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Accounting 3/4 > SAC 1 > Flashcards

SAC 1 Flashcards

1
Q

List the Accounting Principles

A

“CHER@MCG”

  • Consistency
  • Historical Cost
  • Entity
  • Reporting Period
  • Monetary Unit
  • Conservatism
  • Going Concern
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2
Q

List the Qualitative Characteristics

A

“Red Rooster’s Ugly Chicken”

  • Relevance - Reliability
  • Understandability
  • Comparability
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3
Q

Define Consistency

A

Accounting methods should be applied in a consistent manner over time so that valid comparisons of reports can be made between periods.

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4
Q

Define Historical Cost

A

All items should be recorded at their original purchase price as this can be verified by source documents.

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5
Q

Define Entity

A

The owner, business and other businesses are treated as separate entities and accounting records should be kept on this basis.

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6
Q

Define Reporting Period

A

The life of the business is split into arbitrary periods of time to allow for report preparation and profit determination.

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7
Q

Define Monetary Unit

A

All items are to be recorded in common unit of measurement, this being the currency of the country in which reports are to be prepared.

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8
Q

Define Conservatism

A

Gains should only be recognised when certain while losses should be recognised as soon as they are probable, ensuring that assets and profit are not overstated and liabilities are not understated.

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9
Q

Define Going Concern

A

The life of the business is assumed to be continuous.

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10
Q

Define Relevance and Materiality.

A

Only information that assists with decision making of the business should be included in reports.

The materiality of an item is determined on the basis that if its omission will impact on decision making, it is a relevant item to be reported. Items of immaterial value can be excluded from reports as decision making will be unaffected.

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11
Q

Define Reliability

A

The information contained in reports must be free from bias and error so that it is accurate and supported by verifiable evidence (source documents).

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12
Q

Define Understandability

A

Reports must be presented in an easily understood manner, so that users of accounting who have little or no accounting knowledge can still comprehend the information provided.

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13
Q

Define Comparability

A

Reports of the business should be comparable over time, through the use of consistent accounting methods.

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14
Q

What is an asset?

A

A resource controlled by the entity, as a result of past events, which is expected to provide an inflow of economic benefits within the next 12 months (current) / after 12 months (non-current).

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15
Q

What is a Liability?

A

A present obligation, as a result of past events, which is expected to result in an outflow of economic benefits within the next 12 months (current) / after 12 months (non-current).

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16
Q

What is Owner’s Equity?

A

The residual value in the assets of the entity after deducting all its liabilities, representing the owner’s claim to the business.

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17
Q

Define Equity

A

Claims on the assets of the business comprising of internal (owner’s equity) and external (liabilities).

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18
Q

What is revenue?

A

An inflow (or savings in outflow) of economic benefit in the form of an increase in assets (or decrease in liabilities) which results in an increase in owner’s equity. Exclusions include capital contribution.

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19
Q

What is an expense?

A

An outflow (or reduction in inflow) of economic benefit in the form of a decrease in assets (or increase in liabilities) which results in a decrease in owner’s equity. Exclusions include drawings.

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20
Q

What is a “balance sheet’ and what are its uses?

A

An accounting report that details the financial position of a business by showing its assets, liabilities and owner’s equity at a particular point in time.

  • Show’s firm’s financial position (liquidity)
  • Aids decision-making about the firm’s liquidity
  • Shows the composition of equities and the financial structure of the business
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21
Q

Why is the balance sheet recorded “as at”?

A

The Balance Sheet is prepared ‘as at’ a particular point in time because businesses encounter a number of transactions every day and each one of these alters the accounting equation in some way. As such, the balance sheet is only ever accurate at the time it was made.

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22
Q

With reference to one qualitative characteristic, why are assets and liabilities classified?

A

In order for reports to be presented in an easy manner so that users with little accounting knowledge can comprehend the information included (understandability), items in the Balance Sheet are classified as either current or non-current.

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23
Q

What is the purpose of a general ledger?

A

Ledgers provide a link between journals and reports in the accounting process, allowing for easy method of maintaining the accounting equation on a continuous basis and providing account balances so that the Balance Sheet can be prepared periodically.

24
Q

With reference to one accounting principle, explain why balancing in general ledgers are important.

A

Ledgers must be balanced to carry their value into the next reporting period. This satisfies the going concern principle.

25
Discuss the importance of preparing a "trial balance"?
Trial balances are a _list of all accounts from the general ledger with their balances_ (totals for revenue, expense and drawings accounts). Advantages - Can _detect and identify errors_ - Allows the _preparation of financial statements_ Disadvantages - Can _contain undetected errors_ - _Time/Cost_
26
Discuss the importance of double entry accounting?
A system which recognises the _two-fold effect_ each transaction has on the _accounting equation_. Every _credit entry is balanced by a debit entry_. Advantages - Has an _inbuilt double-checking mechanism_. Total debits must equal credits. Improves _reliability_ - Allows for the preparation of balance sheet Disadvantages - Higher cost/time - _Not suitable for all businesses (few transactions)_
27
What are the errors not shown by a trial balance?
- Transactions that have been _omitted_ - _Wrong amounts_ on both sides - Credit and debit _reversed_ - _Wrong ledger accounts_ affected
28
Explain why GST is considered to be primarily a liability?
The business is _assumed to impose a mark-up_ to make profit, which means the _GST Paid on cost will be lower than the amount of GST collected on sales_. As this _GST is owed to the ATO_, it is expected to result in an outflow of economic benefit.
29
Why is GST not included as revenue or expense?
There is _no change in owner's equity_.
30
Explain why GST is not recorded in a payment made to a creditor?
GST is charged at the time when goods are exchanged from the supplier to the customer (_point of sale_).
31
Referring to one accounting principle, explain why the cash received from a debtor (from a previous period) should not be reported as revenue?
- _Reporting Period_ The revenue was _earned in the previous Reporting Period_ when the goods were provided to the customer. It does not increase owner's equity.
32
Explain importance of a cross reference when recording transactions in ledger accounts?
It names the other ledger account affected as part of the double-entry of each transaction. This _aids in tracking both effects of each transaction on the Accounting Equation_, and ensures that a double-entry has been recorded.
33
Two reasons why payments should not be made using cash from the register
- not _verifiable_ - not _traceable_
34
How can a source document satisfy the requirements of a tax invoice?
- the _words "tax invoice"_ - the _ABN of seller_ - the _amount of GST_
35
Explain what is meant by the terms '6/7, n/30'
6% settlement discount if the amount owing is paid in the next 7 days; the net (full) amount is due within 30 days.
36
What is the role of a "memo"
A source document used to _verify an internal transaction_ including: - _non-cash transactions with the owner_ - _correcting entries_
37
What is the role of an "invoice"
A source document used to _verify a sale or purchase of stock on credit_
38
What is the role of a "statement of account"
- NOT a source document - A _summary of the transactions a firm has had with a particular debtor/creditor over a certain period of time_
39
What is an "order form"
A document _requesting the supply of stock or other goods_ - not recorded
40
Explain the function of a special journal
The purpose of using special journals is to _summarise similar transactions so totals can be posted to the general ledger_ at the end of each month and _provides a link between ledger entries and source documents_.
41
How do source documents improve reliability?
They are documents that _provide proof that a transaction has occurred_ and show the specific details of the transaction so that raw figures can be recorded in the business’s journals. Source documents play an important role in upkeeping the reliability of financial reports, by providing verifiable evidence of all transactions which helps to ensure information is accurate and free from bias and error.
42
Why should businesses use cheque butts?
_Security_ – paying by cheque avoids the risks of carrying large sums of cash, and the danger of theft this entails _Traceability_ – cheques must be deposited into a bank account, meaning it is possible to trace the eventual recipient of the funds _Verifiability_ – all payments made by cheque are recorded on the cheque butt, providing a source document to verify the transaction
43
What are the advantages of using special journals?
- _Fewer repetitive ledger entries_ - Improves efficiency of accounting system by _removing excessive detail_ - Include Source Documents
44
Why might a business choose not to use special journals
If _stock is purchased infrequently_, the business may not require a purchase journal. If stock is not sold on credit, there is no need for a sales journal.
45
What are the roles of control accounts and subsidiary ledgers?
Control accounts _summarise transactions that are recorded in the subsidiary records_ (Debtors Ledger, Creditors Ledger, Stock Cards) into the General Ledger. Subsidiary accounts are a _set of ledger accounts kept outside of the general ledger which provide detailed information showing every transaction for each individual debtor and creditor on the day they occur_, while stock cards are the subsidiary record for the stock control account where movements are recorded as they occur.
46
What is the role of a debtor/creditor schedule and an advantage?
_A list of the name and balance of each individual account in the Creditors/Debtors ledger_, added together to enable _checking against_ the balance of the Creditors/Debtors _control account_. - _Checking mechanism, recording errors identified._
47
Discuss the importance of subsidiary and control accounts.
- Define the role of accounts Advantages: - _Double checking mechanism_ created: this internal control function allows for recording errors to be detected and corrected, which improves the reliability of reports. This is done through _checking the totals of the subsidiary ledgers via a schedule against the balance of the control account to identify discrepancies_. - _Ease of reporting_: _Remove bulky detail_ from the general ledger, allowing for relevance and understandability - _Allocation of duties_: Reduce the likelihood of fraud, give employees accountability in their roles of handling i.e debtors or creditors Disadvantages: - _Not suitable for all businesses_: some businesses may only have one debtor or creditor (subsidiary records not necessary) - _Cost/Time_
48
What is the double-checking mechanism in cash payments/receipts?
In payments, add all totals minus discount revenue which will equal the total bank. In receipts, add all totals (excluding cost of sales) minus discount expense which will equal total bank.
49
What is the sundries column and why is there no ledger account?
- List of infrequent transactions - _One ledger account cannot summarise all the difference types of transactions_
50
What is a GST settlement?
A _cash payment made to the ATO_ to _settle the liability that occurs when GST on sales is greater than GST on purchases_.
51
Explain why a GST settlement is not recorded in the GST column in the Cash Payments journal?
- The _GST column in the Cash Payments_ Journal is _only for GST paid to suppliers_ on purchases. A GST settlement is _paid to the ATO_ only infrequently, to settle a GST debt (sundries).
52
What is the difference between discount revenue and discount expense, referring to their definitions.
Discounts claimed by the business are a revenue as they represent a _savings in outflow_ of economic benefits in the form of a decrease in liabilities (creditors control) and results in an increase in owner’s equity. Discounts given by the business are an expense as they represent a _reduction in inflows_ of economic benefits in the form of a decrease in assets (debtors control) and results in a decrease in owner’s equity.
53
What are the advantages and disadvantages of giving discounts?
Advantages - _Cash is received faster from debtors_ - _Possibility of bad debts reduced_ Disadvantages - _Less cash received_ - Net profit reduced (_expenses increased_)
54
What are the advantages and disadvantages of claiming discounts?
Advantages - _Less cash is paid_ to creditors - Net profit increased (_revenue increased_) Disadvantages - _Less cash available for business use_
55
Why might GST be an asset?
- Purchase of a large NCA (high GST) - Less sale of stock than purchase

Accounting 3/4 (3 decks)

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