General Ledger Definitions Flashcards
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Define Double Entry
The principal of double entry requires that every transaction will have an opposite and equal effect on two or more accounts in the accounting equation. For every debit entry there will be an equal or corresponding credit entry.
Definition of a Trial Balance
A trial balance is a list of names and balances of each ledger on a particular day. The trial balance has a debit and credit column which are totalled and must always balance.
Describe the purpose of preparing a Trial Balance
-Detects errors made in posting information in the general ledger.
-Provides a list of general ledger acount balances from which Balance Sheets and Income Statements can be accurately prepared
List three common errors NOT found by preparing a Trial Balance
-Making an error of omission - failing to record a transaction in the general ledger or general journal
-Making an error of commission - making an entry in the wrong ledger account but on the correct side
-Making compensating errors - making two independent errors of equal amounts
-Making an entry on the wrong side of each ledger account
-Making an error of original entry - that is recording an incorrect amount on a source document or in the general journal
List three common 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
-Leaving a ledger account balance out of the trial balance
-Recording a ledger account on the wrong side of the trial balance
Define Asset (Conceptual Framework Definition)
An asset is a present economic resource controlled by the entity as a result of past events
The 3 elements to a framwork definition of an asset
Resource controlled by the entity - A business has control over an asset, A business owner can decide how an asset will be used
Potential to produce economic benefits - An asset has the potential to produce economic benefits (cash/credit)
Result of past events - Purchased asset on (date) from (seller) on (credit/cash)
Right - A business has a right to an economic resource; recive cash from a customer, possess or use property, receive a service (rent office from another business)
Define Liability (Conceptual Framework Definition)
A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
The 3 elements to a framwork definition of a Liability
Resilt of past event - A liability exists because of a transaction that took place on a past date (borrowed money in past - contract)
Transfer of enconomic resource - A business that has a liability to transfer an economic resource (will in future give money)
Existence of obligation - An obligation is a duty to another party that cannot be advoided (legal obligation - legal action will occur for non-returned money)
Define Equity (Conceptual Framework Definition)
Equity is the residual (that is, remaining) interest in the assets of the entity deducting all its liabilities
Define Income (Conceptual Framework Definition)
Income is increases in assests or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
Define Expense (Conceptual Framework Definition)
Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims
Define Accounting Equation
The value of the assets of a business will always equal the combined value of the liabilities and the equity (assets=libailities+equity)
Explain the Monetary Principle
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.
Explain the Materiality Principle
Information is material if the omission of this information from an accounting report could influence the investment decisions of the users of this report. An accounting report should contain all the material information.
Explain the Historical Cost Principle
An asset is recorded in an accounting system at its acquisition value and this value is not changed as time pases.
Explain the Accounting Period Principle
The life a business is divided into intervals of time known as accounting periods.
The length of an accounting period can be, for example, one month, six month or twelve months. An income statement is prepared for each accounting period. A balance sheet is prepared on the last day of an accounting period.
Explain the Going Concern Principle
A business will exist for the foreseeable future.
The going concern principle allows assets (the resources of a business) to be valued at their purchase price in a balance sheet. However, assets that usually increase in value over time, such as, land, are shown at current market value in a balance sheet.
Explain the Accounting Entity Principle (also known as, Business Entity Principle)
A business is seperate from the owner of the business. The personal actions of the owner are not recorded in the accounting system of a business.
Explain the principle and features of GST-Free Supplies
GST free supplies are products that have been specifically exempted from GST.
Examples:
-Fresh food
-Medical services
-Education (primary school, high school, university)
-Child care services
-Exports
Explain the principle and features of Input Taxed Supplies
Input taxed supplies are products that GST is not charged on and it is not possible to claim a GST input tax credit for the purchase of goods and services associated with these products.
Examples:
-Residential Rent
-Financial Services
-Selling Residential Property
-Certain Fundraising Activities by CHARATIES
Explain the principle and features of Taxable Supplies
A taxable supply is a product on which GST is charged.
Examples:
-Furthering an enterprise (selling a bed from a furniture store)
-Connected to Australia (imported to Australia, sold in Australia, exported from Australia)
What is the purpose of Liquidity
Represents a business’s ability to generate the cash they need to repay debt financial commitments as they fall due (cash flow statement and balance sheet)
What is the purpose of Financial Position
Deals with the economic resources of an eitity, its financial struture, its capacity to adapt to change and its liquidity (found on the balance sheet)
What is the purpose of Performance
An eitity’s ability to operate its assets efficiently and effectively in the conduct of its activities.
Classification of income by Nature and Function
Nature - Sales revenue, interest income, rent recieved
Function - operating revenue (e.g. sales from core business operations), non-operating revnue (e.g. interest income, dividends)
Classification of expenses by Nature and Function
Nature - Wages, depreciation, raw material costs, electricity, rent
Function - Costs of goods sol (direct costs of producing goods/services), administrative expenses (office expenses, salaries of office staff), selling + distribution expenses (marketing, commissions, delivery costs), finance expenses (Interest on loans, bank fees)
Classification of assets by Nature and Function
Nature - Cash, inventory, accounts recievable, property, equipment
Function - Current assets (cash, accounts recievable, inventory - used within a year), non-current assets (property, equipment, patents - long term use)
Classification of liabilities by Nature and Function
Nature - loans, accounts payable, tax payable
Function - current liabilities (accounts payable, short term loans - due within a year), Non Current liabilities (long term loans, bond payable - due after a year)
Explain the cash accounting method
Revenue is recorded when cash is recieved, and expenses are recorded when cash is paid (small businesses)
Explain the accrual accounting method
Revenue is recorded when earned, and expenses are recorded when incurred, regardless of when cash is recieved or paid (large businesses)
Principles and Features for Accounting and Reporting GST
GST collected - when a business sells/services and charges GST
GST paid (input tax credits) - when a business buys goods/services and pays GST, which can be claimed back
Principles and Features for the Business Activity Statement (BAS)
A business activity statement is a tax reporting requirement for businesses registered for GST. It is submitted to the ATO to report GST collected and paid, along with other tax obligations.
Key components:
-GST collected on sales
-GST paid on purchases (input tax credits)
-Net GST payable or refundable
Most reporting is Quarterly, sometimes monthly, rarely annually.
Explain the fundamental concepts/conventions of documents in the accounting cycle
Business transactions are recorded using source documents, such as invoices, receipts, and bank statements
These documents provide evidence of financial activities
Explain the fundamental concepts/conventions of journals in the accounting cycle
Transactions are recorded in journals (books of original entry) based on double-entry accounting (debits and credits).
Types:
-Sales journal - records credit sales
-Purchases Journal – Records credit purchases.
-Cash Receipts Journal – Records cash inflows.
-Cash Payments Journal – Records cash outflows.
-General Journal – Records transactions not covered by other journals (e.g., depreciation, adjusting entries).
Explain the fundamental concepts/conventions of ledgers in the accounting cycle
Entries from journals are transferred to the ledger, where accounts are grouped into:
-Assets (e.g., cash, inventory, accounts receivable).
-Liabilities (e.g., loans, accounts payable).
-Equity (e.g., owner’s capital, retained earnings).
-Revenue (e.g., sales, interest income).
-Expenses (e.g., rent, wages, utilities).
Explain the fundamental concepts/conventions of adjusting entries in the accounting cycle
Adjustments are made at the end of the accounting period to match income and expenses correctly.
Common adjusting entries:
-Accrued revenues (earned but not yet received).
-Accrued expenses (incurred but not yet paid).
-Depreciation (allocating asset cost over its useful life).
-Prepaid expenses (e.g., insurance paid in advance).
Explain the fundamental concepts/conventions of closing entries in the accounting cycle
At the end of the accounting period, temporary accounts (revenues and expenses) are closed to retained earnings (or owner’s capital for sole traders).
This resets revenue and expense accounts for the next period.
Explain the fundamental concepts/conventions of financial statements in the accounting cycle
Once all transactions are recorded and adjusted, financial statements are prepared:
- Income Statement – Shows revenue, expenses, and profit/loss.
- Balance Sheet – Shows assets, liabilities, and equity.
- Cash Flow Statement – Tracks cash movements (operating, investing, financing activities).
- Statement of Changes in Equity – Shows changes in owner’s capital or retained earnings.
