VCE Accounting terms/ info

A present economic resource controlled by the entity as a result of past events

Assets

A present obligation of the entity to transfer an economic resource as a result of past event

Liabilities

Reports are prepared for a particular period of time in order to obtain comparable results

Period assumption

Revenue and expenses are recognised when it is earned and incurred to calculate net profit

Accrual basis assumption

Reports are prepared on the assumption that the existing entity will continue to operate in the future

Going concern assumption

Requirement that a business has its own financial records and statements separate from its owner and other entities

Entity assumption

Information should be avaliable to decision-makers in time to be capable of influence on decision

QC: Timeliness

Information should be comprehensible to users with reasonable knowledge of business and economic activities and presented clearly and concisely.

QC: Understandability

Information capable of influencing decision made by the user needs to be included in the financial report

QC: Relevance

Information reported is a faithful representation of real world economic events it claims to represent: complete, free from material error and neutral

QC: Faithful representation

The ability to compare similar types of financial information effectively with other entities or over different reporting periods

QC: Comparability

The ability to ensure that knowledgeable and independent observers can reach the same conclusion that an event is faithfully represented

QC: Verifiability

Capital gain

Earning a profit when reselling investment

Capital return

To be paid money directly from investment

The ability of a business to meet its short-term obligations/ debts as they fall due

Liquidity

Captial avaliable for use in day-to-day operation of a business

Working capital

Current assets : Current liabilities

Working capital ratio

Ability of the business to meet its debts and continues its operations in its long term

Stability

A financial indicator that measures the proportion of the firm’s assets that are funded by external resources

Debt ratio

Total liabilities/Total assets x100%

Debt ratio formula

Ability of a business to earn profit using its capital contribution/revenue

Profitability

Profitability indicator that measures how effectively a business has used owner’s capital to earn profit.

Return on investment

(Net profit / Average owner's equity) x 100%

Return on investment formula

A business owned by a single owner

Sole proprietorship

A business that is co-owned by several owners (2-20)

Partnership

A business owned by shareholders that is a distinct legal entity, incorporated

Company

Internal finance

Capital contribution, retained earning

Cash or assets contributed by the owner

Capital contribution

Business profit kept to fund expansion

Retained earnings

Trade credit, bank overdraft, term loan, lease

External finance

Trade credit

Facility offers by suppliers that allows its purchased good or service, then pay at a later date

Bank overdraft

Withdraw funds greater than balance of account

Term loan

Loan for specific purpose & repaid over time

Lease

Rental agreement that allows business to control an asset over long time

Accounts which you can invest your money in and earn interest over time, very little risk, lower return rate

Savings account

A long term investment strategy aimed at ensuring that an individual will have sufficient cash to live comfortably in the future, cannot access until retirement

Superannuation

An investment in which the shareholder may be entitled to receive a dividend from the company if performance is good, higher rewards, higher risk

Shares in companies

Documents that provide evidence that transaction has taken place

Source documents

Uses of the cash flow statement

Aid decision making about the firm’s cash activities

To assess whether or not the business is meeting its cash target by comparing actual to budgeted

Assist in planning for future cash activities

Identify whether the business is generating enough cash from its operating activites to fund its investing and financing activities

GST payable

Collected more GST than paid

GST receivable

Paid more GST than collected

GST settlement

GST payable that will be paid by the business

GST refund

GST receivable that will be given to business

Internal control

Procedure and polices implemented to protect the assets of entity

Physical safeguard, preventative safeguard, separation of duties, rotation of duties

How can you protect your assets

Cash control

Procedure and polices implemented to protect the cash of entity

Electronic transferred, Use of EFTPOS, verified against register roll

How to protect your cash

Cash flow cover

Assessing the if firm's operating cash flow can meet its short-term debts as they fall due

Net cash flow from operations/average current liabilities

Cash flow cover formula

Protective measures designed to protect physical assets from unauthorized access, damage, or loss

Physical safeguard

Internal control principal that distributes the responsibility of key tasks between multiple member to reduce the risk of fraud and error

Separation of duties

Protects cash by minimising physical handling and therefore is a more secure way of payment

Use of electronic transfer

Cash is verified against register to ensure that the amount received throughout the day is the same as the amount recorded in the register

Verified against register roll

involves doing screening, assessments, and policy checks, to ensure that you hire honest and trustworthy employees

Careful hiring practices

A transaction where a business purchases from a suppliers but is not required to pay until a later date

Credit purchase

A transaction that involves the provision of a service to a customer who is not required to pay until a later date

Credit sales

A summary of all transactions between account payable/receivable over a certain period

Statement of account

Reminder for the accounts payable, summaries all credit trasactions

Uses of statement of accounts

An increase in assets (or reduction in liabilities) that leads to an increase in Owner’s Equity and is an ordinary business transaction

Revenue

A decrease in assets (or increase in liabilities) that leads to a decrease in Owner’s Equity and is an ordinary business transaction

Expenses

Profit is calculated by recording revenue and expenses to ensure that the income statement contains information useful for decision-making

Relevance (Revenue)

Measures the difference between cash inflows and cash outflows

Cash position

Measures the difference between revenue and expenses

Profit (Loss)

To assess whether the business is meeting its revenue and expense target by comparing the income statement with budgeted performance

Use of income statement (performance)

to assess the performance of management in operating the business, primarily related to generating sales and controlling expenses

Use of income statement (management)

Decrease prices, employ effective marketing strategies, improve your service

Increase profit

Change suppliers, buy in bulk which may reduce cost

Decrease expense

a profitability indicator that assesses expense control by calculating the percentage of revenue that is retained as net profit

Net Profit margin

Net profit / Net Sales x 100%

Net profit margin formula

Profitability indicator that shows how well business is controlling their expenses to increase profit

Expense control

number of competitor is the same area, number of customer complaints, number of call received per hour

Non finacnial information that assist decision making

willingness to work hard, management skills, positive attitude, Competitors

Factors of business success

Insufficient professional advice, poor management skills

Factors of business failure

A suggested retail price set by a supplier

Recommended retail price

A percentage added to a product’s cost price to determine selling price

Percentage mark up

Selling price = cost price * (1 + mark-up percentage / 100%)

Percentage mark up formula

Quantity to be sold = (Total fixed cost + profit) / (selling price per unit - variable cost per unit

Cost volume-profit analysis

a business which aims to generate profit by purchasing goods and then selling them at a higher price

Trading Firm

goods purchased by a trading firm for the purpose of resale at a profit

Inventory

system of Accounting for inventory that involves the continuous recording of inventory movements in inventory cards

Perpetual Inventory system

an accounting record that records each individual transaction involving the movement in and out of the business of a particular line of inventory

Inventory Card

the profit earned purely from the purchase and sale of inventory, measured by deducting cost of sales from sales revenue

Gross profit

all costs incurred in order to bring inventory to the location and condition ready for sale

Cost of goods sold

The expense incurred when inventory flows out of the business due to a sale.

Cost of Sales

The cost of delivery of inventory from the suppliers to the business  

Freight In

The cost of delivery of inventory from the business to the customer 

Freight Out/Delivery to Customer 

Purchase from local supplier to support local economy, purchase products that meet safety standards, ensure pricing is fair and reasonable

Ethcial considerations regarding inventory

Measures the percentage of net sales revenue that is retained as gross profit 

Gross profit margin

Gross profit / net sales x100%

Gross profit margin formula

Measures the average number of days it takes for a business to convert its inventory into sales 

Inventory turnover

Average inventory *365 / cost of goods sold  

Inventory turnover formula

the number of days a credit customer has to pay the balance owing

Credit terms

A subsidiary accounting record which detail each individual transaction with each individual accounts receivable/payable and shows the balance owing to that account receivable/payable at any point in time

Accounts receivable/payable records

A listing of names and balance of each Accounts receivable/payable record

Accounts receivable/payable schedule

Returning inventory only within the terms of its relationship with the supplier, ‘fooling’ supplier by returning item damaged in shop can damage reputation and loss of supply, affecting long term profitability

Ethical considerations for purchase return

Legal obligation to accept sales return if goods are damaged or faulty, behaving ethcially may benefit business’ reputation, however should not be ‘foolish’ and accept sales return that is not your fault

Ethical consideration for sales return

A revenue earned when Accounts payable are paid early and a settlement discount is given by the supplier

Discount revenue

An expense incurred when cash is received early from accounts receivable and a settlement discount is given by the business

Discount expense

Less cash is paid to Accounts payable, net profit increased

Benefits of discount revenue

Cash is paid to accounts payable faster so less time to generate cash from sales, unavaliable to make other payments like wages

Costs of discount revenue