed support for the development of high-quality, globally accepted accounting standards, and
suggested that the SEC support further efforts by the FASB and IASB to converge their accounting
standards to enhance the quality and comparability of financial reporting.
It is important to note, however, that since March 2008, foreign companies have been given the choice to
prepare and submit their financial statements with the SEC under either US GAAP or IFRS. Currently,
more than 500 foreign SEC registrants, with a worldwide market capitalisation of US$7 trillion, use IFRS
Standards in their US filings.
Footnotes