Accounting Unit 1 Area Study 2

Accounting Entity Assumption

States that from an accounting perspective, the business is seperate from the owner and other entities and its record should be kept on this basis.

Accural basis assumption

Will calculate profit by subtracting expenses incurred from revenue earned in a particullar reporting period

Going Concern Assumption

That the business will continue to operate in the future and its records are kept on that basis. The life of the business is assumed to be continous

Period assumption

states that reports are prepared for a particular period of time, like yearly or monthly in order to obtain comparable results.

Relevance

Relevant information is capable of making a difference to the decisoon made by users. this helps them to form predictions and/or confirm or change their previous evaulation.

Faithful representation

The information reported must be faithful information of the real world econmic event it represents, it is also complete, non-bias and also free from error.

Comparability

Useful information is provided when the finicial reports of a business can be compared overtime and compared with similiar information of similiar business's

verifiability

ensures that the different knowledgable and independant observers can reach the same conclusion that a partricular represnation of an even is faithfully represeneted

timeliness

finacial information shoud be available to descion makers in time to be capable to influence their desciions

understandability

Requires finacial info to be comprehensible to users with resonable knowledge of business and economic activities.

Sales/fees journal

All credit sales of merchandise and inventory

purchases journal

All credit purchases of inventory or merchandise

Cash recipts journal

Records all cash inflows a business recivies from things like cash sales of a service.

Cash payment journal

Were all Cash outflows are, all cash payments towards another business for things like buying inventory with cash or wages.

what is the two fold effect?

it is where if one thing happens on one side of the accoutnign equation, the other side needs to match/equal it.

If assets increase on one side of the accoutnign eqaution what must/can happen to the liabilites?

Liabilites will also increase

difference between cash and profit?

Cash refers to the actual money a business has on hand or in its bank accounts, while profit is the amount of money remaining after all expenses have been deducted from revenue. Profit indicates the overall financial health and success of a business, while cash flow is crucial for day-to-day operations and meeting short-term obligations

what are benchmarks used for?

to evaluate performance of a business.

Benchmark 1- previous reporting period

Did the indicator improve or worsen compared to last year

benchmark 2- budget performance

was the indicator for this reporting period achieved as expected financially

Benchmark 3- industry averages

was the indicator better/worse than similar busniesses/companies

Liquidity

The abilty of a business to meet their short term debts as they fall due. (current assets and current liabilities)

Working capital ratio (financial)

A liquidity indicator that measures the ratio of current assets to current liabilites to asses the firms ability to meet its short term debts.

stability (financial)

The ability of a business to meet their debts and continue operations in the long term

debt ratios (financial)

measures the proportion of the firms assets that are funded by external sources (higher the percentage is, the higher the risk.)

Debt ratio formula

(total liabilites/total assets) x 100

Return on owners investment (ROI) financial indicator

is proffibilaty indicator that measures how effectivly a business has used an owners capital to earn a profit.

what does high ROI mean?

high roi means that a larger percentage of net profit is earned back to the owner

Return on assets (ROA) financial

is a profability indiactor that measures how effecitvly a business has used its assets to earn a profit. (high roa % is better)

Non finacial indicators

1.) the number of jobs completed in a period

2.) customer satisfaction, found via surveys, reviews or complaints

3.) visitors to company website

supplies vs materials

supplies - items that are used to help deliver the service

materials - items that are part of the final outcome of the service (what is being sold/inventory)

Internal control

procedures and stratagies used to protect the firms assets from theft, damage and misuse

method 1 of internal control - preventitive safe gaurds

Systems such as alarms and security cameras to prevent theft or misuse of assets, as people would be less likely to attempt it if they can get caught easier.

mtehod 2 of internal control- careful hiring practises

screening and assesments of potetional employees to ensure that only trustworthy and responisble candidates are employed

method 3 of internal control- rotation of duties

a strategy where task are not always performed by one singular person, this enables another employee to check over it and complete it to pick up on any errors.

ethical consideration- social consequences

effect on peolple and communities and society.

ethical considerations- enviorment consequence

effects on the local and wider enviorment

ethical considerations- financial considerations

impacts of business descions on the finance of a business (profit, revenue, expenses)

what is shown in a balance sheet?

a companys finacial statement that captures, assets, liabilites and total equity.

what is displayed in an income statement?

it shows wether a company is in a net profit or net loss showcasing revenues and expenses to find the net income (profit or loss)

what does a cash flow statement show?

it shows the inflows and outflows of a business and tracks the movement of cash in 3 different ways, operating, investing and financial activities.

financial activities?

covers cash flows relating to changes in the finacnial structure of the business, (changes in owners equity or loans)

operating activities?

includes all cash flows from day to day trading operations. (day to day operations like cash sales)

investing activities?

includes all cash inflows and outflows relating to the buying and selling of NON-CURRENT ASSETS.

what is an expense

decrease in assets or increase in liabilites that results in a decrease in owners equity (excluding drawings)

what is revenue

increase in assets or decrease in liabilites that result in an increase in owners equity achived by providing goods or services to customers ( excluding capital contribution )

Net profit margin (NPM) (financial indicator)

A financial indicator that determines the percentage of a sales dollar that remains after all expenses have been paid for over a period.

Profability

ability for a business to earn a profit measured over a base such as revenue, assets or owners investment.

profit

This is an absolute dollar amount that represents the net income or earnings after all expenses are subtracted from revenue.

all document types used

receipts, invoices, EFT, cheques.

where are receipts (rec) used?

within the cash receipts journal

where are invoices (Inv) used?

sales/fees journal and purchases journal (both credit journals)

where are Cheques (chq) used

in the cash payments journal

where are EFT used

in the cash payments journal as well as cheques.

Fraud

Wrongfully or criminal deception intended to result in finacial or personal gain under another person/companys name

Theft

The act of stealing by removing personal property with intent to deprive the rightful owner of it.

GST liability

When GST collected > than GST paid so then money has to be paid to the ATO

GST payment

when GST paid > than GST collected so the obligation to pay the ATO has been passed onto the supplier

Procedures to protect a firms cash

1- Cash should NOT be kept on premises

2-Cash procedures should be changed periodically

3-Accurate and up to date cash records must be kept

owners equity

is the residual intrest in the assets of the entity after liabilites are deducted this includes capital, net profit/loss and drawings.