accounting remember stuff

asset

a present economic resource controlled by the entity as a result of past events with potential to produce future economic benefits

accounting equation

asset - liability = owner's equity

asset = liabilities + owners equity

liabilities = asset - owners equity

liability

a present obligation of the entity to transfer an economic resource as a result of past events.

owner's equity

residual interest of assets once liabilities are deducted

eg. capital contribution, net profit or loss, drawings

current asset

asset - a present economic resource controlled by the entity as a result of past events with potential to produce future economic benefits.

current asset - current assets are cash and other types of assets held primarily for the purpose of sale and trading, or are reasonably expected to be converted to cash, sold or consumed by a business within 12 months after the end of the reporting period.

non - current asset

asset - a present economic resource controlled by the entity as a result of past events with potential to produce future economic benefits

non current assets - non current assets are expected to be used by the business entity for a number of years and are not held for the purpose of resale.

current liability

liability - a present obligation of the entity to transfer an economic resource as a result of past events.

current liability - current liabilities are obligations of the entity that are reasonably expected to be settled within 12 months after the end of the reporting period

non current liability

liability - a present obligation of the entity to transfer an economic resource as a result of past events.

non - current liability - non current liabilities are obligations of the entity that are not required to be settled within 12 months after the end of the reporting period

balance sheet

accounting report that details a firms financial position at a particular point in time by reporting its assets, liabilities and owner's equity

purpose: enhances decision making by grouping similar items

gst

price + 10% gst = total price

When a business has collected more GST in a period that it has paid = current liability (GST Liability)

when a business has paid more GST in a period than it collects = current asset (GST Refund)

accounting process

1. source documents

2. records

3. reports

4. advice

rules of accounting

accounting assumptions - govern the way accounting information is recorded. they are the generally accepted rules

qualitive characteristics - inform the way accounting reports are prepared

role of source documents

provide verifiable evidence

ensure financial reports are reliable

support tax obligation and gst compliance

form basis for accounting records

upholds the characteristic of verifiability

source documents - what

- cash receipt

- eft receipts

- eft payment

- sales invoice

- purchase invoice

- memorandum (memo)

- credit note

- statement of account

- bank statement

- delivery docket/shipping confirmation

original given to the customer while a copy is maintained by the business for recording purposes

receipts - source document

cash receipts and eft receipts - record the inflow of cash into the business

receipts go into cash receipts journal

requirements

- business abn

- date of transaction

- document number

- description of transaction

- selling price

- gst amount

- tax invoice reference

- total amount

payments - source document

eft payment - verify a cash payment made by the business, there is no physical cash used to make payments by the business

payments go into the cash payment journal

similar requirements to receipts - no tax invoice reference

why it does not satisfy as a tax invoice

- when business pays using EFT, it relies on receipt from the other party and this is what satisfies requirements for a TAX INVOICE. so eft payment will result in tax invoice being created as does not satisfy to be one and also the contribution to the effective operation of the GST system.

invoices - source documents

purchase invoice - this document records the credit purchase of inventory. (accounts payable) - purchase journal

sales invoice - records credit fees/credit sales (accounts receivable)

- sales journal

where no cash has changed hands but an obligation to repay has been created between the two businesses

requirements

- business

- date of transaction

- "tax invoice" words

- credit terms

- description of transaction

- invoice number

- amount of transaction

- amount of gst

- total amount owing

credit note : returns

a credit note is a document that provides evidence of a reduction of what is owed to a particular supplier by one of its customers.

issued reasoning:

- return of goods due to damage, spoilage or wrong specifications

- incorrect price or quantity

- a sales price reduction not applied when it should have

features

- "tax invoice"

- date of transaction

- credit note number

- amount of gst

- total amount refunded

- description

statement of account

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

features

- customer name

- period of issue

- opening balance

- increase and decrease in amounts owed

- ending balance

bank statement

a bank statement provides a summary of all transactions that affect the business' bank account during a specified period.

it can be used to cross check against business records to ensure the business information is accurate and up to date.

allows business to identify any fraudulent transaction

features

- description

- date

- opening and closing balance

- increase and decrease in amount

memorandums (memo)

memos are used for transactions not covered by the other source documents. internal document for non monetary transactions.

these types of transactions must still be verified by a document to uphold verifiability

memos are issued from within the business and do not involve a third party

features

- memo number

- date

description

- signed by person issuing memo

delivery docket

used to evidence the delivery of goods

the seller or supplier is the business that issues the delivery docket

shipping confirmation

document that indicates that an order has been dispatched and can be expected at some point

digital vs physical source documents

advantage

- saves space

- easy retrieval

- secure backups

- better for the environment

disadvantages

- requires cybersecurity measures

- dependence on technology

entity assumption

the records of assets, liabilities and business activities of an entity is kept completely separate from those of the owner of the entity, as well as from those of other entities.

a separate set of accounting records is maintained for each entity with each financial statement provided providing information on the relevant individual entity only

going concerns assumption

the going concerns assumptions assumes that the business will continue to operate in the future and its records are kept on that basis. the life of the business is assumed to be continuous.

period assumption

the assumption that reports are prepared for a particular point of time, such as a month or a year, in order to obtain comparability of results.

benchmark

it is a reference point or standard such as industry average used to measure, compare and improve a company's financial performance and operational efficiency.

financial indicators

financial indicators are measurement tools used by a business to assess the performance of a business

working capital ratio, debt ratio, cash flow cover, net profit margin

non financial indicators

measure of business performance performance that is not expressed in monetary terms

- customer satisfaction: customer reviews, complaints recieved

- employee satisfaction: staff morale

- number of customers

- product quality

- delivery performance

liquidity

liquidity is the ability to meet short term debts as they fall due

working capital ratio formula

working capital ratio = current assets/current liabilities

recommended answer for wcr

1.5 : 1 represents that for every 1 dollar in current liabilities the business has $1.50 in current assets meaning the business can (cannot if low) meet its short term debts as they fall due.

low wcr - recommendation

capital contribution

high wcr - recommendation

However, the business should look to move some of their current assets to non current assets for the future by investing in non current assets

cash flow cover - def

cash flow cover is a liquidity indicator that assesses the ability of the firm's operating cash flows to meet its short term debts as they fall due

cash flow cover - formula

cash flow cover = net cash flows from operating activities/average current liabilities

average current liabilities - formula

average current liabilities = current liabilities at start + current liabilities at end/2

suggested answer for cash flow cover

a cash flow cover of 1.06 times per month means that the business can pay (cover) every dollar of current liability just one time in a month (changes depending on the cash flow cover ratio). this indicates that the business is financially un/healthy and can/not meet its short term financial obligations through the cash generated by its normal operating activities

good cash flow cover - rec

the business can expand its current operation, reduce its debt by paying down loans, invest to increase cash revenue streams and have a back up to provide support in case of economic downturns

bad cash flow - rec

sell assets, increase its forms of operating cash flows, decrease its operating cash outflows, look to reduce current debt by perhaps refinancing a lot of short term debt with long term finance.

stability - def

stability measures the ability of a business to meet long term obligations

debt ratio - formula + info

(total liabilities / total assets) x 100

this shows the business reliance on external funds to run their business.

their is no good or acceptable level of debt ratio, as it is purely on the business owner's level of risk they are willing to operate with

debt ratio standard answer

this shows the business reliance on external sources of finance to fund 66.67% of their assets, leaving the owner responsible for the remaining 33.33%

low debt ratio answer (17.44 eg)

this indicates the owner is reluctant to use external sources of finance and would rather invest their own cash

high debt ratio answer (90%) -

this indicates that the owner is willing to use other resources than their own to run their business

understandability

understandability requires financial information to be comprehensible to users with reasonable knowledge of business and economic activities. to be understandable, information should be presented clearly and consisly.

verifiability

verifiability refers to the ability to ensure that different knowledgeable and independent observers can reach a consensus that a particular depiction of an event is faithfully represented. verifiability is maintained by retaining the source documents used to record the transaction and is checked through auditing. the purpose of verifiability is to hold the accounting professional accountable for their work

timeliness

timeliness requires information to be made available to decision makers in time to be capable of influencing decisions. information being made available sooner, rather than later, can enhance capacity to influence decisions, while a lack of timeliness can rob information of its potential usefulness. the older the information is the less useful it is.

relevance

relevant information is that which directly assists the user in making decisions. relevant financial information is related to making an economic decision and directly assists the user in forming predictions about outcomes of past, present or future events. it may also confirm or change previous evaluations through provision of suitable feedback.

faithful representation

the financial information reported is a faithful representation of a real world economic event it claims to represent and is complete from free and material error and neutral (without bias)

comparitability

useful information is provided when the financial

reports of a business can be compared over time

and compared with similar information of other

businesses

service business

service business is a small business that operates by providing its time, labour, expertise or knowledge or a combination in return for a fee.

cash transactions

cash receipts - amount of cash the business has recieved form other entities, during a period and sources of the cash

cash receipts journal - cash receipts journal is an accounting record that classifies and summarises all cash received from other entities during a particular reporting period

cash payments - cash outflow to other entities

cash payment journal - is an accounting record that classifies and summarises all cash paid to other entities during a particular period of time

statement of receipts and payments

summarises - all receipts and pauments over a period and includes opening and closing balance to track surplus and deficit

cash surplus (deficit) = cash receipts - cash payments

cash flow statement

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

oa - cash flows related to day to day trading activites - interest on loan repayent or recieved

ia - cash sales of non current assets, cash purchases of non current assets

fa - cash flows related to changes in the financial structure of the firm, capital contribution, loan acquisition, drawings of cash and loan repayments

loan repayments - principal = financing -

- interest = operating

when repaying money to bank, principal is financing and interest is operating becasue interest can change every day and it like the cost of borrowing money

benefits of the cash flow statement

improving the owners decision making in relation to cash management

- to aid decision making about firms cash activites by detailing the sources and uses of cash in a particular period

- to assess whether or not the business is meeting targets by comparing it to a budgeted version, it will allow for correct action to be taken

- to assist in planning for future activites by providing a basis for the next budgeted statement

- to identify whether or not the business is generating enough cash from its operating activities to fund its investing and financing activities

gst payable

gst payable balance at start

+ gst received on fees

- gst paid to suppliers

= gst payable at the end

gst payable is a current liability and is expeted to be settled within 12 months. business make a gst settlment payment when paying the amount owed to the ATO

gst recievable

gst receivable balance at start

- gst received on fees

+ gst paid to suppliers

= gst recievable at end

gst receivable is a current asset and is expected to be converted into cash within 12 months. business receives a gst refund from the ATO

single entry accounting

the process of reading transaction in journals and then using the summarised information to prepare reports

credit transactions

a credit transaction is when a service is performace or goods are exchanged. the cash relating the transaction is not exchanged until a later date meaning the customer owes a dubt to the provider /seller

issues an invoice - purchase and sales invoice

credit purchases is a transaction that includes the acquisition of materials from a supplier who does not require payment until a later date

purchase journal - accounting record that summarises all transaction involving credit

account payable formula

account payable balance at the start

+ credit purchases including gst

- payments to accounts payable

= accounts payable balance at the end

credit fees

credit fees is a transaction that involve credit

sales journal - these transactions are issued here

accounts recievable formula

accounts recievable at start balance

+ sales to accounts recievable including gst

- payments from accounts receivable

= accounts receivable at end balance

settlement of account means that all the amount owed is settled

gst balance

gst payable at start

+ gst on cash sales

+ gst on credit sales

- gst on sales return

- gst on cash purchases

+ gst on purchase returns

gst payable at end

revenue

an increase in assets (or decrease in liabilities) that leads to an increase in owner's equity, except for capital contribution

expense

a decrease in assets (or increase in liabilities) that leads to a decrease in owner's equity, except for drawings

accrual basis assumption

under the accrual basis assumption, revenue is recognised in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner that is; revenue is recognised when it is earned. Expenses are recognised when the consumption of goods and services can be measured that is; expenses are recognised when they are incurred. The accrual basis profit for an accounting period is determined by subtracting expenses incurred for a period from revenue earned in the same period

cost of materials used formula

inventory of materials at start of period

+credit purchases of material

+cash purchases of materials

=cost of materials available for use

-inventory of materials at end of period

=cost of materials used(expense)

income statement

-presents revenue and expenses

- upholding understandability

- making this information comprehensible to a person with reasonable knowledge of business and economic activities, as it is presented clearly and concisely

reminder - gst is never included because business is just collecting it for the gov and not using is a revenue and not paying it as an expense

- accounts payable and accounts receivable are also not included

- drawings and capital contribution by definition are not revenue or expenses

profit > cash

things that affect bank negatively but do not affect net profit - or other cases

credit fees > receipts from accounts receivable

cost of materials used > materials consumed + payments to accounts payable

cash > profit

things that affect net profit negatively but does not affect bank - or other cases

materials purchased + payments to account payable < cost of materials used

profitabiliity net profit margin - definition

a profitability indicator that assesses expense control by calculating the percentage of sales revenue that is retained as net profit.

profitibality - net profit margin

net profit margin = (net profit/net sales) x 100

net sales = total sales less any sales return (customer returns) during the period

net profit margin - recommended answer

This shows that for every $1 of net sales, the business retains ~~ cents.

bench mark for assessing npm

1. previous periods

2. budgeted performance

3. industry average

return on owners investment

a profitability indicator that measures how effectively

a business has used the owner's capital to earn profit

answer

For every $1 invested by the owner, the business generated 20 cents of profit during the period.

pricing strategies

1.Recommended retail price (RRP)

2.Competitors price

3. Market reaction

4. Quotes

5, Percentage mark up

6. cost volume profit (CVP) analysis

correct pricing

price too high

- customers switch to competitors

- fewer sales

- insufficient revenue to cover expenses

price too low

- lots of sales but not enough revenue to cover expenses

- margin on each sale could be higher

- customers may question quality of products

Recommended retail price

selling price suggested by manufacturer/wholesaler, it is easy to use but doesn't guarantee profit

pros

-simple to implement - no complex calculations needed

-provides a consistent price across all retailers, building customers trust

cons

-profit not guaranteed if costs exceed the RRP margin

-limits pricing flexibility to respond to local market conditions

competitors price

allows price to match the market; too high = lose sales; too low = lower profit

pros

- keeps the business competitive and reduces the risk of losing customers

- pricing is informed by real market decisions rather than estimate

cons

- profit margins can be squeezed if competitors price below cost

- offers no competitive advantage as products may appear undifferentiated

market reaction

high demand = charge more, low demand = discount and is based on observation, not calculations

pros

- allows higher pricing during peak demand maximising profit

- flexible and responsive to real time change in consumer behaviour

cons

- relies on observation rather than data which can lead to poor decisions

- discounting in low demand periods may damage brand perception

quotes

estimate costs per job and desired profit and is used by service businesses with unique jobs

pros

- pricing is tailored to each job, ensuring costs and desired profit is covered

- builds customer confidence with transparent job specific pricing

cons

- time consuming to prepare accurate quotes for every unique job

- underestimating costs in a quote can result in a loss on the job

percentage mark up

add a set profit % to the cost price. ensures a profit margin is built in

pros

- guarantees a profit margin is built into every sale

- easy to apply consistently across a range of products

cons

- does not account for competitor prices or market demand

- a fixed mark up may price products out of the market in competitive industries

cost-volume-profit (CVP) analysis

calculate how many units must be sold to break even or earn a desired profit

pros

- determines exactly how many units must be sold to break even or achieve a target profit

- helps management make informed decisions about pricing and production levels

cons

- assumes that all units are sold at the same price which may not reflect reality

- requires accurate separation of fixed and variable costs which can be complex

selling price

cost price x (1 + Mark up as a decimal /100)

cost price

selling price / (1 + mark up as decimal / 100)

variable cost

costs that change directly with the level sales e.g materials, packaging: expressed per unit

fixed cost

costs that do NOT change with the level of sales e.g. rent: expressed per period

break even point

the point where total revenue = total costs

profit= 0 ; selling fewer = loss, selling more = profit

Contribution Margin

selling prices per unit MINUS variable cost per unit, each unit sold contributes to this amount - the gross profit from each sale

quantity to sell (breakeven) - formula

(fixed costs + desired profit)/(Selling price - variable cost per unit)

uses for income statement

1. measure performance - identifies revenue and expenses so the owner can see if the business is profitable

2. asses against targets - compare actual results against budgeted (expected) IS

3. plan for the future - provides a basis for next budgeted IS

4. assess management performance - evaluate how well management is generating revenue and controlling expenses

internal controls

1. physical safeguards

2. preventative safeguards

3. authentication methods

4. separation of duties

5. rotation of duties

6. careful hiring practises

7. effective employee training

theft vs fraud

theft - physically taking another entity's property without consent

fraud - dishonestly obtaining a benefit through manipulation, deception or misrepresentation

physical safeguards

if people cant access it they cant steal it - fences, padlocks, locked storerooms, safes, lock boxes

preventative safeguards

threat of apprehension deters theft and fraud - alarms, security cameras, dummy cameras

authentication methods

limits access to authorised staff only - smart cards, passwords, multi factor authentication, biometrics

separation of duties

no single employee (except the owner) has full control of one asset type - reduces risk of collusion

Rotation of Duties

tasks change between the employees and the next person reviews the previous persons work - also multi skills staff

careful hiring practises

screen and assess candidates for trustworthiness - reduce reliance on other control mechanisms

effective employee training

staff trained in asset management and cyber security, reduces the damage through misuse - includes regular policy review