Accounting - Term 2 2025

What is the accounting period assumption?

Assumes that the life of the business is divided into arbitrary time periods. Known as the Financing Year (eg: July 1st 2023 - June 30 2024)

matching principle

Profit is obtained by matching revenues for the period with the expenses incurred in earning that revenue. (Profit = revenue - expenses)

Recognizing the revenue

When revenue is shown in the accounting records; recorded in the books

Realizing the revenue

when the actual receipt for cash occurs for the revenue; actually receiving the cash for the revenue

accrual accounting

recognises transaction and events when they have an economic impact on the business rather than when the associated cash flow occurs

what does accrual accounting do?

match income to when it's earned, and expenses to when they're actually used

cash accounting

Where the effects of transactions are recognised only when cash is recieved or paid out

balance day adjustments

entries made at balance day (June 30) in order to match the revenue against the expenses accurately so that profit can be determined, and to bring into account assets and liabilities not previously recorded.

What is the purpose of the Accounting Period Assumption?

To determine how the business is going, whether it is making a profit or loss and the position of the business (ie: what the business owns (assets), what the business owes (liabilities) and the owner’s investment (capital)

What are accrued expenses?

Expenses incurred in the current accounting period but are not yet paid or recorded. They are amounts owed by a business and are therefore liabilities.

What impact do accrued expenses have on the statement of profit and loss?

In the profit and loss statement, the amount that is incurred must be added in the current expense account, to increase the expense amount. Accrued expenses are liabilities which if not correctly recorded would understate the expense, leading to a higher Net Profit Figure.

What are accrued revenues?

revenues that have been earned in the current accounting period but have not yet been received or recorded. They are amounts owing to the business and are therefore assets.

What impact do Accrued Revenues have on the statement of profit and loss?

In the profit and loss statement, the amount that is accrued must be added to the current revenue amount, to increase the revenue account. If not correctly recorded, the revenue will be understated, leading to a lower net profit figure.

What are prepaid expenses?

expenses which have been paid and recorded in the current accounting period but will not be incurred until a future accounting period. They are amounts owing to the business and are therefore assets.

What impact do prepaid expenses have on the statement of profit and loss?

In the statement of profit and loss, the amount that is prepaid must be subtracted from the correct expense account to decrease the expense amount. Prepaid expenses, if not correctly recorded, will overstate the expense, leading to a lower net profit figure.

What are unearned revenues?

Revenues which have been paid and recorded in the current accounting period but will not be earned/occur until a future accounting period. They are amounts owed by the business and are therefore liabilities

What impact do unearned revenues have on the statement of profit or loss?

In the statement of profit and loss, the amount of the unearned revenue must be subtracted from the current revenue account, to decrease the revenue account. Unearned revenue, if not correctly recorded, will overstate the revenue, leading to a higher net profit figure.

what is the gross profit ratio and what does it indicate?

the direct relationship between the sales and the gross profit, indicates what margin of gross profit is available to cover other expenses. (For every dollar, this much can be used to cover the expenses)

what do you say for the identification of significant and relevant relationships for the gross profit ratio?

State whether there’s been an increase or decrease in gross profit. Compare the rate of increase/decrease of Net Sales to the rate of increase/decrease of Cost of Goods Sold.

What is an example of what you would write for the identification of significant and relevant relationships for the gross profit ratio - if gross profit ratio declined, total sales went from $392000 in 2019 to $333000 in 2020 (-17.72%) and COGS went from $122000 in 2019 to $165000 in 2020 (26.06%)?

There has been a decline in the Gross Profit. This is due to a decrease in total sales from $392000 in 2019 to $333000 in 2020 (-17.72%) and the Cost of Goods Sold has increased from $122000 in 2019 to $165000 in 2020 (26.06%)

what do you say for the interpretation of trends and patterns for the gross profit ratio?

Compare to the industry average – High Ratio (above the industry average) or Low Ratio (below the industry average).

What is an example of what you would write for the interpretation of trends and patterns for the gross profit ratio - if industry average was 55%, they are 68.88% in 2019 and 50.45% in 2020?

Went from well above the industry average in 2019 (68.88%) to slightly below the industry average in 2020 (50.45%). The industry average was 55%.

what do you say for Thorough and logical explanation of issues if there is a high gross profit ratio?

The business can easily cover all of its costs, earns an acceptable gross profit, room for investing and/or expanding, able to cover drawings

what do you say for Thorough and logical explanation of issues if there is a low gross profit ratio?

Business may be paying too much for inventories, the business will have difficulty in covering its expenses and future running costs, an unacceptable net profit/loss may occur, if ratio continues in this direction, the business may find its way into receivership.

what do you say for the perceptive judgement for proposed change for the gross profit ratio?

gross profit needs to increase.

What do you say for the thoroughly justified decisions for the gross profit ratio?

Increase sales and decrease cost of goods sold

What do you say for convincing recommendations for the gross profit ratio?

Increase selling price, have a ‘sale’ of slow-moving stock, investigate whether types of stock meet customer demand, change suppliers to obtain stock at reduced cost without sacrificing quality, buying in bulk to take advantage of quantity discounts.

what does the net profit ratio measure?

the net profit per dollar of sales

what do you say for the identification of significant and relevant relationships for the net profit ratio?

compare the rate of increase/decrease in total sales with the rate of increase/decrease in total operating expenses.

What is an example of what you would write for the identification of significant and relevant relationships for the net profit ratio - if net profit ratio declined, total sales went from $392000 in 2019 to $333000 in 2020 (-17.72%) and total expenses went from $108680 in 2019 to $158034 in 2020 (31.23%)?

There has been a decrease in the Net Profit because of the increase of Total expenses in 2019 of $108680 to $158034 in 2020 (31.23%) compared to the decrease in Total Sales from $392000 in 2019 to $333000 in 2020 (-17.72%).

what do you say for interpretation of trends and patterns for the net profit ratio?

Compare to the industry average – High Ratio (above the industry average) or Low Ratio (below the industry average).

What is an example of what you would write for the interpretation of trends and patterns for the net profit ratio - if industry average was 30%, they were 41.15% in 2019 and 2.99% in 2020?

The Net Profit Ratio has continued to decrease from 41.15% in 2019 to 2.99% in 2020. The Net Profit Ratio is currently well below the industry average of 30%.

what do you say for Thorough and logical explanation of issues if there is a high net profit ratio?

high operating revenue in conjunction with low operating expenses, positive for the owner’s investment

what do you say for Thorough and logical explanation of issues if there is a low net profit ratio?

net profit ratio is unacceptable, business is not running efficiently selling price margin is too low, sales/revenue volume is low when compared to operating expenses, owner may choose to invest elsewhere, less than adequate return on investment may be earned, expenses are too high to generate an adequate profit - identify the top 3 with highest % increase.

what do you say for the perceptive judgement for proposed change for the net profit ratio?

increase net profit ratio

what do you say for thoroughly justified decisions for net profit ratio?

Increase revenues. Total expenses need to decrease.

what do you say in convincing recommendations for net profit ratio?

investigate selling techniques, investigate pricing mathods, Implement adequate controls over expenses – using specific examples (how top 3 expenses can be reduced)

if insurance is in the top 3 with highest % increase, what should you say in the convincing recommendations for net profit ratio?

find a company with cheaper premiums without risking coverage.

if telephone expenses are in the top 3 with highest % increase, what should you say in the convincing recommendations for net profit ratio?

limit calls to business only or find a cheaper provider

if stationery is in the top 3 with highest % increase, what should you say in the convincing recommendations for net profit ratio?

move towards a more paperless office (ie: electronic communication)

if electricity is in the top 3 with highest % increase, what should you say in the convincing recommendations for net profit ratio?

find a cheaper provider, use energy efficient equipment.