Studied by 15 people
Definition of Accounting entity
States that a business’ owner’s personal transactions are separate from that of the business.
Monetary Definition
States that all business transactions on a financial statement must be put into its money value. Non-quantifiable items must be left out.
Historical cost definition
States that an item’s value at its date of acquisition must be the value reported onto the financial statement.
Materiality definition
States that information that is omitted or misstated must not affect its user’s decision-making.
Accounting period definition
States that the life of a business must be organized into intervals of time; accounting periods.
Going concern definition
States that a business must assume that it will exist for the foreseeable future, until the event of a death, sale or financial downfall of its owner
Purpose and users of financial statements
To provide information about a company’s financial health and performance, giving insight to its revenue, expenses and debt.
Users are: Owners Employees Government Lenders (Banks)
Definition of assets
The resources that the business owns.
definition of liability
Money or service, owing by a business.
Definition of equity
The value of resources contributed to a business by the owner of that business.
definition of income
The flow of assets into a business, except for loans and capital
definition of expense
The resources consumed by the business.
Accounting equations
Assets = Liabilities + Equity
Liabilities = Assets – Equity
Equity = Assets - Liabilities
BIG MAIN ONE
ASSETS + EXPENSES = EQUITY LIABILITY AND INCOME
what is a balance sheet
A financial statement that sets up the assets and liabilities and equity of a business on any one day.
what is an income sheet
A financial statement that outlines that income and expenses of a business to determine whether a profit or a loss has been made.
Principles and features of GST - Taxable supply
Product which GST is charged on.
Includes selling price of Goods (computers, televisions, books), and Services (legal advice or repairs).
GST collected from customer – GST payable, goes to ATO.
GST paid by business for purchases or services – GST input tax,
Principles and features of GST - GST free supplies
Products specifically exempted from GST. (Supplier of these products can claim back GST from purchases or services)
EG: Fresh food, Medical services, Education, Childcare services, and Exports.
Principles and features of GST - Input taxed supplies
Products GST is not charged on and not possible to claim GST tax credit for purchases of goods and services associated with products.
EG: Residential rents, and Financial Services.
Accounting and reporting for GST (BAS)
Business registered for GST will need to lodge a business activity statement with the ATO.
Business needs to calculate amount owed to ATO or amount ATO needs to pay business.
Done each month or quarterly.
Amount paid to or received from ATO is difference between GST payable and credits.
How to calculate GST owed or received from ATO?
Using cash or the accrual method.
Characteristics of taxable supplies
Must involve furthering an enterprise carrying out the activities of a business.
Must be connect to Australia.
Imported into
Sold from
Exported out (GST not charged on exports sent within 60 days of sale, or later if allowed by ATO)
Made for consideration.
A Business must receive something of value exchange for the product.
Not exempt from GST
Not a GST free or input taxed supply.
Registering for GST for a small business
Business or enterprise has a GST turnover of $75K or more.
Non-profit organizations have GST turnover of $150K or more.
If business does not fit into any category, registration = optional.
If business chooses to register, they generally stay registered for at least 12 months and apply for ABN.
Business registered for GST will need to complete a business activity statement.
Internal control
Adopting good business practices to ensure that assets of business are safeguarded.
An attempt to ensure effectiveness and efficiency of business operations are improved wherever possible.
Reasons for internal control
Safeguard assets.
Ensure financial data is accurate and reliable and financial reports are valid.
Compliance with set policies and procedures which also ensures regulations and laws are being followed.
Striving to continually improve the effectiveness and efficiency of business operations.
Two types of internal control?
Administrative and Accounting controls
What are Administrative controls ?
Designed to promote overall operational efficiency, effectiveness and adherence to policies and procedures management have put in place. Eg: Separation of duties.
What are accounting controls?
Designed to protect business assets and ensure accuracy of financial records. Anything aimed to limit possibility of a transaction being manipulated. Eg: only paying invoice after checking contents of order.
What are the four examples of internal control
Separation of duties – Individuals should not have opportunity to perform 2 tasks. – Thus, person cannot record then falsify, or person recording is not person banking.
Authorization – Only authorized persons to perform special duties and tasks, with access to valuable assets and financial recording processes. – Owner/Senior employees can sell/purchase NCA’s.
Rotation of Duties – To avoid collusion, staff duties are rotated – Ensures no one can collude with another to commit fraud.
Verification. – Accuracy of work of individuals should be confirmed by an established checking procedure, including spot checks. – Organization needs formal verification procedure to ensure they are meeting accounting standards too prevent fraud. – EG: Stock checks/Audits
Areas to take internal control over - Cash
Cash registers utilized with restricted access.
Daily cash register must be banked intact, so no cash is spent overnight, + large sums aren’t left in premises overnight.
Cash registers must be balanced regularly by an employee who does not otherwise have access to register.
Surveillance cameras considered for high-risk areas.
Pre-numbered receipts or cash dockets prepared for all cash that is received.
Areas to take internal control over - Accounts receivable
Credit checks on prospective credit customers.
Debt collection process with regular billing, reminder letters, and services of debt collection agencies.
Aging of AR through an application of how long debt has been owed to a collection policy.
Person recording payments from an accounts receivable must not be the same person collecting money.
Areas to take internal control over - Accounts payable
Timely payment, thus the business must clear lines of accounts, which also allows business to take advantage of discounts.
Checking of creditors’ monthly statements against business records.
Separation of ordering, journalizing purchases, and keeping accounts payable ledger.
Writing checks for payment of accounts by authorized persons only, two signatures required in the absence of owner.
Returns and reimbursements processed in a timely manner by authorized persons only.
Areas to take internal control over - Inventory
Secure storage of goods with access restricted to authorized staff.
Safe storage away from elements (weather).
Annual/regular physical stock check, to check what the automated records say should be on shelf is actually on the shelf.
Appropriate insurance cover against theft, loss, or damage to ensure the stock lost can be replaced.
Those that order inventory cannot be the one who receives and records.
Areas to take internal control over - Non current assets
Locking away and/or securing to desk of easily removable assets.
Secure storage in locked and well-lit compounds for larger items such as vehicles and machinery.
Security patrols and cameras.
Purchasing and selling to be undertaken only by persons with authority.
Create an asset register
Limitations of Internal Control
Staff Size – number of staff limits separation of duties and efficiency.
Human Error – perfect internal control cannot avoid mistake.
Collusion – Fraudulent behavior when two or more people work together to commit crimes.
Unusual Transactions – Internal control measures are only suited for expected everyday transactions.
Overriding the rules – Employees pushed to exceeding level of authority and override controls in place.
Not reviewing the system – Limited by not constantly updating and changing systems in place to keep up with business situations.
Cost-effective – Cost to small businesses of providing an absolute assurance against fraud, theft, efficiency, and misuse of assets.
Technological advancements – Computer fraud is difficult to detect w/o advanced computer knowledge and costly programs.
What is the accounting cycle
Documents → Journals → Ledger→ Adjusting entries → Closing entries → Financial statements.
GST Act 1999 (WA):
Business or enterprise has a GST turnover of $75K or more.
Non-profit organizations have GST turnover of $150K or more.
If business does not fit into any category, registration = optional.
If business chooses to register, they generally stay registered for at least 12 months and apply for ABN.
Business registered for GST will need to complete a business activity statement.
Business registered for GST will need to lodge a business activity statement with the ATO.
Business needs to calculate amount owed to ATO or amount ATO needs to pay business.
Done each month or quarterly.
Business Names Registration Act 2011 (Cth):
Business name is registered for a period of 3 years and must be registered at the end of the period.
A fee is charged for registration.
Some name cannot be registered.
If family name, no need to register (unless extra words are added to name).
Bankruptcy Act 1966
Person is insolvent if they cannot pay their debts when they become due.
When a person becomes bankrupt, most of their assets will be sold to repay their debts.
Usually lasts 3 years.
Two types of creditors for bankruptcy
Secured Creditor – Has right to seize and sell some or all the assets as a debtor.
Unsecured creditor – Has no right to seize and sell the assets of a debtor.
Manufacturing type of small buisness
- Converts raw materials such as wood clay or cloth, into finished products or other parts and components that other manufacturers use to produce more complex products.
- Examples: Toys, cars, watches, clothes.
Types:
1. Make to stock - uses past data to forecast future demand.
2. Make to order - allows customers to order products that are customized and manufactured to their specifications.
3. Make to assemble - allows customers to customize products and receive them quicker because they only include the basic components.
What is a trading/retailling business and what are its main types, including examples:
Buys and sells inventory, which mainly consist of products purchased by a business with the intention of re-selling these products at a profit.
- Examples: Shops that sell computers, book, or furniture.
Two types:
1. Retailers - a business that sells inventory to the public.
2. Wholesalers - a business that purchases inventory from a manufacturer and sells this inventory to a retailer.
What is a service providing business and its examples:
- Provides a service to a customer in exchange for a fee, an intangible product that is perceived of value to the customer.
- Can be delivered physically but also through virtual platforms on mobile devices and web browsers.
- Examples: A solicitor, an accountant, hairdressers, or online course teacher.
What are the main types of small business ownerships?
Sole Traders
Partnerships
Sole Proprietor
What are the characteristics of a sole trader?
Number of owners: One person
Liability of owners: Liable for any business debts, personal property can be sold to settle any debts.
Transfer of ownership: Can usually transfer ownership of his and her business without restriction. However, certain occupations such as, a solicitor, ca only be carried on by a suitably qualified person.
Ability to raise capital or borrow money: Limited ability to raise capital - restricted in ability to borrow money. Extent to which they can borrow money depends on property that business offers as security for a loan and the history and current performance of the business.
Distribution of profits: Belongs to sole trader. Received as drawings.
Accounting or legal entity: Business is regarded as separate legal entity from owner. Records are kept separate from personal records of owner.
Continuity of existence: The death or retirement of a sole trader ends the business.
What are the characteristics of a partnership?
Number of owners: Limited to 20 members
Liability of owners: Jointly and severally liable for all business debts. A partner that cannot meet their share of business debts à other partners must pay.
Transfer of ownership: Cannot retire or transfer their interest in the partnership without the agreement of the other partners.
Ability to raise capital or borrow money: Limited ability to raise capital - restricted in ability to borrow money. Extent to which they can borrow money depends on property that business offers as security for a loan and the history and current performance of the business.
Distribution of profits: Profit is divided between the partners - Received as drawings.
Accounting or legal entity: Separate accounting entity.
Continuity of existence: Death or retirement of partner ends the business unless there is prior agreement that it will continue.
What are the characteristics of a small proprietor?
Number of owners: At least 1 shareholder, maximum 50 non-employee shareholders.
Liability of owners: Liability for debts of shareholders in proprietary companies limited by shares is restricted to the amount they owe on their shares.
Transfer of ownership: Constitution of proprietary company can include clause that restricts the right of shareholders to transfer their shared to a new owner.
Ability to raise capital or borrow money: Limited ability to raise capital - restricted in ability to borrow money. Extent to which they can borrow money depends on property that business offers as security for a loan and the history and current performance of the business. Can sell shares.
Distribution of profits: Directors are usually able to approve and pay out the profit to the shareholders in the form of a dividend.
Accounting or legal entity: A separate legal and accounting entity - Can own property, enter contracts its own name and ca sue and be sued in its own name. - accounting records of company are separate from personal records of the shareholders.
Continuity of existence: Can have indefinite life. Does not affect continued existence of company.
What are the advantages and disadvantages of a sole trader?
Advantages:
- Simple to set up and operate. Least expensive to set up.
- You retain complete control. You are the boss and responsible for making all the decisions.
- Owner keeps all the after-tax profits.
- The business is a separate accounting entity and will lodge a tax return each year.
- Relatively easy to change business structure if your business grows or you can sell the business.
Disadvantages:
- Unlimited liability which means all your personal assets are at risk if things go wrong. Owner can lose their house!
- The business is not a separate legal entity, so the owner is responsible for all the debts and tax owed.
- The only way to raise capital for business is for the owner t source finance. Money can only be borrowed and based on the owner's worth/value/capacity.
- If the owner is sick, no one can replace. If the owner decides to wind up the business, it finishes.
What are the advantages and disadvantages of a partnership?
Advantages:
- Each partner can contribute funds to the business, therefore more capital is available.
- Each partner can bring different skills and knowledge to the business.
- Workload can be shared among partners. If one partner is absent the other can cover for them.
- Partnerships are a separate accounting entity, so a tax return needs to be lodged every year.
- Debts of the business can also be shared.
Disadvantages
- Unlimited liability. Private assets of the owners can be sold to cover the business debts.
- If a partner dies or wants to leave, the partnership will end, unless the partnership agreement has a different option.
- Profits are shared. Partners are responsible for all debts incurred even after they leave.
- There may be disagreements between the partners.
One partners decision or action is legally binding on all partners.
What are the advantages and disadvantages of a sole proprietor?
Advantages:
- A separate legal existence means that the liability is limited. Personal assets are safe if the company gets into financial difficulty.
- Shareholders liability is limited to the value of their shares.
- Shareholders can buy and sell their shares at any time. Transfer of ownership is relatively simple.
- Owners can change and the company will continue to exist.
- Capital is easy to raise as there are more owners and make shares can be sold.
Disadvantages:
- A shareholder may not receive profits each year. Directors decide if dividends will be paid from the profits.
- It is more complicated and expensive to form.
- There are demanding recordkeeping and reporting requirements.
- Compliance with Corporation Law necessary.
Outline internal sources of finance:
1. Capital contributed by the owner - all owners can contribute.
2. Retained earnings - profits after taxes & drawings/dividends.
3. Loans from family and friends - this is called equity finance.
- Ads - no need to repay (at times) & no interest.
- Disads - can be limited (eg: sole trader only 1 source of internal fundings) & no leverage/gearing benefits.
Outline external sources of finance:
SHORT TERM
Trade Credit – business purchases items on credit and can repay at a later date
Disadvantages
can only be used for short-term purposes and if default on repayment, then the supplier mat cut off supply or sue you.
Advantages
no interest is charged on credit = interest free short-term loan
Credit Card – used as a short-term form of finance when the business does not have cash available.
Disadvantages interest rates on credit cards often very high
Advantages convenient, can avoid interest if paid off within the interest free period
What are the RISK factors considered by financial institutions when approving finance?
Risk:
- Collateral
Assets to be sold of finance conditions not met. The collateral is often the object for which one is borrowing the money: Auto loans, for instance, are secured by cars, and mortgages are secured by homes.
- Liquidity
Cash Flow. Borrowers must evaluate liquidity, ensuring that cash flow can allow consistent loan payments and cover expenses. Lenders must ensure that they have enough funds to cover the losses that are associated with the loan.
- History
Credit History, a borrower's reputation, or track record for repaying debts.
- Guarantors
People/business to guarantee payment if you/your business can't.
What are the RETURN factors considered by financal institutions when approving finance?
Return:
- Interest rate available
Must be attractive to lenders + borrowers.
- Future business
Will the borrower's business make enough money to cover the finance in the future.
What are the COSTS for a small business engaging in socially, environentally, and ethically responsible behaviour?
- Limiting ability to maximise profits.
- Fear loss of competitiveness as competitors aren't conducting similar schemes.
- Believe customers are not interested.
- Too expensive (train employees, sourcing products).
- Lack of knowledge and expertise.
- Lack of time.
What are the BENEFITS for a small business engaging in socially, environentally, and ethically responsible behaviour?
- Increased ability to attract and retain staff --> Low employee turnover --> Less cost-effective
- Demonstration of care for community.
- New perspectives + ideas.
- Staff participation + satisfaction.
- New business + networking opportunities.
What is sponsorship?
The financial or non-financial (eg: allowing staff to volunteer for events) support of an activity by another organization.
What are the advantages and disadvantages of sponsorships?
A:
- Creating positive publicity
- Increase brand visibility.
- Cost-effective.
- Increase sales.
- Differentiation from competitors
- Access to niche markets
D:
- Negative image association
- Lack of control
- Sponsorship clutter à media overload
What is taxation responsibility?
Tax Avoidance
Legally planning to reduce the amount of tax paid. (Legal but unethical?)
Tax Evasion
Illegally breaking the law to get out of paying tax that one should be paying legally: tax avoidance schemes.
Explain resource conservation:
The careful management of resources so they are used in a manner that eliminates wastefulness.
Businesses can:
o Consider packaging used for products or transporting.
o Less waste - reduce, reuse, recycle.
o Minimize Emissions
What is corporate social responsibility?
Corporate social responsibility (CSR) is the expectation that businesses should consider their impact on society and the environment. It encompasses economic, legal, ethical, and philanthropic responsibilities.
List examples of Corporate social respnsibility and reasons for its importance:
CSR is important because it improves brand perception, boosts employee morale, enhances customer loyalty, and provides a competitive advantage.
Examples of CSR include reducing carbon footprints, engaging in charity work, and improving labor policies. However, CSR initiatives can fail due to lack of evidence, stakeholder buy-in, value measurement, or alignment with the brand's operations.
Principles of perpetual inventory:
Keeps exact record of inventory. There is an instant updating of inventory.
Chances of running out of inventory is low.
The profit and cost of sale can be calculated for every sale.
The purpose of a stock take is to check for inventory loss through spoilage or loss.
Difference of Perpetual to Periodic (Comparision)
Continuous record of inventory maintained.
Purchases are recorded in the inventory account.
Cost of sales is calculated continuously.
Inventory on hand is always known this avoids shortage of stock and can respond to customer enquiries.
Stock take is done to check for inventory loss through spoilage or theft.
Difference of Periodic to Perpetual (Comparision)
Continuous record of inventory is not maintained.
Purchases are recorded in a purchases account.
Cost of sales is determined at the end of the accounting period.
Lack of information as to exact level of inventory on hand
Stock take needs to be done to know the amount of inventory available
errors disclosed by the trial balance
1. Failing to record part of a transaction in the ledger
2. Making two debit entries or two credit entries in the ledger
3. Making a transposition error in the ledger, a transposition error occurs when a set of numbers is written down or typed in an incorrect order
4. Incorrectly calculating a ledger account balance
5. Leaving a ledger account balance out the trial balance
6. Recording a ledger account balance on the wrong side of the trial balance
errors not disclosed by the trial balance
making an error of omission that is failing to record a transaction in the general ledger or in the general journal.
Making compensation error making two independent errors of equal amounts
Making an error of commission that is making an entry in the wrong ledger account but on the right side.
Making an entry on the wrong side of each ledger account
Making an error of original entry that is recording an incorrect amount in the general journal
purpose of making trial balance
Detects errors made in posting information into the general ledger
Provides a list of general ledger account balances from which are prepared important accounts reports such as the balance sheet.
What is the format of a balance sheet
Current Assets
Total current assets
Noncurrent assets
Total NCA
TOTAL ASSETS
Current Liabilites
total current liabilites
NC LIABILITES
TOTAL NCL
TOTAL LIABILITIES
NET ASSETS
EQUITY
(Profit and loss)
(minus drawings)
total equity must equal net assets
format of an income sheet
SALES
LESS SALES RETURNS
DISCOUNT ALLOWED
NET SALES
LESS COST OF SALE
LESS CARTAGE INWARDS
LESS CUSTOMS DUTY
ADD DISCOUNT RECIEVED
GROSS PROFIT
ADD OTHER INCOME
OTHER EXPENSES
SELLING AND DIS
GEN AND ADMIN
FINANICAL EXPENSES
PROFIT FOR PERIOD (GROSS PROFIT - ALL EXPENSES)
external sources of finance being long term
Term Loan – this is borrowed money obtained from a bank/other financial institution that will be paid back over agreed time frame
Disadvantages
interest paid on the loan, lack of flexibility over some loans, -Advantages
higher amounts can be borrowed –. Interest rates may be fixed,
3. Mortgage – a specific type of long-term loan secured over land or property
Advantages
interest paid on the mortgage is a tax deduction, interest rates may be lower than term loans as a mortgage is usually longer such as 20 – 30 years.
Disadvantages
Mortgages are secured over the property
Note
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