Accounting Unit 1

Examples of a non-current asset?

Investments, Fittings, Premises and term deposits (that last more than 12 months)

Examples of a current asset?

Accounts receivable

Give more examples of Current assets

Term deposit/Investment (if less than 12 months), Accrued income (owing to us)

What is the difference between GST credit and GST payable?

GST credit is GST you get back; GST payable is GST you must pay to the ATO..

What is a term deposit?

money invested with a bank for a fixed period that earns guaranteed interest

What is accrued income?

Income earned but not yet received in cash by the business

What the difference between accounts receivable and accounts payable?

Accounts receivable is money customers owe the business; accounts payable is money the business owes suppliers.

What is a premises?

The building or place where a business operates or conducts its activities.

What are fittings?

Fixtures or items attached to a building, such as shelves, counters, or light fittings.

Examples of non-current Liability?

Mortgage &, loan from bank

What is a mortgage?

A loan used to buy property, secured against the property until it is repaid.

Examples of a current Liability?

Creditors, bank overdraft, & Accrued expenses.

What are creditors?

people or businesses you owe money to for goods or services bought on credit.

What is a bank overdraft?

When a business withdraws more money than it has in its bank account.

What are accrued expenses?

Costs already incurred but not yet paid or recorded in cash.

What are retained earnings?

Profits the business keeps and reinvests instead of paying out to owners as drawings or dividends.

What are reserves?

Portions of profits set aside for specific future purposes or to strengthen the business.

What is the accounting equation?

ASSETS = LIABILITIES + EQUITY

What documents are used to make entries in the accounting system?

Order forms - documents, but not source documents
Invoice
Receipt
Quotations - documents, but not source documents
Cheque
Cash register roll

What does the income statement/ statement of financial performance show?

Profit or loss - by comparing a business’s income with its expenses for a specific period.

What does the balance sheet statement of financial position show?

The assets, liabilities and equity on one day.

The conceptual framework of accounting includes and sets out things like…?

Definitions of different types of accounts

What account takes place when applying for a loan to buy a building, house, act

Mortgage

What will trading business classify operating expenses into?

Selling and distribution expenses

General and administration expenses

Financial expenses

What is selling and distribution expenses?

The costs involved in preparing the goods for sale

e.g. adverting, freight outwards, sale’s wages, repairs to delivery, vehicle expenses, depreciation on delivery vehicle

What is General and administration expenses?

Costs that relate to the management and/or administration of the business or that are of a general nature

e.g. insurance, rent expense, stationary, repairs for office equipment, telephone, depreciation on equipment, rates, water, electricity & bad depts

What is Financial expenses?

Costs of raising finance for the business or costs charged by the bank for maintaining the business’ accounts e.g. bank fees, interest on loan, interest expense.

What is sales?

What is less sales?

What is discount allowed?

Amount sold for

sent back to us

When customer pays less (25% off)

What is gross profit?

the money a business makes after subtracting the cost of producing or buying the goods it sells.

What operating expense classifications might a business college use?

Direct teaching, promotional, office, and financial expenses.

What operating expense classifications might a plumber use?

Motor vehicle, direct plumbing, and general and office expenses.

Cartage inward meaning?

the delivery cost paid to transport purchased goods from the supplier to business.

Cartage outward meaning?

delivery cost paid by a business to transport goods from the business to customers.

What order is the 5-step cycle next to the 4-step accounting cycle?

Source documents → Documenting

Journal → Recording

Ledger, Trial Balance → Processing

Financial Statements → Reporting

Examples of a right:

Receives cash from another party

Receive goods or services from another party

Exchange economic recourses with another party on favorable terms

Rights over physical objects e.g. property, equipment, inventories

Rights to use intellectual property

Examples of potential to produce economic benefits

Receive contractual cash flow or another economic resource

Exchange economic recourses with another party

Produce cash inflows or avoid cash outflows

What is the purpose of a trial balance?

To detect errors made in posting information in the general ledger

To provide a list of general ledger account balances from which accounting reports are prepared e.g. income statement and balance sheet

What are the errors not found when disclosing a trial balance?

• Error of omission – failing to record a transaction in the general journal and ledger

• Error of commission – Entering the transaction in the wrong ledger account but on the correct side

• Making compensating errors – making 2 independent errors of equal amounts

. Entry on wrong side of each ledger account

What is the purpose reporting events?

to provide financial information to users for decision-making

Name 2 items that are cash payments but not expenses

asset purchases and liability repayments

What equation is the framework definition applied with?

A - L = E

Difference between documents and source documents

Documents are any written business records; source documents are original records proving transactions.
(Receipt is the SOURCE DOCUMENT
Because it is the original proof that the purchase happened.)
(That spreadsheet/report is a DOCUMENT
Because it contains information, but it is not the original proof.)

On which principle are entries in the General Ledger based?

DOUBLE ENTRY PRINCIPLE

What is the purpose in processing events/ general ledger?

To classify and organize transactions into accounts

What are the analysis steps for assets?

Control - Yes, the owner of ABC traders is able to decide what to do, who can use, where to store and how to use the motorcycle.

Right - Yes ABC traders owns and can use the motor vehicle will have proof (invoice & receipts) showing that they bought the motor vehicle

Potential to produce economic benefits - Yes, the motor vehicle will be used in daily operation of the business which will help them to generate income

What are the analysis steps for Liabilities?

Obligation - Yes, ABC traders owes XYZ bank the money by law have an obligation to pay them.

Transfer of economic resource - Yes, when ABC Traders pay the loan, money will be taken from their bank account

Past events - Yes, ABC traders borrowed the money from XYZ Bank on 1st March 2022

What are the analysis steps for Income?

Increases of assets or decreases of liabilities: Yes, ABC traders will receive $900 which will increase their cash at bank (asset).

Increase in equity:
Yes, Assets $9000 = Liabilities $0 + Equity $9000, or Sales income increases profit that owner must get (equity)

Not contribution from holders of equity claims: Yes, equity increases, but is not capital contributions from the owner.

What are the analysis steps for expenses?

Derecognition of assets or recognition of liabilities: Yes, ABC traders will pay $5000 which will decrease their cash at bank (asset)

Decrease in equity:
Yes Assets ↓ $5000= Liabilities 0 + Equity ↓ $5000

Not distribution to holders of equity claims:
Yes, the amount is $5000 and this information is complete and free from error and can therefore be entered in the financial records as such.

Give an example of the recognition criteria of liabilities

Relevance- Yes, the loan could influence the decision-making of users of the balance sheet, e.g. investors, and there will be an outflow of economic benefits when they pay the loan

Faithful representation - Yes, the value of the loan is $10 000, and this information is complete and free from error and can therefore be entered in the financial records as such.

Give an example of the recognition criteria of assets

Relevance- Yes, the laptop could influence the decision-making of users of the balance sheet, has a physical existence, and it is probable that an inflow of economic benefits will occur from this use

Faithful representation- Yes, the value of the laptop is $1 500, and this information is complete and free from error and can therefore be entered in the financial records as such.

Give an example of the recognition criteria of income

Relevance- Yes, the sales will affect the profit, and decision-making being made relating to the profit, and there was an inflow of economic benefits, they received money for sales.

Give an example of the recognition criteria of expense

Relevance- Yes, the wages will affect the profit and decisions being made relating to the profit, and there was an outflow of economic benefits, paid the wages (decrease cash at bank)

Advantages of periodic inventory system

Simple system to use

Advantages of perpetual inventory system

. Short term income statement (e.g. monthly) can be prepared as Cost of Sales at all times
. Owner knows how much stock is left after each sale, so it’s unlikely to run out of stock
. Fast and slow moving inventory lines can be easily identified

Disadvantages of perpetual inventory system

More expensive to set up perpetual inventory system than periodic inventory system

Disadvantages of periodic inventory system

. Must do physical stock take to determine inventory figure
. Periodic inventory system does not provide as much information to owner as the perpetual inventory.

What does the AASB 102 Inventories define inventory as?

Assets held for resale, partly finished goods and supplies that will be consumed in the manufacture of a product or in providing a service.

What are the accounts used in the following transaction?
M. Action returned inventory to the value of $110 inclusive of GST. The cost of the goods returned

was $80.

Sales Return
GST Payable
Accounts receivable

Inventory
Cost of Sales

What are the accounts used in the following transaction?
Received a cheque from Sarah Singleton, a debtor, in payment of her account, $200

Cash at bank
Accounts Receivable

What are the accounts used in the following transaction?
A debtor, IM, disappeared. Write his dept of $13 750 inclusive of GST off as irrecoverable

Bad Depts
GST credit
Accounts Receivable

Explain the difference between the perpetual and periodic inventory systems when buying inventory

Perpetual records inventory immediately in the inventory account, while periodic records purchases in the purchase account

Explain the difference between the perpetual and periodic inventory systems when selling inventory

Perpetual records 2 entries: the sale and the cost of goods sold. Periodic records only the sale and calculates the cost of sale at the end.

What type of account is insurance?

expense

What type of account is an interest on a loan?

expense