Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Accounting Unit 1 > Outcome 2 (chaps 5-8) > Flashcards

Outcome 2 (chaps 5-8) Flashcards

1
Q

Identify the four stages in the accounting process.

A

Source documents —> Records —–> Reports —–> Advice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Referring to one Qualitative Characteristic, explain the role of source documents in the accounting process

A

Source documents provide the verifiable evidence of the details of a transaction, thus ensuring that the information in the accounting reports will be reliable; that is, free from bias and subjectivity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Explain the importance of source documents in the determination of GST owing to the ATO

A

Source documents must include detailed information about the transaction, including the price of the transaction including the GST and the amount of the GST. Without these details, the source documents cannot be used to substantiate GST it has collected on its sales or services, or the GST it has paid to its suppliers. Therefore, the business may end up paying to the ATO more GST than is required.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

List the information that must be shown on a source document that includes GST

A
  • The words ‘tax invoice’ stated clearly
  • The name of the seller
  • The Australian Business Number (ABN) of the seller
  • The date of the transaction
  • A description of the item/goods provided
  • The price of the transaction including the GST
  • The amount of the GST
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

GST (Goods and Services Tax)

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the two functions of source documents

A

1) They provide verifiable evidence of the details of a transaction, ensuring that information in accounting reports are reliable; that is, free from bias
2) Provide evidence that is required by the Australian Tax Office (ATO) relating to the firm income tax and GST obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

State the source document used to verify cash received

A

A cash receipt is the source document used to verify cash received.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

State the effect of GST on the amount of cash received for a sale.

A

It will increase the amount of cash received for a sale because at the time a cash sale is made, the business will receive from the customer the cash for the service, plus the GST.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Explain why the GST received on a cash sale creates a GST liability.

A

GST is collected on behalf of the Australian Government, so the business owes the GST to the government. For this reason, any GST a small business collects or receives on its sales creates a GST liability to the Australian Taxation Office (ATO).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Cash Receipt

A

A source document used to verify cash received

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What information is found on a Cash Receipt

A
  • Tax Invoice
  • Date of transaction
  • The receipt number
  • Name and ABN of the seller
  • Description of what has been provided
  • Selling Price including GST
  • Amount of GST
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

State three reasons why cash payments should be made by cheque

A
  • Owner can avoid carrying large amounts of cash
  • Cheques can be traced to identify the business or individual who deposited the funds into their account
  • The cheque butt is retained after every payment to provide evidence of the amount and use of the cash
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

State what is meant by the following terms:

  • Drawee
  • Drawer
  • Payee
A
  • drawee – the financial institution or bank of the drawer
  • drawer – the entity writing the cheque
  • payee – the entity that is receiving the cheque or to whom the cheque is written.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Explain why cheques should be crossed as ‘Not Negotiable’.

A

A cheque that is marked as ‘Not Negotiable’ can only be deposited into the account of the nominated payee, thus making it sensible business practice.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

State the document that would show a business which cheques given out had been processed

A

A bank statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Explain why GST paid to suppliers reduces the firm’s GST liability.

A

When a firm pays GST to suppliers, the firm is allowed to deduct this from the GST it owes to the ATO. That is, because the GST will be forwarded to the ATO by the firm’s suppliers, it is treated as if the business had paid the GST straight to the government. Thus, GST paid to suppliers will decrease the firm’s GST liability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

State two situations in which it would be inappropriate to pay by cheque.

A
  • Many businesses will not accept cheques unless a prior arrangement has been made.
  • Cheques are inappropriate for small payments (such as buying milk or basic stationery).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Explain the role of a petty cash system.

A

Under a petty cash system, a small amount of cash is set aside with individuals reimbursed from the petty cash fund for small amounts they have paid on the firm’s behalf.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

State two other forms of payment.

A
  • Debit cards or credit cards

* Phone or internet banking to transfer cash electronically from one account to another

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Define Not Negotiable

A

A control mechanism that ensures that the cheque can only be deposited into the account of the nominated payee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is a Cheque

A

A cheque is a document informing the bank, the drawee, to transfer funds from the account of the drawer to the bank and account of the payee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

State the source document used to verify a credit transaction.

A

State the source document used to verify a credit transaction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

State which entity receives the original and which entity retains the copy.

A

The customer receives the original of the invoice and the firm retains the copy of the invoice.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

State the current asset created by a credit sale.

A

A Debtor is created by a credit sale.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

State the current liability created by a credit purchase.

A

A Creditor is created by a credit purchase.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Explain the purpose of a memo.

A

Memos can be issued for any transactions that cannot be evidenced by any of the other source documents and can verify internal transactions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Invoice

A

A source document used to verify credit transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Memo

A

A source document used to verify internal transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

List the type Source Documents

A
  • Cash Receipts
  • Cash Payments and Cheque Butts
  • Credit Transactions and Invoices
  • Internal Transactions and Memos
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Define the term ‘service business’.

A

A small business that operates by providing its time, labour or expertise (or a combination of all three) in return for a fee or charge

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

List five typical service businesses

A
  • Plumbers
  • Motor mechanics
  • Editors
  • Hairdressers
  • Architects
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Explain the relationship between a firm’s cash receipts, cash payments and its bank balance

A

Cash receipts will increase a firm’s bank balance, while cash payments will decrease a firm’s bank balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

List three items that are treated as ‘cash’ in an accounting system.

A
  • Notes and coins
  • Cash in the firm’s bank account
  • Cheques a firm may have received from customers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

State the source documents that provide evidence of:

  • Cash Receipts
  • Cash Payments
A
  • cash receipts – cash receipt, cash register roll or bank statement
  • cash payments – cheque butt or bank statement.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Explain the function of the following elements of a single-entry accounting system:

  • Source Documents
  • Cash Journals
  • Statement of Receipts and Payments
A
  • source documents – the verifiable evidence of transactions to be recorded in the cash journals
  • cash journals –accounting records that classify and summarise cash transactions during a particular reporting period
  • Statement of Receipts and Payments – an accounting report that shows the firm’s cash receipts and payments and the consequent change in its bank balance over a reporting period.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are the elements of a Single Entry Accounting System

A

Source Documents
Records: Cash Journals (Cash Receipts Journals, Cash Payments Journal)
Reports : Statement of Receipts and Payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Journal

A

An accounting record which classifies and summarises transactions during a particular reporting period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Statement of Receipts and Payments

A

An accounting report which lists cash receipts and payments during a reporting period, the change in the bank balance, and the opening and closing bank balance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Single Entry Accounting

A

the process of recording transactions in journal and then using the summarised information to prepare reports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

1 Explain the function of the Cash Receipts Journal

A

A Cash Receipts Journal is an accounting record that summarises all cash received from other entities during a particular reporting period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

2 Referring to one Qualitative Characteristic, explain why receipt numbers must be recorded in the Cash Receipts Journal.

A

Receipt numbers must be recorded so that there is reference to the source document used for a particular transaction. This will provide the verifiable evidence and ensure that the reports are free from bias and subjectivity (Reliability).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

3 Explain why transactions must be recorded in both the Bank column and a classification column

A

While the Bank column records all cash received during a particular reporting period, the classification column is used to record the source of that cash; it allows for frequent cash receipts to be summarised, so that only the totals needs to be reported in the Statement of Receipts and Payments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Explain the function of the Cash Receipts Journal

A

A Cash Receipts Journal is an accounting record that summarises all cash received from other entities during a particular reporting period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Referring to one Qualitative Characteristic, explain why receipt numbers must be recorded in the Cash Receipts Journal.

A

Receipt numbers must be recorded so that there is reference to the source document used for a particular transaction. This will provide the verifiable evidence and ensure that the reports are free from bias and subjectivity (Reliability).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Explain why transactions must be recorded in both the Bank column and a classification column

A

While the Bank column records all cash received during a particular reporting period, the classification column is used to record the source of that cash; it allows for frequent cash receipts to be summarised, so that only the totals needs to be reported in the Statement of Receipts and Payments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Explain the function of the sundries column in a Cash Receipts Journal.

A

The sundries column is used to record any receipts that are infrequent.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Explain the double checking mechanism used to check the totals of the Cash Journal.

A

The total of the Bank column should equal the sum of the totals of the other (classification and sundries) columns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Explain why GST on cash fees creates a GST liability.

A

The business collects GST on cash fees from its customers on behalf of the government. It becomes a liability for the business and creates a present obligation, the settlement of which will result in an outflow of economic benefits that must be paid to the ATO.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Explain the function of the Cash Payments Journal.

A

The Cash Payments Journal is an accounting record that classifies and summarises all cash paid to other entities during a particular reporting period.

50
Q

Explain why cancelled cheques should be recorded in the Cash Payments Journal.

A

All cheques must be accounted for in the Cash Payments Journal, even cancelled ones, so that the firm has a record of all cheques issued (and Reliability is upheld).

51
Q

Explain why a Cash Payments Journal usually has more classification columns than a Cash Receipts Journal.

A

Cash payments for most businesses will be more varied/diverse than its cash receipts. Therefore, there will be a need to create more classification columns in the Cash Payments Journal.

52
Q

Explain why GST paid to suppliers reduces the GST liability.

A

When GST is paid to suppliers, it is allowed to deduct this from the GST it owes to the ATO. That is, because the GST will be forwarded to the ATO by the firm’s suppliers, it is treated as if the business had actually paid the GST straight to the government. Thus, GST paid to suppliers will actually decrease the firm’s GST liability.

53
Q

State three pieces of information regarding a firm’s cash position, which are not shown in the cash journals

A
  • The firm’s bank balance at the start of the period
  • The firm’s bank balance at the end of the period
  • The overall change (increase or decrease) in the firm’s bank balance.
54
Q

Explain the function of a Statement of Receipts and Payments.

A

The Statement of Receipts and Payments is an accounting report that lists summarised cash receipts and cash payments during a reporting period, the change in the bank balance, and the opening and closing bank balance.

55
Q

Show the formula to calculate a cash surplus or cash deficit.

A

Surplus (Deficit) = Cash Receipts – Cash Payments.

56
Q

Explain the effect on the firm’s bank balance of a

  • Cash Surplus
  • Cash Deficit
A
  • cash surplus – will lead to an increase in the bank balance
  • cash deficit – will lead to a decrease in the bank balance.
57
Q

Cash Surplus

A

An excess of Cash Receipts over cash payments, leading to an increase in a positive bank balance or a decrease in a bank overdraft

58
Q

Cash Deficit

A

An excess of Cash Payments over Cash Receipts , leading to a decrease in a positive bank balance or an increase in a bank overdraft

59
Q

What is the difference between a Deficit and an overdraft

A

A deficit refers to a decrease in a firms bank balance, the change, but does not necessarily mean a negative balance. A overdraft refers to a negative balance; it describes not a change but a level of cash

60
Q

Explain how the Statement of Receipts and Payments can be used to assist decision-making.

A

It can be useful for decision-making because it summarises all the information relating to the firm’s cash position. It can then be used to help the owner make decisions about the firm’s cash receipts, payments and level of cash on hand. For example, a high bank balance means the owner may wish to use the excess cash to pay off loans, take extra drawings or purchase newer non-current assets. A low bank balance means the owner may need to make lower loan repayments, lower drawings, use credit for some purchases, or perhaps make a capital contribution.

61
Q

Define the term ‘GST payable’.

A

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.

62
Q

GST Settlement

A

A payment made by the ATO by a small business to settle GST payable

63
Q

Explain why most small businesses will end up with GST payable.

A

Because selling prices are usually higher than cost prices, GST received on fees will usually be greater than GST paid to suppliers. This will mean that under normal circumstances, most small businesses will end up with a liability in relation to GST.

64
Q

Explain how GST payable is reported in the Balance Sheet.

A

GST payable is reported as a current liability in the Balance Sheet as the business has a present obligation, which is expected to result in an outflow of economic benefits (when GST is paid to the ATO) sometime in the next 12 months

65
Q

Explain why a GST settlement must be recorded in the sundries column of the Cash Payments Journal.

A

The ‘GST’ column of the Cash Payments Journal is used to record GST paid to suppliers. As the ATO is not a supplier to the firm, the GST settlement must be recorded in the sundries column.

66
Q

Define the term ‘GST receivable’.

A

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 on its fees.
 

67
Q

State two ways a small business could end up with GST receivable.

A

If the business makes a bulk purchase of goods/supplies (which it has not yet sold/used) or if the business purchases expensive non-current assets

68
Q

Explain how GST receivable is reported in the Balance Sheet.

A

GST receivable is reported as a current asset in the Balance Sheet as it is a resource of which future economic benefit is expected to flow to the entity (when the business will receive the refund from the ATO) sometime in the next 12 months.

69
Q

GST Refund

A

A cash receipt from the ATO to clear GST receivable

70
Q

Define the term ‘internal control’.

A

Internal control is the procedures and strategies used to protect the firm’s assets from theft, damage and misuse.

71
Q

Briefly describe five internal control mechanisms.

A
  • Physical safeguards - prevent unauthorised people from accessing a particular item through barriers, such as fences, padlocks or locked storerooms and, for cash in particular, through the use of safes, lock-boxes and lockable cash drawers.
  • Preventative safeguards - involve dissuading misuse or theft of assets through the threat of apprehension. Systems such as alarms and security cameras work on the premise that people are less likely to attempt theft if they are concerned they will be caught.
  • Separation of duties - involves ensuring that no one employee (except the owner) has complete control over a particular type of asset, so their actions are open to scrutiny by another employee. The more people involved in the process, the less chance there is of collusion occurring.
  • Rotation of duties - involves ensuring that tasks are not always performed by the same employee, so that their actions are open to scrutiny by the next employee who performs that task.
  • Careful hiring practices - involve effective screening and assessment of potential employees to ensure that only the most trustworthy and responsible candidates are employed.
  • Effective employee training - involves ensuring that staff are skilled in the use and management of the assets they are required to use or supervise, reducing the likelihood that assets are damaged through misuse.
72
Q

What are the five internal control mechanisms

A 
Physical Safeguards
Preventative Safeguards
Separation of duties
Rotation of Duties
Careful Hiring Practices
Effective Employee Training
73
Q

State one way each of the following internal control mechanisms could be applied to the protection of cash:
•physical safeguards
•separation of duties
•rotation of duties

A
  • physical safeguards – cash should not be kept on the premises in large quantities or overnight. If it is necessary to keep it on the premises, then it must be contained in a safe
  • separation of duties – one employee is in charge of cash receipts and another in charge of cash payments. Thus, not just one employee has complete control over the cash
  • rotation of duties – if there is more than employee, rotate the tasks they perform in relation to cash handling so that their actions are open to scrutiny.
74
Q

State three benefits of making payments by cheque

A
  • Allows large payments to be made without the risk of carrying cash
  • Cheques can be cancelled if lost or stolen and the eventual recipient of the funds can be traced if necessary
  • The cheque butt allows for the recording of the details of the transaction
75
Q

Explain why small payments should be made using a petty cash system rather than straight from the register.

A

A petty cash system allows all payments to be verified and authorised, regardless of their size or nature.

76
Q

List five other cash control mechanisms

A
  • All cash transactions should be verified by a pre-numbered document
  • Payments should not be made directly from the till
  • Cash in registers should be verified against the cash register roll
  • Cash should not be kept on the premises
  • Takings should be banked at least daily
  • Cash procedures should be changed periodically
  • Accurate and up-to-date cash records must be kept
  • A bank reconciliation should be conducted regularly.
77
Q

Cash Control

A

The procedures and strategies used to protect the firms cash

78
Q

Bank Statement

A

A bank statement is a record, kept and provided by the firm’s bank, of all the transactions affecting the firm’s bank account

79
Q

Referring to a bank statement, identify the type of transactions that are recorded in the:

  • Credit Column
  • Debit Column
A
  • credit column – cash receipts/deposits

* debit column – payments/withdrawals

80
Q

Explain how the bank statement can be used to verify the accuracy of the firm’s own cash records.

A

The information on a bank statement should match the information recorded by the firm in its own cash journals, but we need to compare the two sets of records, the bank statement produced by the bank and the journals produced by the firm, to see if this holds true. This is performed by carrying out a bank reconciliation.

81
Q

State the two main reasons for differences between the bank statement and cash journals.

A
  • There may be transactions the bank knows about, but the business does not.
  • There may be transactions the business knows about, but the bank does not.
82
Q

Explain the process to account for direct debits and direct credits.

A

Direct debits and direct credits are items that the firm does not know about, but the bank does. They will appear on the bank statement but not in the cash journals and, as such, must be accounted for by the firm and added to the cash journals.

83
Q

Explain the process to account for deposits not yet credited and unpresented cheques.

A

Deposits not yet credited and unpresented cheques are items the firm knows about, but the bank does not. They will appear in the cash journals but not on the bank statement and, as such, must be accounted for by the firm and reported in a Bank Reconciliation Statement.

84
Q

Explain what action the business should take if a cheque from one of its customers is dishonoured.

A

A business that receives a dishonoured cheque must follow up with the customer from whom the cheque was received in the first place, and demand payment in some other form.

85
Q

Bank Reconciliation

A

the process of verifying that the entries in a firms cash journals are the same as those recorded by the firms bank on the bank statement

86
Q

Direct Credit

A

A deposit of cash directly into a bank account

87
Q

Direct Debit

A

A withdrawal of cash directly from a bank account

88
Q

Dishonoured cheque

A

A cheque that cannot be honoured/exchanged for cash because there are insufficient funds in the account of the drawer to allow the payment to be made

89
Q

Dishonoured cheque

A

A cheque that cannot be honoured/exchanged for cash because there are insufficient funds in the account of the drawer to allow the payment to be made

90
Q

Deposit not yet credited

A

a cash deposit that is yet to appear on the bank statement (usually due to the timing of its preparation)

91
Q

Unpresented cheque

A

a cheque that has not yet been presented for payment by the payee

92
Q

Dishonoured cheque

A

a cheque that cannot be honoured/exchanged for cash because there are insufficient funds in the account of the drawer to allow the payment to be made.

93
Q

What are the three types of transactions the firm would not know about

A

Direct Credit
Direct Debits
Dishonoured Cheque

94
Q

What are the two types of transactions the bank would not know about

A
  • Deposits not yet Credited

- Unpresented Cheques

95
Q

List the steps involved in the bank reconciliation process.

A

i Compare cash receipts – check the bank column of the Cash Receipts Journal against the credit column in the bank statement
ii Compare cash payments – check the bank column of the Cash Payments Journal against the debit column in the bank statement
iii Update the cash journals – items circled in the bank statement must be added to the cash journals
iv Prepare a Bank Reconciliation Statement – items circled in the cash journals must be reported in the Bank Reconciliation Statement

96
Q 
In the bank reconcilation process, Explain the process to account for items that are circled in the:
•	credit column of the bank statement
•	debit column of the bank statement
•	Cash Receipts Journal
•	Cash Payments Journal
A
  • credit column of the bank statement – are added to the Cash Receipts Journal
  • debit column of the bank statement– are added to the Cash Payments Journal
  • Cash Receipts Journal – are reported as deposits not yet credited in the Bank Reconciliation Statement
  • Cash Payments Journal – are reported as unpresented cheques in the Bank Reconciliation Statement.
97
Q

Explain the function of a Bank Reconciliation Statement.

A

A Bank Reconciliation Statement attempts to explain any differences between the bank balance determined in the firm’s cash records and the bank balance reported on the bank statement.

98
Q

Identify the column on the bank statement in which a dishonoured cheque would be recorded.

A

A dishonoured cheque would be recorded in the debit column on the bank statement.

99
Q

Explain how a dishonoured cheque is recorded in the cash journals.

A

A dishonoured cheque must be recorded as a ‘negative cash receipt’ in the cash journals. This is because a dishonoured cheque is originally recorded as a cash receipt; when the business discovers the cheque has been dishonoured, it must reverse that receipt.

100
Q

Explain the effect on an overdraft balance of a:
• deposit not yet credited
• unpresented cheque

A
  • deposit not yet credited – will decrease the overdraft (negative) balance
  • unpresented cheque – will increase the overdraft (negative) balance.
101
Q

Explain the role of the previous month’s Bank Reconciliation Statement in the bank reconciliation process.

A

Items reported in the previous month’s Bank Reconciliation Statement must be checked against the next month’s bank statement to see if the deposits not yet credited have now appeared in the credit column of the bank statement (and, if so, tick them off) and the unpresented cheques have now appeared in the debit column of the bank statement (and, if so, tick them off).

102
Q

Explain how items that fail to appear on consecutive bank statements should be accounted for in a bank reconciliation.

A

If items reported in the previous month’s Bank Reconciliation Statement fail to appear in the next month’s bank statement, it must be reported again in the next Bank Reconciliation Statement, because the bank still does not know about it.

103
Q

Profit

A

the net increase in the owner’s equity as a result of the firm’s operations. It is calculated by measuring the firm’s revenue and deducting from this its expenses

104
Q

Revenue

A

an inflow of an economic benefit (or saving in an outflow) in the form of an increase in assets (or decrease in liabilities) that increases owner’s equity (except for capital contribution)

105
Q

Expense

A

an outflow or consumption of an economic benefit (or saving in an inflow) in the form of a decrease in assets (or increase in liabilities) that decreases owner’s equity (except for drawings).

106
Q

State one reason why a capital contribution is excluded by the definition of revenue.

A

A capital contribution is not a result of the firm’s operations, which is what is required for an item to be defined as revenue.

107
Q

State one reason why Drawings is excluded by the definition of an expense.

A

Expenses refer to what the business has consumed in order to earn revenue, not what the owner has withdrawn for personal purposes, so Drawings is excluded as an expense

108
Q

Explain how the Reporting Period principle assists in the calculation of profit.

A

The Going Concern principle assumes that the life of the business is continuous or never-ending, so to follow this principle alone means that profit could never be determined. As a result, the owner would not have information about the performance of their firm until it was too late to do anything about it. This is why the Reporting Period principle is so important: it allows us to divide the life of the business into arbitrary periods in order to determine profit.

109
Q

Explain how the Reporting Period principle leads to Relevance in accounting reports.

A

Once the length of the reporting period is determined, it is important that the calculation of profit includes only revenues and expenses for the current reporting period. This ensures Relevance in the reports by including only information that is useful for decision-making about profit. If we were to include items other than revenue and expenses (such as Drawings) or revenue or expenses outside the current reporting period, our reports would contain information that would not be useful for decision-making, and would actually distort decision-making for the owner.

110
Q 
Explain why the following items are excluded from an Income Statement:
•	capital contribution 
•	purchase of a non-current asset 
•	loan repayment 
•	Drawings
A
  • capital contribution – is not a revenue as it is not earned by the business, but rather contributed by the owner
  • purchase of a non-current asset – is not an expense because it does not decrease owner’s equity and it doesn’t decrease assets overall
  • loan repayment – is not an expense because it does not decrease owner’s equity; it decreases assets and liabilities
  • Drawings – is not an expense as it is not consumed by the business to earn revenue, but withdrawn by the owner for personal use.
111
Q

Explain why an Income Statement is titled for a particular period rather than as at a particular date.

A

The Income Statement reports transactions that have occurred not just on the one day, but over a period of time.

112
Q

Explain why an Income Statement is titled for a particular period rather than as at a particular date.

A

The Income Statement reports transactions that have occurred not just on the one day, but over a period of time.

113
Q

Citing four examples, explain how a business can earn a Net Profit and yet suffer a cash deficit.

A

It is possible for a business to earn a Net Profit but still suffer a cash deficit due to:
• drawings
• a loan repayment
• a cash purchase of a non-current asset
• a GST settlement.
These items will have no effect on Net Profit as they are not expenses. However, each is a cash payment, and as a consequence will decrease Bank.

114
Q

Citing three examples, explain how a business can incur a Net Loss and yet generate a cash surplus.

A

It is possible for a business to incur a Net Loss but still generate a cash surplus due to a receipt of:
• a loan
• a capital contribution from the owner
• a GST refund.
These items will have no effect on Net Profit as they are not revenues. However, all are cash receipts, and as a consequence will increase Bank.

115
Q

Explain how GST received from customers and paid to suppliers can lead to:
• more cash than profit
• less cash than profit

A
  • more cash than profit – if GST received from customers is greater than GST paid to suppliers, it will increase Bank but have no effect on Net Profit
  • less cash than profit – if GST paid to suppliers is greater than GST received from customers, it will decrease Bank but have no effect on Net Profit.
116
Q

Expense

A

An outflow of economic benefit (or reduction in the inflow) in the form of a decrease in assets ( or increase in liabilities) that reduces owners equity (except for drawings)

117
Q

Revenue

A

An inflow of economic benefit (or saving in the outflow) in the form of an increase in assets (or decrease in liabilities) that increases owners equity (except for capital contribution)

118
Q

Capital contribution

A

An internal source of finance consisting of cash ( or other assets) contributed to the business from the personal assets of the owner

119
Q

Cheque Butt

A

A source document used to verify cash payments

120
Q

Income Statement

A

An accounting report which details the revenues and expenses incurred during the reporting period

121
Q

Net Profit(loss)

A

Measures the differences between revenues and expenses

Accounting Unit 1 (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions