Notes - Validation 2 ( + Systems)

Manufacturing Business

A manufacturing business is any company that uses raw materials or components such as wood, metal, clay or cloth, to create finished goods. Make most of the products a business uses, including electronic devices, furniture, medical equipment or aircrafts. Coca Cola, or West farmers chemicals energy &fertilisers.

Trading Company

A business that sells various inventory for a profit. The inventory they sell mainly consists of products purchased by the business with the intention of re-selling these products at a profit. Example, furniture store, clothing store, bookshop.

Retailer

A business that sells inventory directly to the public.

Wholesaler

A business that purchases inventory in bulk at discounted prices from manufacturers and sells it to retailers.

Service Providing Business

A company that provides services to customers for a fee. For example, a hairdresser.

Accounting Principles

A set of rules for making entries in an accounting system and preparing accounting reports.

Accounting Equation

The equation stating that total assets equal the sum of liabilities and owner's equity.

Double-Entry Accounting

A recording process where each entry on the debit side has a corresponding entry on the credit side.

Accounting Cycle

The series of steps that accountants follow to manage a business's financial transactions throughout a financial period. These six steps include Financial Transaction, General Journal, General Lodger, Trial Balance, Financial Statements and Analysis.

Source Documents

Receipts or tax invoices that prove a transaction occurred.

General Journal

Documents or journalizes each daily transaction in date order.

Accounting Entity principle

The assumption that a business’s assets and liabilities are kept separate from the owner’s personal assets and liabilities. Reflects only business’s financial position and performance.

Monetary Unit Principle

Only transactions that can be expressed in terms of the currency of the country they are in, should be recorded in business financial accounts. Non-monetary aspects are factors such as the quality of customer service, employee morale, or the reputation of a company. Used for efficiency when comparing financial statements.

What are the limitations of monetary principle.

Assumes the purchasing power of the currency remains stable over time, which is not always the case due to inflation.

Historical Cost Principle

Assets are recorded at their original purchase price and do not change value over time. Advantage as it prevents over-valuation of an asset (appreciation - unpredictable market conditions). disadvantage as it doesn’t account for inflation (current market value) which doe snot reflect gain in value.

Materiality Principle

Materiality is the principle of disclosing information in financial reports that is important and relevant to decision making. (influence users/ creditors/ investors)

Accounting Period Assumption

The life of a business is divided into time intervals known as accounting periods. the ATO accounting period is from 1 July to 30 June each year. Shows business’s performance over a specific time period.

Going Concern Concept

The assumption that a business will continue to operate for the foreseeable future. Therefore financial reports are prepared on the assumption that an entity will continue operating in the foreseeable future.

Asset

Something owned by a business expected to generate future economic benefits.

Liability

Something a business owes, representing money or services owed to others.

Equity

Resources or money contributed into the business by the owner.

GST Free Supplies

Goods and services that are exempt from GST. This includes medical supply, education, fresh food, and childcare services.

Input Taxed Supplies

Products that GST is not charged on, and it is not possible to claim a GST input tax credit for the purchase of the goods and services associated with the products. in the GST Act, e.g. financial supplies, interest, and residential accommodation. For example renting a house, can’t charge GST on rent or claim GST on a leaking tap.

Taxable Supplies

Goods and services that attract GST.

Business Activity Statement (BAS)

A government form that must be lodge to the ATO from most businesses, either monthly or quarterly. It is important as it shows how much is owed to or from the ATO.

Australian Business Number (ABN)

An 11-digit identifier for the gov, public and other businesses, issued to businesses as evidence for GST registration. Also informs trading partners they have to pay GST on tax invoice and that they can claim credit.

Balance Sheet

A financial statement showing a company's assets, liabilities, and equity at a specific point in time, adhering to the accounting equation.

Liquidity

A business’s ability to pay its short-term debts. Compare current assets and current liabilities. Want to have more assets so can pay debt of when fall due.

Stability

The comparison of total liabilities against total equity to assess a business's gearing position. Gearing is the amount of debt – in proportion to equity – that a company uses to fund its operations.

GST Legal Requirements for small businesses?

Must register if small businesses with a turnover of more than $75 000 per annum; those who provide taxi travel as part of their business, regardless of their turnover; not-for-profit organisations with a turnover of more than $150,000 per annum although sole traders and partnerships with an annual turnover less than $75 000, registration is optional.

What can excessive borrowing lead to?

Excessive borrowing to finance a business can be problematic as it leads to high interest payments, negatively impacts cash flow, and can make a business appear riskier to investors and lenders, potentially leading to higher borrowing costs in the future. 

Difference between debtor and creditor?

debtor are people that owe the business money and creditors are people that the business owes money too (suppliers).

accounts receivable and accounts payable difference?

Accounts receivable is money the business can collect from costumers, and accounts payable is money owed from the business.

Difference between cash at bank and cash in hand?

Cash in hand is cash and coins on the premises on the business. Cash at bank is cash in a business’s bank account,

What is the periodic inventory system?

A method where inventory is updated at specific intervals (e.g monthly or yearly) rather than continuously - it is a physical stock take to determine correct stock levels.

Advantages for a periodic inventory system?

Cheap and easy to use.

Saves daily time - inventory doesn’t have to be tracked all the time. Only count periods.

Good for small businesses - better for fewer sales.

Disadvantages for a periodic inventory system?

Time consuming - labour intensive, costly and inconvenient, disruptive to business operations.

Outdated info - only know the stock levels after the count, which can lead to overorder or under order

Possible Mistakes - counting inventory manually can lead to errors, affecting your records.

Less control - You might not notice if items got stolen, damaged, or spoiled until the count is done.

Not great for busy businesses - with lots of sales, hard to keep track and run into stock problems.

Key differences between inventory systems

Frequency of updates - Perpetual updates continuously with every transaction. Periodic updates only at regular intervals.

Technology and cost - Perpetual requires more technology/costly, periodic done manually (less expensive)

Accuracy - Perpetual provides more accurate, real-time data, while periodic system only provides accurate data the physical count.

What is a perpetual inventory system?

A method that is used once the inventory is sold- the cost of goods sold is to be transferred out of the inventory account and into a cost of sales at the time they are sold.

Advantages to perpetual inventory system?

The possibility of running out of inventory is reduced as the business owners knows how much trading stock is left after each sale

Short term ( e.g. monthly) incomes statements can be prepared as sales and  the cost of sales is known at any time.

Fast and slow moving inventory lines can be easily identified

Disadvantages to perpetual inventory system?

Is more expensive to set up than the periodic inventory system (it requires a computerized system)

Stock takes still need to be carried out to ensure that what is on shelves is the same as what the computer system states (but this can be done at any time) Also used to discourage thefts

Technical difficulties can occur - the system may have the wrong data imputed