Accounting Flashcards
Accounting
Accounting is the collection, recording and reporting of financial information to assist businesses in making decisions.
Stages of accounting
Stage 1: Documents
Stage 2: Recording
Stage 3: Reporting
Stage 4: Analysis and Advice
Internal users of accounting
Owners, managers and employees
external users of accounting
banks, shareholders, ATO, Suppliers and regulatory bodies
What is the Accounting Equation
Assets = Liabilities + Owner’s equity
Assets
assets are a resource, controlled by the business, from which future economic benefits are expected to flow
liabilities
Liabilities are present obligations of the business to transfer an economic resource to another entity
Current Assets
Are resources controlled by the firm, which are expected to provide an economic benefit when: consumed or sold or converted into cash within 12 months
Non-Current Assets
Are resources controlled by the firm, which are expected to provide an economic benefit for a number of years and are not held for resale
current liabilities
are present obligations to transfer an economic resource with a settlement expected within the next 12 months
Non-Current liabilities
financial obligations of a company that are not expected to be settled within one year.
Balance sheet
An accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owner’s equity.
Needs to include:
- the name of the company
- the title of the report “balance sheet”
- the date of when the balance sheet is: use “as at”
- All Assets
- All Liabilties
- Owner’s equity
Liquidity
the ability of a business to meet its short- term debts as and when they fall due
what is working capital ratio
The working capital ratio assesses whether the business has enough current assets to cover its current liabilities.
Working capital ratio = Current Assets/Current Liabilities
If the working capital ratio is 1:1 or above the liquidity is satisfactory and if it is below 1:1 the liquidity is unsatisfactory. be careful for benchmarks though
How Answer a Question:
The WCR is less than / greater than 1:1. This means that the firm has (insert $ value) in current assets to repay every $1 in current liabilities. Therefore, it should be able / may not be able to meet its short- term debts as they fall due. The firm’s liquidity is satisfactory / unsatisfactory.
How do you write a balance sheet
- label name of company and then “as at”
- Fill in all of the assets, liabilities and Owners Equity
- calculate total of both - they should equal each other
Owner’s equity
Residual (left over) interest in the assets of the firm after liabilities are deducted
Stability
the ability of the firm to meet its debts and continue its operations in the long term.
Debt Ratio
Assesses the proportion of the firm’s assets that are funded by the external finance
Formula: Total liabilities/Total Assets x 100
How to answer question:
The debt ratio of (insert %) means that (insert %) of the firm’s assets are funded by external finance. This is satisfactory / unsatisfactory as it is lower / higher than (insert benchmark of __%). The firm’s stability is positively / negatively impacted because it should be able / may not be able to meet its debts and continue operations in the long term.
Statement of Receipts and Payments
Statement of Reciepts and Payments is a financial report that provides a summary of a firm’s receipts and payments over a stated period of time. This provides the owner with information to check if there is a cash deficit of a surplus at the end of the month.
Cash surplus
When the Cash recieved is greater than the cash paid during this period: This increases the business’ bank balance
Cash deficit
When cash recieved is less than the cash paid during the period: This decreases the business’ bank balance
Budget
A financial plan that sets out the expected transaction for future accounting periods
Cash Budget
An accounting apart which predicts future cash receipts and payments, determines the expected cash surplus or deficit and estimates the bank balance at the end of the budgeted period
Cash budget variance report
An accounting report which compares actual and budgeted cash flows, highlighting variances so that problems can be identified and corrective action taken.
