Exam Revision Flashcards
Trading business
Buys and sells inventory
A retailer is a business that sells inventory to the public
A wholesaler is a business that purchases inventory from a manufacturer and sells this inventory to a retailer
Service business
Provides a service to a customer in exchange for a fee
Sole trader
Is a business owned by one man or woman
Advantages of being a sole trader
Easier and less expensive to establish and operate
Sole trader does not have to share the profit with other owners
Disadvantages of being a sole trader
Liable for all the debts of the business
One person may not have enough money to start or expand a business
Limited sources of advice when making business decisions
Business may have to close or be sold if sole trader has a serious illness
Any losses made by the business cannot be shared with other owners
Sole trader will find it more difficult to take annual holidays
Partnership
Is a business, other than a company, that is owned by two or more people. The number of members of a partnership is limited by law. Max of 20 people
Advantages of a partnership
Two or more partners maybe able to raise more capital than can one sole trader
Partners contribute different skills to the business
Partners share the workload of operating a business
One partner can cover for another partner who is sick or on holiday
Partners share the risks and losses of the business
Disadvantages of a partnership
Partners are jointly and severally liable for all the debts of the partnership
Conflict over business policy or personality clashes can occur. Can end the partnership
Has a limited life
Any profit made by the business must be shared between a number of people
Partnership Ageememt
- The aims of the partnership
- The profit or loss sharing ratio
- The voting procedures as meetings of partners
- Procedures to be followed in the event of the retirement or death of a partner and procedures to be followed for the admission of a new partner
Corporations act 2001
All aspects of company formation and certain aspects of company operation are controlled by an Act of the commonwealth parliament known as the corporations act 2001
Company
An organisation established under the Corporations Act 2001 as a separate legal entity. A company can make contracts in its own name, can own property and can sue and be sued in its own name.
Capital of a company
The money or other resources that a person invests in a business is known as capital. The capital of he company is divided into shares. Each share is given a money value. People purchase these shares and become the owners of the company. Known as shareholders
A company limited by shares
One in which the liability of the shareholders for company debts is limited to the amount owing on their shares
Proprietary company
Is a company that cannot raise money from the public. Must have at least one shareholder and max 50 non-employee shareholders. Must have the word “proprietary” or “Pty” included in its own name
Small and large proprietary companies
A small proprietary company must satisfy any two of the following three conditions
- The revenue for the year is less than 25 million
- He assets at the end of the year are less than 12.5 million
- The company has less than 50 employees at the end of the year
Advantages of a company limited by shares
The death of a shareholder does not end the company as it is a separate legal entity
Shareholders of a company limited by shares have the protection of limited liability
Disadvantages of a company limited by shares
A company is subject to much greater regulation
A company is more expensive to form
Sources of finance
Loans from family or friends A credit card A bank overdraft A term loan Lease finance Factoring
Credit card
Short term source of finance for a business, paid within a few months. Very expensive form of short term borrowings unless it is paid off within the interest free day periods
Bank overdraft
Is a loan made by a bank in which the customer can withdraw more money from his or her bank account than had been deposited in the account.
Term loan
Long term source of finance obtained by the bank, paid back after a number of years
Accounting
Is a system of recording and processing business events and reporting to people on the performance of a business
The accounting process
Documenting events
Recording events
Processing events
Reporting to people
Accounting assumptions
Set of beliefs that accountants have about how an accounting system works
Monetary assumption
All business events can be measured in terms of money. A business event must be given a money value before it can be recorded in an accounting system
Business entity assumption
A business is separate from the owner of the business. The personal actions of the owner are not recorded in the accounting system of a business
Accounting period assumption
Life of a business is divided into intervals of time known as accounting periods. Income sheet prepared for each accounting period
Going concern assumption
A business will exist for the foreseeable future. Allows assets to be valued at their purchase price in a balance sheet
Accounting principles
Set of rules for making entires in an accounting system, and preparing accounting reports
AASB accounting standards
Australian accounting standards board has issued a set of accounting rules that companies listed on the stock exchange and some other organisations must follow when they prepare accounting reports for their owners
SAC 1- definition of the reporting entity
The statement of accounting concept defines those entities which are reporting entities. It states that an entity is a reporting entity if it is reasonable to expect the users of financial reports who are dependent upon them for information which will be useful for making and evaluating decisions about the allocation of scarce resources
SAC 2- objectives of general purpose financial reporting
The statement focuses on the objective of general purpose financial reports in order to make them useful for dependent users. Objectives:
General purpose financial reports should provide information useful to users for making and evaluating decisions about the allocation of scarce resources
GPFRs should provide information in a manner which assists in discharging the accountability of management
Assets
Is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
Liabilities
Is a present obligation of the entity arising from past events, the settlement of which is expected to result in an overflow from the entity of resources embodying economic benefits
Equity
Is the residual interest in the assets of the entity after deducting all its liabilities
Accounting equation
Assets= liabilities + equity
Goods and services tax
Is a 10% tax that is added to the price of most products sold by a business in Australia and on products imported into Australia
GST free supplies
Fresh food Medical services Education Child care services Exports
Get registration
A business that has annual sales of $75000 or more must register with the Australian taxation office to collect GST and must charge GST on the products that it sells unless these products are exempt from GST
Australian business number
Is an 11 digit number that is issued to a business and helps the ATO ensure that the business pays the correct amount of tax
Business activity statement
A business that has to pay GST will have to send the ATO, along with a cheque, a statement setting out the GST payable and the GST input tax credits
Questions to decide if GST should be charged on transactions
- Is this a business activity
- Has the business received consideration
- Is the transition connected to Australia
- Is the product exempt from GST
General ledger
Is a pm accounting record that contains a number of files
Features of the general ledger
Is made up of a series of files known as ledger accounts
Every type of asset, liability, equity, income and expense has its own ledger account
A ledger account has two sides
Each side of a ledger account has a date, cross-reference and amount column
Trail balance
Is the list of the names and balance of each ledger account on a particular day. Has a debit column and a credit column. Entries in each column are totalled. The total of the debit column of a trail balance should always equal the total of the credit column
Purpose of preparing a trail balance
Detect errors made in posting information into the general ledger
Provide a list of general ledger account balances from which are prepared important accounting reports
Errors found by preparing a trial balance
Failing to record part of a transaction in the ledger
Making two debit entries or two credit entries in the ledger
Making a transposition error in the ledger
Incorrectly calculating a ledger account balance
Recording a ledger account balance on the wrong side of the trail balance
Errors not found by preparing a trail balance
Error of omission Error of commission Compensation errors Making an entry in the wrong side of each ledger account Error of original entry
Balance sheet
Is an accounting report that sets out the assets, liabilities and equity of a business on any one day
Capital
Is the money or other resource that the owner has invested in a business
Income statement
Made up of income and expenses
Includes profit and loss
Inventory
Assets held for resale in the normal course of business
Perpetual inventory system
Trading stock purchased is recorded in an inventory ledger account. Two seperate ledger entries are required to record the sale of the inventory
Advantages of the perpetual inventory system
Short term income statements can be prepared as the cost of sales is known at any time
The possibility of running out of inventory is reduced as the business owner knows how much trading stock is left after each sale
Fast and slow moving inventory lines can be easily identified
Disadvantages of the perpetual inventory system
I more expensive to set up than the periodic inventory system
Internal control
Set of business rules that are designed to protect the assets of the business to prevent fraud and to ensure the the business operates efficiently
Manufacturing business
Converts raw material into finished products
