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Accounting terms Flashcards

1
Q

Ethical considerations

A

When a business considers the consequences of a decision on the environment and its various stakeholders. Decision makers have a moral obligation to act with honesty and integrity in all human and financial dealings.

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2
Q

Assets

A

A present economic resource controlled by the entity that has the potential to produce a future economic benefit within 12 months or for longer than 12 months

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3
Q

Liabilities

A

A present obligation of the entity that will result in the transfer of an economic resource within 12 months or after 12 months

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4
Q

Owner’s Equity

A

The residual interest in the assets of the entity after deducting all its liabilities. The amount left over for the owner.

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5
Q

Balance Sheet use

A

Being able to identify the assets, liabilities and owner’s equity of the business as at a point in time in order to assist in planning and decision making, such as assess liquidity, assess stability and assess value of non-current assets

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6
Q

Going Concern Assumption

A

Financial reports are prepared on the assumption that the existing entity will continue to operate into the future and records are kept on this basis

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7
Q

Accounting Entity Assumption

A

The records of the entity are to be kept completely separate from those of the owner of the entity as well as from those of other entities. A separate set of accounting records is maintained for each entity

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8
Q

Accrual Basis Assumption

A

Revenue is recognised when earned and expenses are recognised when incurred regardless of whether cash has been received or paid so that an accurate profit or loss can be calculated

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9
Q

Period Assumption

A

Reports are prepared for a particular period of time such as a months or a year, in order to obtain comparability of results

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10
Q

Relevance

A

Relevance states that reports must include all information that is capable of making a difference to the decisions made by the users of the report and exclude information that is not.

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11
Q

Faithful Representation

A

The information reported must be a faithful representation of the real-world economic event it represents, be complete, free from material error and without bias

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12
Q

Verifiability

A

Verifiability means that knowledgeable and independent observers can reach a conclusion that reports faithfully represent what they are intended to represent as they are based on verifiable source documents that can be checked through the auditing process.

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13
Q

Comparability

A

Comparability states that reports should be able to be compared period to period and business to business

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14
Q

Timeliness

A

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions

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15
Q

Understandability

A

Understandability requires that information be comprehensible to users with reasonable knowledge of business activities and therefore should be presented clearly and concisely in reports

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16
Q

Liquidity

A

the ability of the business to meet its short-term debts as they fall due

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17
Q

Working Capital Ratio

A

A liquidity indicator that measures the ratio of current assets to current liabilities to assess the firm’s ability to meet its short-term debts as they fall due

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18
Q

Working Capital Ratio equation

A

CURRENT ASSETS/CURRENT LIABILITIES = RATIO

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19
Q

Stability

A

Ability of the business to meet its debts and continue its operations into the future

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20
Q

Debt Ratio

A

Measures the proportion of a firm’s assets that are funded by external sources

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21
Q

Debt Ratio Equation

A

(TOTAL LIABILITIES/TOTAL ASSETS) 100 = %

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22
Q

Sole Proprietorship

A

Owned and operated by a single individual in their name or a business name. Owner pays tax on their profit.

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23
Q

Sole Proprietorship advantages

A

The owner receives all profits and has complete control over decision making. Easy and cheap to set up and easy to sell or close down

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24
Q

Sole Proprietorship disadvantages

A

Owner has unlimited liability and limited access to capital, skills/knowledge/ideas → can only call on owner’s expertise
Heavy workload, stress, hours, etc

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25
Q

Unlimited liability

A

Owner is personally responsible for all debts and losses therefore can lose personal assets (home, car, etc. if placed under OWN name)

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26
Q

Limited Liability

A

Shareholders have no responsibility for liabilities or losses of the company and personal assets are safe

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27
Q

Partnership

A

Owned by 2-20 people and is governed by a partnership agreement. Each partner earns a share of profits or losses and pays tax individually

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28
Q

Partnership Advantages

A

Easy and cheep to set up with greater access to capital, skills, knowledge, ideas and ability to take advantage of the Tax Free Threshold by splitting income

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29
Q

Partnership Disadvantages

A

Unlimited liability, shared decision making may lead to conflict and a partnership also has a limited life

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30
Q

Proprietary Company

A

A separate legal entity with between 1 and 50 stakeholders that pays tax in its own name at a 30% fixed rate

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31
Q

Proprietary Company Advantages

A

Has limited liability, greater access to capital and knowledge and exists in perpetuity (continues even when shares are bought and sold)

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32
Q

Proprietary Company Disadvantages

A

High establishment costs and high ongoing/annual accounting and compliance costs alongside a higher level of government regulation

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33
Q

Public Company

A

A separate legal entity with unlimited shareholders that is listed on the Australian stock exchange.

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34
Q

Public Company Advantages

A

Limited liability with greater access to capital (millions of dollars) and knowledge, exists in perpetuity and pays tax in its own name at 30% tax rate

35
Q

Public Company Disadvantages

A

Establishment costs are high and need to issue a public prospectus.
Ongoing/annual accounting and compliance costs are high and under a higher level of government regulation. Business is also required to have an audit undertaken which is costly.

36
Q

Internal sources of Finance

A

Capital contribution, retained earnings

37
Q

External Sources of finance

A

Trade credit, Bank overdraft, Term loan, Leasing

38
Q

Capital contribution

A

Funds contributed by the owners

39
Q

Retained earnings

A

Past funds generated by the business

40
Q

Trade credit

A

Buying goods on credit so a business can generate sales before paying for goods but can only be used to purchase inventory from suppliers

41
Q

Bank overdraft

A

Facility provided by the bank whereby they allow a business to withdraw more than the funds they have available in the account

42
Q

Term loan

A

Bank lends for a major purchase in which principal and interest is then repaid over a term

43
Q

Leasing

A

A form of rental agreement in which a business have use of an asset but do not own it and makes monthly payments

44
Q

Goods and Services Tax

A

GST is a 10% tax levied by the federal government on sales of most goods and services

45
Q

RIPD

A

Receiving GST increases the amount owing, and Paying GST decreases balance

46
Q

Return on Owner’s Investment

A

profitability indicator that measures how effectively a business has used owner’s capital to earn profit

47
Q

Return on Owner’s Investment Equation

A

Net Profit/Average owner’s equity X100 = %

48
Q

Strategies to Improve Return on Owner’s Investment

A

Increase Net profit by increasing sales or decreasing expenses. Decrease average owner’s equity by increase drawings to lower owner’s equity

49
Q

Source Documents

A

Source documents are printed or electronic documents that provide evidence that a transaction has occurred

50
Q

Cash receipt journal

A

records all money received

51
Q

Cash payments journal

A

records all money paid

52
Q

Advantages of preparing a cash journal

A

Summarises all similar transactions for a period of time into meaningful columns in one journal and cross checking mechanism

53
Q

Disadvantages of preparing a cash journal

A

Time and cost as preparation may need a professional which costs money

54
Q

Cash Flow Statement

A

Reports all cash flows during a period from operating, investing and financing activities and calculates the change in the bank balance during the period

55
Q

Operating activities

A

Cash sales, interest received, GST received, GST refunded, receipts from accounts receivable, cash expenses, expenses, GST paid, GST settlement, payments to Accounts payable

56
Q

Investing Activities

A

Purchases and sales of non-current assets

57
Q

Financing Activities

A

loans received, cash contribution, loans repaid, cash drawings

58
Q

Benefits of Preparing a cash flow statement

A

Aid decision-making about the firm’s cash activities, assist in planning for future activities and assess whether or not the business is meeting its cash targets.

59
Q

Cash Flow Cover

A

A liquidity indicator which measures the ability of a firm to pay short term debts out of operating cash flows

60
Q

Cash Flow Cover Equation

A

Net Cash Flow from Operations/average current liabilities

61
Q

Strategies to improve CFC

A

Improve cash flow from operating activities by reducing cash expenses or increasing cash sales and reducing average Liabilities

62
Q

Internal Control Procedures

A

Policies and procedures designed to protect the firm from fraud, loss and theft

63
Q

Separation of Duties

A

split the responsibility for receiving cash and recording the cash in the cash journals

64
Q

Rotation of Duties

A

rotate staff between jobs to help identify irregularities by the previous person

65
Q

Careful Hiring Practices

A

check references & carefully assess new staff for honesty and integrity

66
Q

Physical/Preventative Safeguards

A

security cameras, alarm systems, safes

67
Q

Cash Controls

A

use pre-numbered source documents, verify balance of cash register against the cash register roll, bank cash daily and change banking procedures regularly to avoid predictable behaviour

68
Q

Credit Transactions

A

When a service is performed or goods are exchanged but the cash relating to the transaction is not exchanged until a later date.

69
Q

Accounts Payable

A

A supplier who is owed a debt by the business for goods or services purchased from them on credit

70
Q

Accounts receivable

A

A customer who owes a debt to the business for goods or services sold to them on credit

71
Q

The Income Statement

A

an accounting report which summarises revenues earned and expenses incurred during the reporting period

72
Q

Revenue

A

Increases in assets (or decreases in liabilities) that result in increases in owner’s equity, other than capital contributions from the owner

73
Q

Expenses

A

Decreases in assets (or increases in liabilities) that result in a decrease in owner’s equity, other than those relating to drawings by the owner

74
Q

Use of the Income Statement

A

Aids decision making and planning by evaluating revenues, expenses and profit and allows the owner to identify where changes may be necessary to take corrective action and improve

75
Q

Items which affect Cash Flow but not Profit

A

GST, Receipts from Accounts Receivable, Payments to Accounts Payable, Cash purchase or sale of a Non-current asset, Loans received, Loan repayments, Capital contributions, Drawings

76
Q

Calculate bank for the balance sheet

A

OB + cash recipts - cash payments = CB

77
Q

Calculate inventory for the balance sheet

A

OB + cred purch of inventory (No GST) + cash purch of inventory (No GST) + contribution of inventory - inventory consumed - drawings = CB

78
Q

Calculate Accounts receivable for the balance sheet

A

OB + credit sales - receipts from accounts receivable = CB

79
Q

Calculate Equiptment for the balance sheet

A

OB + purchase (no GST) + contribution - drawings = CB

80
Q

Calculate GST for the balance sheet

A

OB + GST received on cash sales + GST charged on credit sales + GST refund - GST paid on cash - GST charged by suppliers - GST settlement = OB

81
Q

Calculate Accounts Payable for the balance sheet

A

OB + Credit purch - payments to accounts payable = CB

82
Q

Calculate Bank loan for the balance sheet

A

OB + new loan - loan repayments = CB (split C and NC)

83
Q

Calculate Owner’s equity for the balance sheet

A

OB + Net profit + capital contribution - drawings = CB

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