Unit 2 Accounting & Trading Firms – Key Points (Last-Minute Review)

Five categories of financial accounts: Assets, Liabilities, Owner’s Equity, Revenues, Expenses.
Asset definition: present economic resource controlled by the entity from past events with potential for future benefits.
Liability definition: present obligation to transfer an economic resource resulting from past events.
Owner’s Equity: residual interest after liabilities are deducted; equals Assets − Liabilities.
Revenues: increases in assets or decreases in liabilities that increase Owner’s Equity (other than owner contributions).
Expenses: decreases in assets or increases in liabilities that reduce Owner’s Equity (except Drawings).
Key equation: \text{Assets} = \text{Liabilities} + \text{Owner's Equity}
Rearranged: \text{Owner's Equity} = \text{Assets} - \text{Liabilities}

Present economic resources controlled by the entity from past events with future benefits.
Examples: Cash at bank, Inventory, Accounts Receivable, Vehicles, Equipment, Furniture, Fixtures & Fittings, Machinery, Building.
Current vs non-current not explicitly defined here, but Inventory is a Current Asset as it is held for resale within 12 months.

Present obligation to transfer an economic resource.
Examples: Bank overdraft, Accounts Payable, Loan, Mortgage, Accrued Expenses (e.g., wages, utilities).
A liability implies an obligation to pay or transfer resources in the future.

Residual interest after liabilities are deducted.
Components: Capital (owner’s contributions), Net profit/loss, Drawings (owner withdrawals).

Revenues: increases in assets or decreases in liabilities that increase Owner’s Equity, e.g., cash/credit sales, service fees, interest revenue.
Expenses: decreases in assets or increases in liabilities that reduce Owner’s Equity, e.g., Cost of Sales, Advertising, Wages, Rent, Utilities.

Purchases inventory from suppliers for resale at a higher price.
Cost Price (CP) = price paid to acquire inventory; Selling Price (SP) = price at which inventory is sold.
Profit per unit = \text{SP} - \text{CP}.
Inventory is a key asset and must be managed/monitored.
Trading Firms vs Service Firms:
- Trading Firms hold/inventory physical goods; Service Firms provide intangible services.
- Inventory needs storage and controls; services are not stored.

Inventory = goods purchased for resale by a trading firm.
Importance: (1) primary revenue source; (2) significant balance sheet asset.
Inventory is classified as a Current Asset.
Current Asset: present economic resource controlled by the entity, expected to be sold, consumed or converted into cash within 12 months.

Two purchase methods: Cash purchases or Credit purchases.
Cash purchase: pay and receive inventory at purchase; affects Inventory (up) and Cash (down).
Credit purchase: supplier allows payment later (Accounts Payable); Inventory up; Accounts Payable up; GST liability adjustments as applicable.
Accounts Payable: amounts owed to suppliers for inventory purchased on credit.

Two sale methods: Cash sales or Credit sales.
Cash sale: receive cash at sale; Inventory down; Cost of Sales (expense) recognized; Cash up; GST liability up; Sales revenue up.
Credit sale: customer pays later; Inventory down; Accounts Receivable up; Cost of Sales recognized; GST liability up; Sales revenue up.
Cost of Sales = cost price of inventory sold; Sales revenue = selling price of inventory sold.

A balance sheet shows financial position at a date.
Two-fold effect: every transaction affects at least two items on the balance sheet.
With GST, at least three items may be affected.

Structure: Current Assets, Non-current Assets, Current Liabilities, Non-current Liabilities.
Balance Sheet reports financial position at a point in time.
Fundamental equality: \text{Assets} = \text{Liabilities} + \text{Owner's Equity}

Purchasing Inventory for cash (example): Inventory increases; Cash decreases; GST liability decreases (if GST paid).
Purchasing Inventory on credit (example): Inventory increases; Accounts Payable increases; GST liability affected accordingly; no immediate impact on Owner’s Equity.
Selling Inventory for cash: Inventory decreases; Cost of Sales increases; Cash increases; GST liability increases; Sales revenue increases.
Selling Inventory on credit: Inventory decreases; Accounts Receivable increases; Cost of Sales recognized; GST liability increases; Sales revenue increases.

11.1: Identify which assets would be classified as inventory for various businesses; determine classifications.
11.2: Determine the effects on the accounting equation for specified inventory transactions.

Identify, define and explain the accounting elements: Assets, Liabilities, Owner’s Equity.
Explain the operations of a trading business.
Explain the importance of inventory to a trading business.
Define and classify inventory.
Explain the ‘two-fold effect of transactions’.
Show the ‘two-fold effect of transactions’ for a trading firm using a worksheet.