Unit 2: Accounting and decision-making for a trading business - Vocabulary Flashcards

A set of vocabulary flashcards covering key concepts from the lecture notes on inventory, assets, recording, and ethical considerations in a trading business.

Service Business

A business that generates profit by providing its time, labour, assets or expertise (or a combination) in return for a fee.

Trading Business

A business that generates profit by purchasing goods and then selling them at a higher price.

Inventory

Also known as stock; a present economic resource controlled by the entity, held for resale and expected to be converted to cash within 12 months; current asset.

Asset

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

Current Asset

An asset expected to be converted to cash, sold, or consumed within 12 months.

Non-Current Asset

An asset expected to be used for more than 12 months and not held for resale.

Accounts Receivable

A current asset representing amounts owed by customers from credit sales.

Accounts Payable

A current liability representing amounts owed to suppliers for credit purchases.

GST

A 10% goods and services tax; recorded separately (GST Clearing); recognized at the time of purchase and sale; not added to inventory cost.

GST Clearing

A liability/clearing account used to track net GST payable or receivable related to inventory purchases and sales.

Cost of Sales

An expense that records the cost price of inventory sold (excluding GST).

Sales Revenue

Revenue from selling inventory; the selling price before any expenses.

Net Profit

The residual income after subtracting expenses from revenue; increases owner’s equity.

Source Documents

Business documents that provide evidence of a transaction, supporting verifiability and faithful representation.

Credit Note

A document verifying a return of inventory; used for both sales returns and purchase returns.

Purchase Return

Return of inventory to supplier; reduces Accounts Payable and GST Clearing; verified by a credit note.

Sales Return

Return of inventory by a customer; reduces Accounts Receivable and GST Clearing; verified by a credit note.

Credit Sale of Inventory

Inventory sold on credit; increases Accounts Receivable; no immediate bank impact; revenue and cost of sales recognized.

Cash Sale of Inventory

Inventory sold for cash; increases Bank; reduces Inventory; revenue recognized (selling price excluding GST) and cost of sales recorded.

Inventory Account

Account used to record all movements of inventory; increases from purchases and decreases from sales; excludes GST.

Cost Price

The purchase price paid for inventory, excluding GST.

Drawings

Owner’s withdrawal of inventory for personal use; decreases inventory and owner’s equity; verified by memo; no GST.

Memo

Internal document used to record/verifiy internal transactions not covered by other source documents.

Inventory for Advertising

Using inventory to promote the business; counted as an expense and reduces assets; decreases net profit.

Internal Control

Mechanisms to protect inventory from theft, fraud and damage (e.g., physical safeguards, separation of duties, tracking, training).

Accounting Entity Assumption

Business records are separate from the owner and other entities; each entity has its own financial statements.

Verifiability

Ability to obtain consensus that a depiction of an event is faithfully represented; maintained by source documents and auditing.

Faithful Representation

Information is complete, free from material error, and neutral; traceable to actual events via source documents.

Two-Fold Effect of Transactions

Each transaction affecting inventory must impact at least two accounts (double-entry).