Accounting and finance year 11

FInal exam prep

Double entry accounting

Every action recorded in general ledger requires at least 2 entries. This is called double entry accounting principle

prepaid expenses

Service paid for in advance

Inventory of supplies

Resources purchased for use withing business and will be consumed within one year

Accrued expenses

Expenses generated in an accounting period but have not been paid by end of that period

Payment of accrued expenses in the next accounting period

Account is closed when the wages owing are paid in the next accounting period

Unearned income

Money received from a customer for a service that ill be performed in the future

Accrued income

Amount of money owing to a business, from an income transaction that has not been received by balance date

Accrued income in the next accounting period

Accrued income ledger closed when interest is received in next accounting period

Nature of depreciable asset

held for use in the production or supply of goods or services, for rental to others or for administrative purposes. Expected to be used during more than one accounting period

Cost of a depreciable asset

purchase price, cost of transporting asset to the premises and the cost of setting the asset up ready for use

2 types of depreciation

Straight line method and reducing balance

Define depreciation

Allocation as an expense, of the depreciable amount of the asset, over its useful life

Causes of depreciation

Wear and tear, technical obsolescence and commercial obsolescence

Myths about depreciation

Depreciation sets aside cash for the replacement of the asset, Depreciation is a means of calculating the current market value of an asset

liquidity

ability of a business to pay its debts as they fall due

stability

ability of a business to survive the long term

profitability

ability of a business tomake an acceptable level of profit

Types of liquidity ratios

current ratio and the quick asset ratio (acid test ratio)

how to calculate current ratio

Current assets/ current liabilities x100

Current ratio less than 100%

may find difficult to pay short term debts or business operating in an industry in which money is collected from sales very quickly

Current ratio between 100% and 200%

business should be able to pay its short term debts

Current ratio more than 200%

Able to pay short term debts and business has extra current assets available

How to calculate quick asset ratio

Current assets except inventory and prepaid expenses/Current liabilities except for bank overdraft

Quick assets more than 100%

Business should be able to pay its short term debts

Quick asset ratio less than 100%

Business in emergency may not be able to pay its short term debts

debt to equity ratio equation

Total liabilities/equity x100

What does debt to equity ratio measure

gearing

What is gearing

Extent of the borrowings of the business

Best debt to equity ratio for small business

70% or less

best debt to equity ratio for large businesses

100% to 200% or higher

Types of profitability ratios

Gross profit, profit, expense, return on assets

Gross profit ratio equation

Gross profit/net sales x100

Increase in gross profit ratio

Increase selling price > increase in purchase price of inventory

Purchase inventory lower price

Decrease in gross profit ratio

New competitors entering market

Price war between competing businesses

Plan to increase market share by selling inventory at cheaper price

Increase purchase price >increase in selling price

Profit ratio equation

Profit/net sales x100

Increase in profit ratio

Increase in gross profit ratio or reduction in expenses

Decrease in profit ratio

Expense increasing that not passed on in form of increased selling prices r increased competition causing business lower selling prices

Expense ratio equation

Expenses(Other than cost of sales)/net sales x100

Return on assets equation

Profit/Average assets x100

Eftpos

(Electronic funds transfer at point of sale) system that allows a customer to use a debit card to pay for products and with agreement from retailer, withdraw cash

EFTPOS advantages

May generate more sales as some consumers may prefer to shop at businesses that offer this service

Reduces the amount of cash held on premises as customers pay for products by depositing funds into bank account of business

EFTPOS disadvantage

fee is charged for providing this service to customers