SAC 1 Flashcards
List the Accounting Principles
“CHER@MCG”
- Consistency
- Historical Cost
- Entity
- Reporting Period
- Monetary Unit
- Conservatism
- Going Concern
List the Qualitative Characteristics
“Red Rooster’s Ugly Chicken”
- Relevance - Reliability
- Understandability
- Comparability
Define Consistency
Accounting methods should be applied in a consistent manner over time so that valid comparisons of reports can be made between periods.
Define Historical Cost
All items should be recorded at their original purchase price as this can be verified by source documents.
Define Entity
The owner, business and other businesses are treated as separate entities and accounting records should be kept on this basis.
Define Reporting Period
The life of the business is split into arbitrary periods of time to allow for report preparation and profit determination.
Define Monetary Unit
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.
Define Conservatism
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.
Define Going Concern
The life of the business is assumed to be continuous.
Define Relevance and Materiality.
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.
Define Reliability
The information contained in reports must be free from bias and error so that it is accurate and supported by verifiable evidence (source documents).
Define Understandability
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.
Define Comparability
Reports of the business should be comparable over time, through the use of consistent accounting methods.
What is an asset?
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).
What is a Liability?
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).
What is Owner’s Equity?
The residual value in the assets of the entity after deducting all its liabilities, representing the owner’s claim to the business.
Define Equity
Claims on the assets of the business comprising of internal (owner’s equity) and external (liabilities).
What is revenue?
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.
What is an expense?
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.
What is a “balance sheet’ and what are its uses?
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
Why is the balance sheet recorded “as at”?
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.
With reference to one qualitative characteristic, why are assets and liabilities classified?
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.
What is the purpose of a general ledger?
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.
With reference to one accounting principle, explain why balancing in general ledgers are important.
Ledgers must be balanced to carry their value into the next reporting period. This satisfies the going concern principle.
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
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)
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
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.
Why is GST not included as revenue or expense?
There is no change in owner’s equity.
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).
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.
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.
Two reasons why payments should not be made using cash from the register
- not verifiable
- not traceable
How can a source document satisfy the requirements of a tax invoice?
- the words “tax invoice”
- the ABN of seller
- the amount of GST
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.
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
What is the role of an “invoice”
A source document used to verify a sale or purchase of stock on credit
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
What is an “order form”
A document requesting the supply of stock or other goods
- not recorded
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.
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.
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
What are the advantages of using special journals?
- Fewer repetitive ledger entries
- Improves efficiency of accounting system by removing excessive detail
- Include Source Documents
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.
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.
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.
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
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.
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
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.
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).
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.
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)
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
Why might GST be an asset?
- Purchase of a large NCA (high GST)
- Less sale of stock than purchase
