U1 AOS 1

the accounting equation

assets - liability = OE

asset

a present economic resource controlled by the entity as a result of past events that has the potential to produce future economic benefits

liability

a present obligation of the entity as a result of past events to transfer an economic resource

owners equity

the residual interest in the assets of the entity after the liabilities are deducted (net worth)

current asset

a present economic resource that is expected to be sold, consumed or converted into cash within 12 months after the end of the reporting period

non-current asset

a present economic resource that is expected to be used by the business for a number of years and is not held for the purpose of resale

current liability

obligation of the entity that are expected to be settled in the next 12 months after the end of the reporting period

non-current liability

obligation of the entity that are not expected to be settled in the next 12 months after the end of the reporting period

accounting entity assumption

the records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.

going concern assumption

the business will continue to operate in the future, and its records are kept on that basis. (indefinite life)

period assumption

reports are prepared for a particular period of time, such as a month or year, in order to obtain comparability of results

accrural basis assumption

revenues are recognised when earned and expenses are recognised when incurred, so profit is calculated as revenue earned in a particular period less expenses incurred in that period (counts as earned when bought, not received)

relevance

the financial information must be capable of making a difference to the decisions made by users, helping them form predictions and confirm/change previous evaluations

faithful representation

financial info reported must accurately reflect the real world economic events they claim to represent, ensuring completeness, neutrality, and freedom from material error

verifiability

different knowledgeable and independent observers can reach the same conclusion that a particular depiction of an event is faithfully represented.

comparability

useful info the financial information should be able to be compared across different entities and time periods to identify similarities and differences. (consistency)

timeliness

financial information should be available to decision-makers in time to be capable of influencing their decisions

understandability

financial information should be understandable or comprehensible to users with a reasonable knowledge of business and economic activities, and presented clearly and concisely

the accounting process

1. source documents (receipts, bank statements, invoices etc.)

2. records (journals, inventory cards)

3. reports (cash flow statement, income statement, balance sheet)

4. advice (make suggestions, give options, highlight concerns)

ethical considerations

the social and environmental consequences of a financial decision

small business

a business in which the owner and manager is the same person and which employs fewer than 20 people

4 reasons for starting a small business

• profit motive

• independence

• identification of market opportunity

• employment

sole proprietorship

a business owned by a single individual, operating their business in their own right under their own name or a registered business name

PROS	CONS
easy + cheap owner has full control owner receives all profits	unlimited liability limited skills start up money limited

partnership

a business owned by two or more persons in business together with a view to making a profit

PROS	CONS
easy + cheap greater access to capital + skills tax adv. if married	unlimited liability profits shared control shared

proprietary company (Pty Ltd)

a business that exists as a separate legal entity that is entitled to do business in its own right

PROS	CONS
limited liability life of business is ongoing (separate legal entity) greater ability to attract capital	high establishment $$ separate tax for ASIC and ATO

unlimited liability

the legal status of sole proprietorships and partnerships is that they are not recognised as separate legal entities, so the owner is personally liable for the debts of the business

limited liability

the legal status of a company that exists as a separate legal entity, so the owners have no further responsibility for liabilities incurred by the business

starting a business from scratch pros/cons

PROS	CONS
almost total freedom no goodwill fee freedom to set customer expectations	no customer base large start up capital

buying an existing business pros/cons

PROS	CONS
proven track record immediate income available previous owners can help	pay for goodwill difficult to change existing procedures + expectations previous success may be dependent on owner

buying a franchise pros/cons

PROS	CONS
recognised brand name established reputation all equipment provided (goodwill)	high purchase price rigid guidelines ongoing franchise fees

goodwill

an intangible asset representing the value of the firm’s reputation, clientele, viability and future growth prospects

reasons for success/failure of a business

SUCCESS	FAILURE
market research location cash management	competition insufficient capital poor planning

internal finance

funds generated by/within the firm: assets, capital

capital pros/cons

PROS	CONS
no set repayment no interest charge	limited to resources of owner increased personal risk

(internal finance)

retained earning pros/cons

PROS	CONS
no set repayment no interest	limited to previous profits (may not exist)

(internal finance)

external finance

funds generated outside the business - liabilities

term loans pros/cons

PROS	CONS
secured loan = lower interest makes purchase of $$ assets possible	requires business commitment principal + interest repayments put pressure on cash flow

a form of external finance provided by banks and other lenders for a specific purpose and repaid over time

trade credit (becomes an account payable) pros/cons

PROS	CONS
immediate access to goods + services gives business time to generate sales before payment	trade credit only used for purchases w/ that supplier short repayment period

a form of external finance offered by some suppliers, which allows customers to purchase goods/services and pay at a later date

leasing pros/cons

PROS	CONS
reduces initial outlay allows assets to be updated	no ownership of A requires commitment

a written agreement that grants to the lessee the right to use a particular asset for a specified period of time in return for periodic payments to the lessor

lessee = person applying for lease

bank overdraft pros/cons

PROS	CONS
readily accessible flexible	high interest can be recalled at short notice

an external source of finance provided by a bank that allows the account holder to withdraw more than their current account balance

guidelines for seeking finance

• term of finance should match life of asset

• cost of interest must be considered

• debt ratio - can the firm borrow further?

what does the lender look for when applying for a lease?

• amt and purpose

• business details (ownership structure, future goals etc)

• financial statements + credit rating

• deposit + security

recommended retail price

price suggested by manufacturer