Cash accounting Flashcards
Single entry accounting system
A system that allows financial data to be sorted, classified and recorded so that financial information needed to complete accounting reports (such as a balance sheet) can be generated.
Service business
e.g
A small business that operates by providing its time, labour or expertise in return for a fee.
(e.g accounting firms, hairdressers)
Cash
The business immediately receives or makes payment for the transaction that just occurred
Credit
Payment is not made until a later date
Journal:
An accounting record that classifies and summarises transactions during a particular reporting period (Journals are key tools in any single entry system)
Cash receipts journal
Accounting record that summarises all transaction where cash is received from other entities during a particular reporting period.
Cash payments journal
Accounting record which classifies and summaries all transactions where cash is paid to other entities during particular reporting period.
Common errors in cash journals
credit transactions are not recorded
Contributions of owner (other than cash) are not recorded
Drawing of assets (other than cash) not recorded
A statement of receipts and payments
Is a report that summarises the financial information that has been sorted, classified and recorded in cash journals
Opening bank balance
The figure represents how much cash was available in the business’s bank account at the start of the reporting period
Closing bank balance
The figure represents how much cash should be available in the business’s bank account at the end of the reporting period
Cash surplus
An excess of cash receipts over cash payments, leading to an increase in a positive bank balance or a decrease in bank overdraft
Cash deficit
An excess of cash payments over cash receipts leading to a decrease in bank balance or an increase in bank overdraft
Advice for cash deficit/ low closing bank balance
- Effective advertising to boost cash fees/sales
- Reduce loan repayments
- Reduce drawings
- Purchase more inventory of supplies using credit facilities
- Ask the owner to make a cash capital contribution
- Borrow cash from a bank (a loan)
- Organise a bank overdraft facility
Advice for a cash surplus/ high closing bank balance
- Higher loan repayments to reduce debt
- Owner can take greater drawings in cash from the business
- Upgrade/ purchase newer non-current assets
- Expand the businesses operations or open a new store in a new location
GST:
Goods and service tax
A 10% tax levied by the federal government on sales of goods and services
GST Received
GST received from customers on cash transactions
GST paid
GST paid by the business to suppliers on cash transactions
What is GST payable?
What is it classified as?
GST owed by the business to the ATO when the amount of GST the business has received on its fees is greater than the GST it has paid to its suppliers
Current liability
What is GST receivable?
What is it classified as?
GST owed to the business by the ATO when the amount of GST the business has paid to its suppliers is greater than the GST it has received from customers.
Current asset
GST settlement:
A payment made to the ATO by the business to settle GST payment (cash payment)
GST Refund:
A cash receipt from the ATO to clear GST receivable (cash receipt)
GST payable / GST receivable
Opening balance of GST: \+ GST received from customers - GST paid to suppliers \+ GST refund (to settle previous GST payable) OR -GST settlement (to settle previous GST paybale) = GST balance
How to calculate profit:
Profit = revenue - expenses
What is revenue?
An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for capital contribution)
What is an expense?
A decrease in assets (or increase in liabilities) that reduces owner’s equity (except for drawings
Income statement:
An accounting report that details the revenue earned and expenses incurred during the reporting period
How to set up owner’s equity on a balance sheet?
Owner’s equity:
Capital $____
Plus net profit / less net loss $_____
Less drawings $_____. $_______
Net profit margin
(Net profit / net sales) x 100
How to evaluate NPM
1) Past performances (helps determine trends)
2) Industry averages
3) Budgeted performance/ targets or KPIs
How to improve NPM
1) Effective advertising that will boost sales by a greater amount than spent on advertising
2) Renegotiate with existing suppliers to secure a cheaper price for supplies
3) Change suppliers to excess a cheaper price for supplies/materials
4) Buy materials in bulk in order to access a discount marking materials
5) Review staff rostering in order to minimise wage expense
6) Improve service delivery in order to build positive word of mouth in the market which boosts sales
Cash payments that are not expenses
examples and effect
Therefore contribute to cash deficit and not effect net profit
Cash drawings
Loan repayments
Cash purchase of non-current assets
GST settlement
Cash recipets that are not revenue
Examples and effect
Therefore contribute to a cash surplus and not effect/prevent net loss
Capital contribution
Loan received
GST received
GST refund
Structure for (explain a net profit whist cash deficit) and (explain a net loss whilst cash surplus)
Cash and profit are two different measures of performance
Net profit is revenues earned minus expenses incurred, whilst net cash is cash receipts minus cash payments. There are some items that will impact net profit but not net cash and vice versa.
One example is…
Another example is…
(e.g: Capital contribution of $4000 as this is a cash receipt that has contributed to net surplus however is not classified as revenue and therefore would not have the same positive impact on the net loss.)
Return on assets
(net profit/total average assets) x 100
Average total assets
(Total assets at start + total assets at end) / 2
Is a higher return on assets better or lower?
Higher return on assets
indicates efficient use of the businesses assets to earn profit
How to improve return on assets?
Same as improving net profit:
1) Effective advertising that will boost sales by a greater amount than spent on advertising
2) Renegotiate with existing suppliers to secure a cheaper price for supplies
3) Change suppliers to excess a cheaper price for supplies/materials
4) Buy materials in bulk in order to access a discount marking materials
5) Review staff rostering in order to minimise wage expense
6) Improve service delivery in order to build positive word of mouth in the market which boosts sales
OR
Reduce average total assets:
1) Sell IDLE/UNPRODUCTIVE assets
2) Sell assets and then lease them back
