accounting chapter 5-9

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Source document functions

provide verifiable evidence of the details of a transaction, ensuring faithful representation AND provide evidence for ATO when they audit as it involves GST

GST balance formula

GST collected (on sales) - GST credits (on purchases)

Tax invoice

a source document that contains specific information required by the ATO to substantiate GST amounts (most source documents are tax invoices)

Information needed in a tax invoice

the words ‘tax invoice’ stated clearly, the name of the seller, the Australian Business Number (ABN) of the seller, the date of the transaction, a description of goods/services provided, the price of the transaction including the GST, the amount of GST

Cash sales and GST effect on the accounting equation

increase in bank by total amount (including GST), increase in GST liability (the GST), increase in owner’s equity (revenue which is cost price)

Cash payments and GST effect on the accounting equation

decrease in bank by total amount (including GST), decrease in GST liability (the GST), decrease in owner’s equity (expense which is cost price)

How to tell the difference between the receipts

cash register receipts has served by, credit card receipts also include account number and type of transaction,

Bank statements

a statement provided to customers by their banking institution that gives details of all cash transaction relevant to that particular account that have occurred over a specific period of time and the resulting balance at the end of that period.

Invoice

the only source document for credit transactions

Credit transactions

a business exchange where goods, services or money are received immediately but payment is paid at a later date

Invoices include

the terms of the transaction e.g (5/7, n/30 meaning 5% discount applied if total amount is paid within 7 days but the full amount is due within 30 days)

A statement of account

provided to credit customers to give details of transactions that have occurred over a specific period of time and the resulting balance owed at the end of that period

Credit note

a document that evidences that there is a reduction in the amount owed by the customer

Memo

a source document used to verify internal transactions

Markup formula

cost price x (1+ markup/100 )

What must go in cash receipts/cash payments journal

• date, details, source document number, bank, classification columns, sundries, GST

• the bank must equal the sum of the classification, sundries and GST columns

Cash flow statement

an accounting report that reports all cash flows during a period, classified as operating, investing and financing activities.

Operating activities

cash flows related to day-to-day trading activities

Investing activities

cash flows related to the purchase and sale of non-current assets

Financing activities

cash flows related to the changes in the financial structure of the firm

Cash flow cover formula

(net cash flows from operating activities)/(average current liabilities) = times per period

average current liabilities

(beginning current liabilities+ending current liabilities)/2

internal control mechanisms

physical safeguards (padlocks, fences, safes), preventative safeguards (alarms, security cameras), authentication methods, separation of duties, rotation of duties, careful hiring practices, effective employee training

cash control mechanisms

cash transactions should be verified by a pre-numbered document, electronic payments over cash payments, payments shouldn’t be made directly from the till, cash should not be kept on the premises in large quantities or overnight, cash procedures should be changed periodically, accurate and up to date cash records, takings should be banked daily but at varying times

sales/purchases journal must include

date, account payable/accounts receivable name, invoice number, classified columns/inventory of materials, GST, total accounts payable/accounts receivable

revenue

increases in assets or decreases in liabilities that result in increases in owner’s equity, other than those relating to capital contributions

expenses

are decreases in assets or increases in liabilities that result in decreases in owner’s equity, other than those relating to drawings