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Assets definition
The economic resources under the control of the
business entity, e.g. vehicles
Liabilities definition
The present obligations of the business to
transfer economic resources to other entities, e.g. bank loans
Owner’s equity Definition
The residual interest an owner has in a business
once the liabilities of the business are subtracted from the assets of the business.
Revenues
The inflows of resources which usually result in an
increase in the assets of the business.
Net profit definition
The amount of money a business has left after subtracting expenses from revenue
What are the Qualitive characteristics of accounting
Relevance, Faithful representation, Comparability, Verifiability, Timeliness, Understandability
Timeliness definition
A qualitative characteristic of accounting that requires information to be presented in a timely manner so that it may influence decisions
Understandability definition
A qualitative characteristic of accounting that requires information to be presented clearly and concisely in an understandable fashion
Relevance definition
A qualitative characteristic of accounting that requires all information that could influence decision-makers to be included in accounting reports
Faithful representation definition
A qualitative characteristic of accounting that requires information being reported to be complete, without bias and free from error
Comparability definition
A qualitative characteristic of accounting that requires financial reports to be prepared using consistent accounting methods so that performance can be compared
Verifiability definition
A qualitative characteristic of accounting that enables accounting information to be checked against business documents
What are the accounting assumptions?
Period, Accrual basis, Going concern, Entity
Period assumption definition
A financial events are recorded and reported for a specific period of time, which allows valid comparisons of performance to be made
Accrual basis assumption definition
A profit for a given period of time is determined by deducting expenses incurred from the revenue earned in that same period
Going concern assumption definition
A business will continue to operate indefinitely and won’t be wound up in the near future
Accounting entity assumption definition
A requirement that all relevant items be reported for a business entity, excluding any personal transactions of the owner and any other entity
Trading firm
A business that earns its revenue from buying and selling goods
Service firm
A business that earns its revenue from providing services to its customers
Manufacturing firm
A business that uses raw materials to make products, which it then sells
Sole proprietorship
A business owned by a single person
Partnership
A business co-owned by 7 to 20 individuals
Company
A business owned by shareholders that is a distinct legal entity
Franchise
A form of business in which the owner agrees to run the business as a member of a group, with all franchise members operating as similar businesses
Franchisee
A business owner who has agreed to be part of a franchise group
Franchisor
The parent business in a franchise group, which establishes the rules of the group and usually receives a fee from all members
internal sources
Funds provided to a business by the owner, which may include the owner’s capital plus any retained profits
External sources
Funds borrowed from an individual or business that is external to the business seeking finance
What are the Internal sources?
Proprietor’s capital and Retained profits
What are the External sources?
Trade credit, Overdraft, Term loans and leasing
Retained profits
Profits kept within a business rather than being withdrawn by the owner
Trade credit
Short-term credit usually made available by suppliers of materials or goods
Overdraft
A bank account with a negative balance, used as a short-term source of finance
Term loan
A loan taken out for a fixed period of time, and due for repayment at a predetermined date
Leasing
Payment of a fee to use an asset that isn’t actually owned by the business
What is the working capital ratio?
Current Assets / Current Liabilities
What are the Cash inflows from Operating activities?
providing services for cash
selling goods for cash
collecting cash from accounts receivable
commission received
interest received
GST received
What are the Cash inflows from Investing activities
Selling non-current assets for cash
What are the Cash inflows from Financing activities
capital injections by the owner
borrowing cash via loans
What are the Cash outflows from Operating activities
purchasing inventory for cash
paying cash to accounts payable
paying cash for services
paying cash for expenses
GST paid
What are the Cash outflows from Investing activities
Buying non-current assets for cash
What are the Cash outflows from Financing activities
cash drawings
loan repayments
