Accounting and Finance - Test One

Yr 11 Test one - Introduction, Business structures, Finance sources, Accounting conventions and assumptions, GST

Accounting

a system of recording and processing business events and reporting to people (Owner, managers, creditors, investors, gov. Organisations) on the performance of the business

Service Business

Provides a service - not as expensive to set up (no inventory) eg. Lawyer, hairdresser, lawn mower

Manufacturing Business

Purchase raw products, convert them to products to sell. Eg. Card maker, furniture maker.

Trading/ Retail Business

Purchase finished goods to sell to customers. Eg. Woolworths

Wholesaler

Purchases bulk goods and sells them to other companies

ABN

Australian Business number. 11 digits. Used to identify business to pay the right amount of tax

Registering a Business

If your trading name is something other than your own name (Piper Allisons Fast Mows). For three years, paying a fee, receive an ABN.

Bankruptcy Act

1966 Commonwealth. Assets have to be sold, lasts for three years

Insolvent

Unable to pay debts

Bankruptcy

Unable to pay debts owing. Could include declaration of intent, a debt agreement, personal insolvency agreement, voluntary bankruptcy.

Asset

An item of value that a person/ business owns. Eg. Cash, land, buildings, equiptment

Creditor

Person or business OWED money by a business

• Secured - Right to seize and sell some or all assets of the assets of a debtor

• Unsecured - no right to take assets of debtor.

Partnership Act

1895 (WA)

Followed if there is no partnership agreement in place

Partnership Agreement

Written agreement - outlines how profit/ loss is shared, if one falls away, aims, workload sharing

Small Proprietary Company

Must satisfy TWO of the three:

• Under 100 Employees

• Under $100 million income

• Under $50 Million assets

Considerations before applying for finance

• Purpose of loan

• Risk involved in repayments

• Collateral

Bank Consideration before Loan Approval

• Business Plan

• History

• Guarantors

• Liquidity (can the business make enough profit to make repayments)

Retained Profits

Past Business Profits

Pro - no cost invovled

Personal Savings

Money you already have. Remember to retain some money to stay liquid

Family and Friends

Receive low interest money

Pro - they feel a sense of pride, you get money

Con - receive unsolicited advice, relationships can sour

Bank Loan

Most common. Must satisfy application process. Typically between 20 - 30 years.

Shares

Only for companies, shareholders want dividends, could loose control of business

Credit Cards

Adv - convenient

Dis - high interest rates

Bank Overdraft

Agreement with bank to go into red - pay interest on every day in debt. Pay back in the short term. Easy to organise.

Leasing

Asset rented, receive money. Keeps asset in use - eg. current computer software.

Grants

From gov/ big business, local councils. Money given for a purpose. No payback needed.

Debt Factoring

Sell off debts to a third party (debt factors), they chase up debts while you receive your lump sum of money owed.

Crowd Funding

People donate money, don’t have to pay back. However must have supporters.

ACCOUNTING PROCESSES

Documenting Events

FIRST STEP, documents daily ‘source documents’. Eg. tax invoice, receipts, wages, bills.

ACCOUNTING PROCESS

RECORDING EVENTS

SECOND STEP, Information on source documents, combined into general journal.

ACCOUNTING PROCESSES

PROCESSING EVENTS

THIRD STEP, general journal processed into general leger.

ACCOUNTING PROCESSES

REPORTING

FOURTH STEP, used to create reports for business owners, ATO, (in public companies - employees, investors, community)

AASB Accounting Standards

1985. Rules that all organisations must follow when reporting.

Conceptual Framework of Accounting

SAC one - Identifies the type of organisation that has to follow the AASB standards

SAC two - Sets out the reason why a reporting entity prepares accounting reports

The Framework - Defines accounting terms, outlines how to prepare a financial report.

GST

Goods and Services tax. 10%

If have a turnover greater than $75,000 per year - must register

Must have an ABN

Paid monthly or quarterly, reported on a BAS statementB

BAS

Business Activity statement - records GST. Is sent to ATO

Accrual method

Transaction is recorded when it occurs, irrespective of when money is received.

Taxable Supply

• Furthers an enterprise

• Connected to Australia (exported within 60 days of sale)

• Receives consideration

• Isn’t GST exempt

GST exempt products (Input taxed supply)

• Fresh fruit and veg (as well as some other staples)

• Child care

• Education

• Medical services

• Religious services

GST input tax Credit

Money to be claimed back from the ATO on products or services purchased by a business.

GST Payable

GST received from customers, that a business needs to pay back to the ATO.

Non Current Asset

Long term asset, won’t be used in less than a year.

• Land

• Car

• Building

• Office Furniture

Current Asset

Item of value used in less than a year

• Inventory

• Cash in the bank

• Debtors

Accounting Principals, Assumptions, Conventions

Set of rules accountants have about how the accounting system works.

Accounting/ Business Entity Assumption

Personal transactions remain separate from the business

Monetary Assumption

All transactions in Australia must be recorded using AUD. Must be assigned an estimated monetary value.

Going Concern Assumption

Financial reports are prepared, assuming the business will continue, valuing assets at their original value.

Accounting Period Assumption

Businesses must record once a financial year

Financial Year

1st July to 31st June

Historical Cost Assumption

Assets valued at their original purchase value.

Materiality Assumption

Financial reports must be relevant, up to date, and true.