1. Purposes of Accounting and Accounting Framework Flashcards
According to the Australian Bureau of Statistics, a small business employs…
less than 20 people
What are the 3 types of businesses?
- Manufacturing
- Service providing
- Trading/Retailing/Merchandising
Manufacturing
Characteristics
Examples
Purchase raw materials or components and convert them into products for sale
Manufacturer normally sells goods it makes to retail outlets or sometimes directly to customers
e.g. holden, wine producer, chocolate manufacturer
Service Providing
Characteristics
Examples
Provide a service to customers
e.g. Ace cinema, Telstra, plumber, accounting firm
Trading/Retailing/Merchandising
Characteristics
Examples
Purchase stock and resell it at a higher price
e.g. Bunnings, Coles, Harvey Norman
Types of Business can be divided into 2 parts. What are they?
Number of owners
Industry/What they do?
Describe Number of Owners.
Sole Trader
1
Partnership
2-20
Company
shareholders
What is another name for income statement?
Profit and loss statement
What is another name for balance sheet?
Statement of financial position
What does the income statement provide information on?
Provides information about the performance of the business by providing information on the profit or loss it has achieved for a particular period of time
income
profit/loss
expenses
Describe the usefulness of the income statement
- if the owner wants someone to invest in the business, he will have to show that the business is profitable
- management needs to know how the business is performing to make decisions about how to allocate resources and where to cut expenses
What does the balance sheet provide information on?
shows the financial position of the business
represents information at a particular point in time which states the level of business financial stability
Describe the usefulness of the balance sheet
- a variety of stakeholders can make decisions about their investment in the business
Any potential lenders/investors can get info on the following:
- How much finance has been invested in the business?
- Is the business overindebted?
- Can the business meet its financial obligation?
- What kind of assets does the business have?
assets, liabilities, equity
Why is cash flow important?
If the business doesn’t have enough cash, it cannot pay its liabilities and expenses. If business cannot pay owner, it may have to close
What is liquidity?
The ability of the business to meet its debts as they fall due in short term, generally within 12 months
Working Capital= …
If figure positive,
If figure negative,
Working Capital = current assets - current liabilities
Working Capital = CA - CL
If figure is positive,
business has more CA than CL so business can pay of its debts
If figure is negative,
there’s a risk that short term creditors may not get paid, business may need to liquidate (close)
What are assets?
What is a CA?
Give examples of CA
What is NCA?
Give examples of NCA
Assets- resources in a business
CA- resources that are likely to be consumed or converted into cash in 12 months or less
Cash at bank
Debtor/Accounts receivable
GST credit
prepaid expenses
stationery supplies
inventory/stock
term deposits (matures less than 12 months)
NCA- resources that will be used in the business for more than 12 months
Motor Vehicle
Land/Building
Office furniture
What are liabilities?
What is a CL?
Give examples of CL
What is a NCL?
Gives examples of NCL
Liabilities- money or service owing by a business
CL- amount due by the business that will be paid in 12 months of less
GST payable
Bank overdraft
creditors/accounts payable
accrued expenses
expenses due
NCL- amount due by the business that will be repaid in more than 12 months
mortgage
bank loan
Explain the two types of income?
Revenue- the income from the day-to-day operations of the business
a business earns a revenue by selling goods or by rendering a service to customers
Gain- a profit on the sale of a NCA
What is equity?
Equity is the value of resources invested by the owner into the business
The owner can bring:
- cash
- non-current assets
What is an expense?
A business incurs an expense when in buys goods or when it uses a service
