accounting

Going concern assumption

the assumption that the existing entity will continue to operate in the future, and its records are kept on that basis.

Accrual basis assumption

the assumption that 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.

Period assumption

The assumption that all reports are prepared for a particular period in order to obtain comparability between results. The maximum period length is 12 months for taxation purposes.

Qualitative characteristics

the qualities of the information in financial reports

Relevance

states financial information must be capable of making a difference to the decisions made by users by helping them to form predictions and/or confirm or change their previous evaluation.

Faithful representation

states financial information should be a faithful representation of the real-world economic event it claims to represent: complete, free from material error and neutral (without bias).

Verifiability

states financial information should allow different knowledgeable & independent observers to reach a consensus (agree) that an event is faithfully represented. Verifiability is maintained by retention of source documents used to record the transaction and checked through auditing.

Understandability

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

Comparability

states financial information should enable users to identify and understand similarities in and differences among items when compared with similar information about other entities, and with similar information about the same entity for another period or date.

Timeliness

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

Asset

a present economic resource controlled by an entity as a result of past events.

Liability

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

Owner’s equity

the residual interest in the assets of the entity after the liability is deducted. 

Revenue

transactions that either lead to an increase in assets or a decrease in liabilities & overall work to increase the owner’s equity of a business. (Excluding capital contributions).

Accounting entity assumption

the assumption that 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.

Expenses

transactions that either lead to a decrease in assets or increase in liabilities & overall work to decrease the owners equity of a business. (Excluding drawings).

Classification

grouping together items that have some common characteristic.

Current asset

a present economic resource controlled by an entity as a result of past events that is reasonably expected to be converted to cash, sold or consumed within the next 12 months.

Non-current asset

a present economic resource controlled by an entity as a result of past events that is not held for resale and is reasonably expected to be used for more than the next 12 months.

Current liability

a present obligation of an entity to transfer an economic resource as a result of past events that is reasonably expected to be settled within 12 months.

Non-current liability

a present obligation of an entity to transfer an economic resource as a result of past events that is not required to be settled within 12 months.

Reporting period

The ongoing life of the business is broken into regular intervals of time for the preparation of financial reports.

Profit

Revenue earned (not necessarily received in cash) less expenses incurred (not necessarily paid in cash) over the reporting period.

Accounting Assumptions

Period (Reporting period) Accrual basis Going concern Entity

Qualitative Characteristics - ABBREVIATION

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Stakeholders

Refers to individuals & organisations that are interested in the financial performance of the business. E.g. owner, ATO, accountants, business advisors, potential owners, employees, accounts payable/creditors.

Footing

Refers to an informal process that can occur at any time used to determine the balance of a ledger account. Before the Trial Balance can be prepared, each ledger account must be ‘footed.’

Balancing

Refers to ruling off an asset, liability or owner’s equity account to determine its balance at the end of the current period & transferring that balance to the next period.

Financial information

Financial data that has been sorted, classified & summarised into a more usable & understandable form to help stakeholders make business decisions. Expressed in dollars & cents.

Financial data

Refers to the raw facts & figures on which financial information will be based.

Non-financial information

Relates to any information that cannot be found in financial statements and is not expressed in dollars and cents, or reliant on dollars and cents for its calculation. An example of this could be the level of carbon emissions emitted by a business.

Tax Invoice

A source document that contains specific information required by the ATO to substantiate GST amounts. The source document used to verify a transaction involving the GST is a tax invoice.

Narration

A brief description of a transaction recorded in the General Journal, including a reference to the relevant source document.

Cash receipt

A source document used to verify cash received cash receipt.

EFTPOS (Electronic Funds Transfer Point of Sale)

An instant electronic transfer of cash from a customer’s debit or credit account to the business’s bank account at the time of sale.

Trial balance

Refers to a list of all the accounts in the General Ledger, & their balances, to determine if total debits equal total credits.

Goods and Services Tax (GST)

A 10% tax levied by the federal government on most purchases of goods (Excluding fresh food) & services. Under the GST, the federal govt charges consumers a tax of 10% of the price of whatever they have purchased. It is the duty of each business to collect GST on behalf of the ATO.

General Journal

An accounting record used to analyse & record each transaction, and to identify its source document before posting to the General Ledger.

Explain an advantage & a disadvantage of using double-entry accounting.

Pro: The Trial Balance checks on the accuracy of the double entry recording process. This works to improve the accuracy of the recording process which is reflected in the reports used by stakeholders to assess business performance.

Con: Double entry recording requires more skill & is more time consuming which may work to increase administration expenses compared to other alternatives. It can be tedious.

GST refund

A cash receipt from the ATO to settle a GST asset from a previous period.

GST receivable

GST owed to the business by the ATO when the amount of GST the business has paid to its suppliers is greater than the GST it has received on its fees.

Accounts Payable

A supplier from whom goods (usually inventory) or services have been purchased on credit and the amount is still owing for those purchases (also called a creditor).

Credit terms

Information that details how many days a business has to pay for a credit transaction & any applicable settlement discount.

Purchase returns

The return to a supplier (Accounts Payable) of inventory bought on credit.

Purchase invoice

Source document used to verify a credit purchase of inventory or other items.

Credit note

A source document that verifies the return of inventory.

Settlement discount

A reduction in the amount paid by a credit customer in return for early repayment.

Discount revenue

A revenue in the form of a decrease in liabilities (Accounts Payable) and an increase in OE earned when Accounts Payable are paid early and a settlement discount is given by the supplier.

Benefits of discount revenue

Less cash is paid to Accounts Payable, meaning some chas is retained to make other payments such as wages or other expenses.

Net profit is increased as the discount earned is revenue.

Costs of discount revenue

Cash is paid to AP faster, meaning there may be less time to generate cash from sales.

Cash is unavailable to make other payments such as wages or other expenses.

Credit transaction

A transaction that involves an exchange of g/s on one date, followed by the exchange of cash at a later date.

Credit purchase

A transaction that involves the buying inventory on credit, with the exchange of the inventory on one date, followed by the exchange of cash at a later date.

Accounts Payable Turnover (APTO)

The average number of days it takes for a business to pay its Accounts Payable.

Statement of Account

A summary of the transactions a business has had with a particular Account Payable (or Account Receivable) over a certain period of time (usually a month).

Strategies to manage Accounts Payable

Develop a strong relationship with each supplier

Pay within, but as close as possible to, the credit terms

Pay early to earn discount revenue (if available & affordable)

Check each Statement of Account against the Accounts Payable ledger account

Appoint an Accounts Payable Officer/Clerk

Consider non-financial information

Communicate in a timely fashion

Liquidity

The ability of a business to meet its short-term debts as they fall due.

Order confirmation

A document issued by the supplier confirming the receipt of an order (for inventory).

Delivery docket

A document issued by the supplier to accompany a delivery, listing the type and quantity of all items delivered.

Order form

A document issued by a business requesting the supply of inventory or other goods.

Commencing entry

Refers to a General Journal entry to establish double-entry records by entering existing asset, liability and owner’s equity balances in the ledger accounts.

Fair value

The price of an asset contributed by the owner that would be received if that asset was sold at the time it was acquired by the business.

Memo

An internal source document used to verify a transaction that does not involve cash and is not a sale, purchase or return of inventory.

Ethical Considerations

Ethical considerations are the social & environmental consequences of financial decisions.