4.8 Establishing record-keeping strategies Flashcards
Why is maintaining accurate records essential for a business, and how do these records impact decision-making, investment, and loan opportunities?
Maintaining accurate records is not only an obligation of the business, but also serves as an invaluable tool for decision-making. Without accurate records, an owner has a restricted understanding of how the business is performing and where improvements need to be made. Furthermore, investors and financial institutions are unlikely to invest in or make loans to a business that cannot demonstrate its financial position.
What are the legal requirements for businesses in Australia regarding the retention of financial records, and what types of documents must be kept? Why is it important for businesses to back up and secure their electronic records?
Businesses are required by law to keep records of their financial transactions for at least five years for tax purposes. This includes all documents relating to income and expenses such as tax invoices, receipts and bank statements, as well as other important documents such as employee contracts. While the Australian Taxation Office (ATO) allows businesses to keep all such information electronically, it is important that businesses keep their electronic information backed up and secure
what is source documents?
written documents that provide evidence of a financial transaction
What are source documents in the context of a business, and why are they important for the production of financial reports?
Provide examples of common source documents that a business might generate and retain.
When established, a business will engage in a variety of financial transactions, all of which can be recorded on paper and electronically. Cash register dockets, credit card or EFTPOS vouchers and purchase invoices are all examples of these records. As well as handing these to a customer (either physically or electronically), a business will keep a copy, and it is these copies that are used to produce the financial reports. Original paper documents recording transactions are known as source documents. Source documents are essential for the business owner as they provide the basic data necessary for the ultimate production of financial reports.
What are the common features typically found in source documents across different businesses, and why are these features important for accurately recording financial transactions?
The type and format of source documents will vary between businesses, reflecting the differences in operation. There are common features in most records, however, including:
-the date the transaction occurred
-the names (and addresses if applicable) of the parties involved
-the nature of the transaction
-the amount of money involved.
What is the purpose of journals in business accounting, and how do they assist in the preparation of financial reports?
Businesses record the information from these documents into journals. This allows the business to keep a chronological summary of all transactions to assist in the preparation of financial reports. Cash received by a business is recorded on the duplicates of receipts issued to those from whom the cash has been received.
what is a cash receipt journal?
The journal that summarises this data is known as the cash receipts journal.
what is a cash book?
Payments that a business makes will be recorded in the cash payments journal. When these two journals are combined, it is known as a cash book.
provides a summary of all the business’s cash receipts and cash payments; it is compiled from the receipt and payment source documents.
What are the main benefits of having a cash book?
The main benefit of using a cash book is that it allows the business owner to:
-keep a tight control on the cash
-monitor the business’s cash-flow position — that is, the money coming into the business and the money leaving the business
-determine the cash balance.
what is an income statement?
used primarily to help a business calculate how much profit it has made over a period of time
What is the purpose of an income statement in a business, and how does it help measure the success of the business in trading?
A business earns income by selling a good or service to its customers. To measure how successful a business is at trading, a financial report called an income statement is drawn up. The income statement (also called the revenue statement or the profit and loss statement) is used primarily to help a business calculate how much net profit it has made over a period of time.
What does an income statement show?
The income statement shows:
- the amount of income or revenue earned
- the costs or expenses incurred in earning that revenue
- whether a profit or a loss has been incurred in the period under review.
What is the main difference between the income statements of a trading business and a service business, and how does this difference affect the calculation of net profit?
The income statement for Globe International shows how expenses are deducted from revenue to determine net profit. This income statement is for a trading business (a business that purchases goods from suppliers and then sells them at higher prices to customers). Service businesses (ones that provide a service) do not calculate cost of goods sold (and therefore do not show gross profit).
What are the three key steps in completing an income statement, and how do these steps lead to the calculation of net profit for a business?
The first step in completing an income statement is to record the revenue, which is the income earned by a business. A café, for example, earns revenue by selling food and drinks, whereas Globe International earns money from selling apparel. The second step is to record the cost of goods sold, which is the money spent on purchases of raw materials or finished goods for resale, and to use this figure to calculate gross profit. The gross profit/loss is the amount remaining when the cost of goods sold is deducted from revenue. The third step is to calculate net profit. To earn revenue, a business will have a variety of expenses. Common expenses include wages and salaries, payments for telephone, electricity, postage, motor vehicle expenses and so on. A net profit/loss is the amount remaining when operating expenses are deducted from gross profit. The word ‘net’ means all expenses have been deducted.
How can the owner of a business utilize the profits generated, and what are the implications of each option for the growth and sustainability of the business?
For the owner of a business, profit represents a return on the contribution they have made to the business in terms of both labour and funds. The owner can either withdraw profits from the business as a reward for taking the risk of running the business or reinvest the profits within the business so that the business grows.
