Lesson 6 - Booklet 1 Revision Flashcards
What is Accounting?
Accounting is a management information system that involves the collecting, sorting, classifying and recording of financial data to produce and report financial information to assist business owners in decision making.
Financial information is…
Data which is usually expressed in dollar terms.
Non-financial information is…
Any information that cannot be found in the financial statements and is not expressed in dollars and cents or reliant on dollars and cents for its calculation.
Examples of non-financial information include…
No. of customer complaints
No. of website visitors (hits)
No. of sales returns
Who are the main users of financial information?
Customers
Suppliers
Banks and other financial institutions
Employees
Prospective owners
The Australian Tax Office
What are the four stages of the accounting process?
- Source documents
- Records
- Reports
- Advice
A source document is…
A document that provides both the evidence that a transaction has occurred and the details of the transaction itself.
Recording is…
The process of sorting, classifying and summarising the data contained in the source documents so that it is more useable.
Reporting is…
The preparation of financial statements that communicate financial information to the owner.
Advice is…
The provision to the owners of a range of options available to their aims/objectives, together with recommendations as to the suitability of those aims / objectives
The accounting process is used to…
…take financial data and convert it into financial information in order to be able to make decisions about the business.
T/f - “Tax invoice” means the source document is an invoice.
False - this is on all source documents which involve GST and is a requirement set by the Australian Tax Office.
The two types of transactions are…
Cash and credit.
The point of difference between cash and credit transactions is…
The immediacy of the payment.
Cash = Customer pays immediately.
Credit = Customer pays at a later date.
Give me two pieces of info that would indicate that a source document was an invoice.
- Payment terms
- Invoice number
- The words “Due by”
T/f - The business at the top of the invoice has issued the source document.
True - the header can always be used to identify who issued the invoice.
This source document is a…
Cheque butt.
This source document is a…
Invoice.
T/f - This document is a source document.
False - This is a cheque. It cannot be used as a source document as it is not retained by either party in a transaction. It must be paid into the bank for processing.
This source document is a…
Memo.
T/f - This document is a source document.
False - a Bank Statement is not strictly a source document, though it can be used to verify a transaction in the absence of the original source document (e.g. if it got lost)
This source document is a…
Invoice.
This source document is a…
Cheque butt.
This source document is a…
Receipt.
This document is a…
Bank Statement
Source documents that are used for CASH transactions are…
Receipt
Cheque butt
Source documents that are used for CREDIT transactions are…
Invoice
The three elements of the accounting equation are…
Assets
Liabilities
Owners Equity
T/f - The accounting equation is:
Assets = Liabilities + Owners Equity.
True
T/f - The accounting equation is:
Assets + Liabilities = Owners Equity.
False.
The accounting equation is:
Assets = Liabilities + Owners Equity.
Who am I?
A present economic resource controlled by the entity (as a result of past events) that has the potential to produce future economic benefit
Asset
Who am I?
A present obligation of the entity (as a result of past events) to transfer an economic resource.
Liability
Who am I?
The residual interest in the assets of the entity after all its liabilities are deducted.
Owners equity
Grouping together items that have similar/common characteristics is referred to as…
Classifying/classification
Inventory, Bank, Accounts Receivable, Equipment, Vehicle and Premises are examples of…
Assets
Loan, Accounts Payable, Bank Overdraft and Mortgage are examples of…
Liabilities
Who am I?
The assumption that the accounting records of asset, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.
Accounting entity assumption.
Current assets =
a) Less than 12 months
b) More than 12 months
a) Less than 12 months.
Non Current assets =
a) Less than 12 months
b) More than 12 months
b) More than 12 months
What is the purpose of the Balance Sheet in Accounting?
A Balance Sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and owner’s equity.
What’s the difference between “current” and “non-current” assets on a Balance Sheet?
Current assets are short-term assets that are expected to be converted into cash or used up within one year, while non-current assets are long-term assets that have a useful life of more than one year, such as property and equipment.
What is the residual interest that an owner has invested in a business recorded as in the owners equity section?
Capital.
How do you calculate the total of the owners equity section?
Assets - liabilities = OE
How would you classify the following item?
Inventory is a current asset.
How would you classify the following item?
Van is a non-current asset.
How would you classify the following item?
Electricity bill is a current liability.
How would you classify the following item?
Accounts Receivable is a current asset.
How would you classify the following item?
Accounts Payable is a current liability.
How would you classify drawings?
Owners equity.
How would you classify capital contribution?
Owners equity.
Which two figures must balance in the Balance Sheet?
Total Assets = Total Equities
How do you calculate Total Equities?
Total Liabilities (CL+NCL) + Total OE
Why does a balance sheet have two columns for balances?
Left column = item totals
Right column = element totals
What is the accounting equation?
A = L + OE
What is the basic idea of the two-fold effect?
The concept of the two-fold effect outlines that every transaction will impact the accounting equation in a minimum of two ways.
According to the two-fold effect, what must remain true after a transaction has been recorded?
The accounting equation must still balance, i.e. A=L=OE.
T/f - A single transaction can impact two items in the same element.
True - examples of this include cash purchase of inventory and cash received to settle an account receivable.
When there are two impacts under the same element, what additional piece of information must we write then recording in the Accounting Equation?
We must include the overall impact.
T/f - When the owner takes a “Drawing” - this would mean the drawings would increase, whilst causing Owners Equity overall to decrease.
True - the Owners Equity decreases, as Drawings have increased.
T/f - A capital contribution would increae the value of owners equity.
True.
Which two elements would be impacted following a monthly loan repayment?
Assets (bank) decrease
Liabilities (loan) decrease
Which two elements would be impacted if a busines purchased $1000 of inventory on credit?
Assets (inventory) increase $1000
Liabilities (accounts payable) increase $1000
What would happen when a business made a cash payment to settle an Accounts Payable of $1000?
Assets (bank) decrease $1000
Liabilities (AP) decrease $1000
Which elements would be impacted when the owner makes a drawing of $1000 cash?
Assets (bank) decrease $1000
Owners Equity (drawings [have increased]) decrease $1000
How do we measure liquidity?
Working Capital Ratio
How do we measure stability?
Debt Ratio
What is the formula for stability?
TL/TA x 100
What is the formula for WCR?
CA/CL
How should the WCR be written?
The WCR should always be written as a ratio to the number 1. E.g. ____ : 1
How should the debt ratio be written?
The debt ratio should always be written as a percentage.
What does the WCR of 2:1 represent?
This represents good liquidity. It suggests that for every $1 of current liabilities, the business has $2 in current assets. This would be a good result.
What does a WCR of 0.5:1 represent?
This represents poor liquidity. It suggests that for every $1 of current liabilities, the business only has 50c in current assets. This would be a bad result and suggests the business will have difficulty in meeting its short term debts.
Define liquidity.
Liquidity measures the ability of the business to meet its short term debts as they fall due by comparing current assets with current liabilities.
Define stability.
Stability measures the businesses ability to meet its total liabilities and continue operating in the long term.