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?

Cash at bank, Inventory - what we buy & sell, Accounts receivable (that last less than 12 months)

Give more examples of Current assets

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

What is an example of prepaid expenses?

Rent paid in advance for future months before the service or benefit is received.

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 time at a fixed interest rate.

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, & GST payable

What are creditors?

Individuals or businesses the entity owes money to for goods or services received.

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
Invoice
Receipt
Quotations
Cheque
Cash register roll

What does a general ledger consist of?

Accounts with debit and credit sides

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 are the stages of which a business cycle is processed through the accounting system?

Documenting recording, processing and reporting events

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

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 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.

What order is the financial transactions processed?

Source documents → Journal → General ledger → Accounting reports.

Explain what a trial balance is

A list of ledger account balances ensuring total debits equal total credits in accounting records.

explain what a ledger is

A collection of accounts where business transactions are recorded and organized.

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 bank0

Faithful representation - yes, the amount is $50000 and this information is complete and free from error and can therefore be entered in the financial records as such.