Unit 1 Accounting Exam Revision

Define Assets

A present economic resource controlled by the entity that has the potential to produce future economic benefits

Define Current Asset

A present economic resource controlled by the entity that is expected to be sold, consumed, or converted into cash within 12 months after the end of the reporting period.

Define Non-current Asset

A present economic resource controlled by the entity that is expected to be used by the business for a number of years and is not held for the purpose of resale.

Define Liabilities

A present obligation of the entity to transfer an economic resource.

Define Current Liabilities

Obligations of the entity that are reasonably expected to be settled in the next 12 months after the end of the reporting period.

Define Non-Current Liabilities

Obligations of the entity that are not expected to be settled in the next 12 months after the end of the reporting period.

Define Owners Equity

The residual interest in the assets of the entity after liabilities are deducted. This includes capital, net profit/loss, and drawings.

Define Revenue

An increase in assets or reduction in liabilities that leads to an increase in owners equity (except for capital contribution).

Define Expenses

A decrease in assets (for an increase in liabilities) that reduces owners equity (except for drawings)

Define Relevance

Relevant information that is capable of making a difference to the decisions made by users. This helps them to form predictions and/or confirm or change their previous evaluations.

Define Faithful Representation

The information reported must be a faithful representation of the real-world economic event it represents (complete, free from error, and neutral/not bias).

Define Comparability

The qualitative characteristic that enables users to identify and understand similarities in, and differences among items.

Define Verifiability

Ensures that different, knowledgeable and independent observers can reach the same conclusion that a particular representation of an event is faithfully represented.

Define Timeliness

Having financial information available to decision makers in time to be capable of influencing their decisions.

Define Understandability

Requires financial information to be comprehensible to users with reasonable knowledge of business and economic activities.

Define the Accounting Entity Assumption

The records of assets, liabilities and business activities of the entity are kept completely seperate from those of the owner of the entity as well as from those of other entities.

Define the Accrual Basis Assumption

Under the accrual basis, revenue is recorded when it is earned, even if payment is received later. Expenses are recorded when they are incurred, even if they are paid later. This ensures a more accurate reflection of Net Profit.

Define the Going Concern Assumption

Financial reports are prepared on the assumption that the existing entity will continue to operate in the future.

Define the Period Assumption

Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results.

What are the 4 reasons for establishing a business

1) To create a profit

2) To create employment

3) To adress social causes

4) To peruse a personal goal

Define a small business

A business that employs less than 20 people and where the owner/s are responsible for the principal decision making.

Accountants are experts in providing advice and direction on:

- ownership structures

- pricing policies

- tax minimisation

- superannuation obligations

The role of a lawyer is to:

- assist in any form of legal matter

- be the businesses representation in civil cases

- register for licences

- assist with the lodging of a registered trademark

The role of a bank manager is to:

provide specific advice regarding business finance and suggest alternatives in terms of financing options.

What are some examples of sponsored assistance programs

- TAFE courses

- Industry associations

- Business Victoria

- Small Business mentoring services

What are alternative investment opportunities to establishing a business

- Investing in cash

- Investing in shares

- Investing in property

- Cryptocurrency

What is are examples of investing in cash?

- Term deposit

- Bank account

- Bonds

What is a term deposit

Money that has been invested into a bank, credit union, or building society for a fixed term and you get a fixed rate of interest over that term.

What are the advantages of a term deposit

- Minimum investment requirements

- Earn 2-3% interest p.a.

- Very low risk

What are the disadvantages of a term deposit

- Can not access money before maturity of term

- May automatically role over into a new term with a lower rate.

What are examples of investing in shares

- Dividends

- Capital gain

Define Dividends

A distribution of company profits paid to shareholders based on the number of shares owned.

What are advantages of dividends

- Some company shares provide steady income streams

- Receive an income without selling the asset

What are disadvantages of dividends

- Company must make profit in order for dividends to be distributed (some risk)

- Distribution of dividends is taxable income and companies have to pay tax as well as the shareholder.

What are examples of investing in property

- Rent

- Capital gain

Define rent

Obtained through owning a property and collecting rent from tenants

What are advantages of rent

- Regular payments provided that the property is tenanted

- Interest rates are at their lowest for borrowed funds

What are disadvantages of rent

- Must exceed load repayments in order to make profit

- Pay tax on rental profit

- If no tenant in property then no rent is received. Loan repayments must continue.

Define Cryptocurrency

A digital or virtual form of currency.

What are advantages of cryptocurrency

- Cryptocurrencies are decentralised, free from government control or regulation, enabling unrestricted transactions.

- Cryptocurrencies enable fast, secure online transactions without banks, reducing costs.

What are disadvantages of cryptocurrency

- Cryptocurrencies are well known for their significant price inconsistency, making them a high-risk investment

- More prone to cyber security attacks, and the investor can lose everything if hacked.

- Negative impact on the environment as cryptocurrency mining consumes a lot of energy.

What are the 4 types of ownership structures

1) Sole Proprietorship/Trader

2) Partnership

3) Private Company

4) Public Company

Define Sole Proprietorship/Trader

Refers to businesses owned by a single individual owner, under their own name or a registered business name.

What are advantages of being a Sole Proprietor/Trader

- Easy and cheap to set up

- Owner has full control over decision making

- Owner receives all profits and has full access to the capital of the business

What are disadvantages of being a Sole Proprietor/Trader

- The owner has unlimited liability which means they are responsible for all debts and liabilities of the business

- Business has limited life; could be in danger of shutting down if the business owner dies

Define Partnership

A business co-owned by several individuals who share a common profit motive, usually between 2-20 owners.

What are advantages of being part of a Partnership

- Relatively cheap to set up

- Greater access to capital and skills

- Tax advantages can exist

What are disadvantages of being part of a Partnership

- Control over decision making is shared among the partners

- Owners have unlimited liability and the partnership itself has limited life

- Profits are shared among the partners

Define a Private Company (Pty Ltd)

A business owned by 2-5- shareholders, which is registered with 'Proprietary Limited' (Pty Ltd) at the end of its name

What are advantages of a Private Company

- Limited liabilities

- Specialised skills are available; can afford their own specialist employees

- Life of the business is ongoing even if a director/shareholder decides to leave or die

What are disadvantages of a Private Company

- Establishment costs are high

- Difficulty attracting additional capital as they cannot publicly advertise for funds

- Seperate tax return

Define Public Company (Ltd)

A business with at least 5 shareholders and 'Limited' (Ltd) in its name. Shares of the business are freely traded on the stock exchange for any member of the public to purchase.

What are advantages of a Public Company

- Limited liability

- Greater ability to attract capital as there is limited liability

- Companies can publicly advertise for funds through the ASX

What are disadvantages of a Public Company

- Establishment costs are high

- There is greater separation between ownership and control (shareholders may not have any control over the business' daily operations)

- Records of the business have to be made public

What are the advantages for starting a new business

- Almost total freedom in determining how the business operates

- Freedom to set customer expectations

- No need to pay for good will

What are the disadvantages for starting a new business

- No track record, so there is a greater risk of failure

- Large start-up capital required that will essentially have to be provided by the owner

- More difficult to obtain finance

What are the advantages to buying an existing business

- A proven track record can increase the chances of success

- All assets, practices, suppliers and customers are already established

- An immediate income stream is available

What are the disadvantages to buying an existing business

- Previous success may have been dependent on the skills of the previous owner(s) and their relationship with the customers

- Difficult to change exisiting procedures, staff and customer expectations

- Existing assets may require major renovation, repair, or even replacement.

What are the advantages to buying a franchise

- Recognised brand name

- All equipment necessary to commence operations

- Bulk buying power through the franchise group

What are the disadvantages to buying a franchise

- High purchase price

- Firm guidelines for operations

- Competition from fellow franchisees

Define internal sources of finance

Funds that come from within the business

Define external sources of finance

Funds that are sourced from outside the business; that is, from liabilities

What are examples of internal sources of finance

- Capital Contribution

- Retained earnings

What are advantages to capital contribution as an internal source of finance

- No interest charge

- No repayment date

What are disadvantages of capital contribution as an internal source of finance

- Funds can be limited (e.g. to profits previously earned)

Define capital contribution as an internal source of finance

Funds contributed by the owner to commence, support or expand business operations

Define retained earnings as an internal source of finance

Refers to the business profits that are kept to fund the future plans and activities of the business

What are the advantages of retained earnings as an internal source of finance

- No interest charge

- No repayment date

What are the disadvantages of retained earnings as an internal source of finance

- Limited to previous profits

What are examples of external sources of finance

- Bank overdraft

- Trade credit

- Leasing

- Term loan

Define bank overdraft as an external source of finance

Allows business to withdraw funds greater than current balance of account

What are advantages of having bank overdraft as an external source of finance

- Readily accessible

- Flexible, can be used for a variety of purposes

What are disadvantages of having bank overdraft as an external source of finance

- Higher interest charge

- Can recall money at a short notice

Define trade credit as an external source of finance

Facilities that are offered by suppliers that allows customers to purchase goods and services immediately, and pay them at a later date.

What are the advantages of having trade credit as an external source of finance

- Allows business time to generate sales before the repayment is required

- No interest charge

- Discounts are available from the supplier for early payment

What are the disadvantages of having trade credit as an external source of finance

- Can only be used for purchases with that supplier

Define leasing as an external source of finance

Allows business to use and control an asset for a period of time, while making regular payments

What are the advantages of leasing as an external source of finance

- Allows asset to be updated when they become outdated

- Reduces maintenance and repair costs

What are the disadvantages of leasing as an external source of finance

- No ownership of the asset

- Requires commitment by the business for the term of the lease

Define term loan as an external source of finance

Funds provided by bank or other lender for a specific purpose and repaid overtime

What are advantages of term loans as an external source of finance

- Makes possible to purchase assets that are expensive

- Flexible, can be used for a variety of purposes

What are disadvantages of term loans as an external source of finance

- Interest charges

- Repayments are required

- Principle + interest must be paid back

What are external factors to the success of a business

- High demand for their product or service

- A location that is visible and easily accessible for customers

What are internal factors that lead to the success of a business

- A thorough business plan that details all aspects of the firms operations

- Sufficient starting capital

- Owners personal qualities and skills

What are external factors that lead to the failure of a business

- Competition from other small and large businesses

- Poor location

What are internal factors that lead to the failure of a business

- Insufficient start-up capital

- Poor marketing

- Poor management skills and lack of willingness to seek professional advice

- Poor customer relations

What are examples of ethical considerations

- Social consequences

- Environmental consequences

- Financial consequences

Define social concequences

The effect on people, communities and society

Define environmental consequences

The effects on the local and wider environment

Define financial consequences

The impacts of business decisions on the finances of a business

What are three price-setting methods

- Recommended Retail Price (RRP)

- Percentage mark-up

- Cost-volume-profit analysis

What is recommended retail price

A selling price that is recommended by the manufacturer or wholesales

What is percentage mark-up

A percentage added to a product's cost to determine it's selling price

Define profit margin

The difference between cost price and selling price

What is a cost-volume-profit analysis

It is used to determine the quantity of products a business may need to sell, or the selling price it must charge, to break even

Define break-even point

The level of sales where total revenue equals total expenses, neither a profit or loss

What are fixed costs

Expenses that remain constant, regardless of the number of units sold in a period

What are variable costs

Expenses that vary directly with a change in the volume of sales

What is contribution margin

The difference between the selling price and the variable cost of a product

What is a Source Document?

Documents that provide both the evidence that a transaction has occurred and the details of the transaction itself.