Topic 2 - Introduction to Financial Accounting and Terminology Flashcards
the accounting equation
A + E = L + OE + I
double entry accounting
a system where every transaction is recorded in at least 2 accounts. eg, asset and liability, eg income and expense
Perpetual Inventory System
Trading stock is recorded as inventory
Advantages of perpetual inventory system
short term income statements can be prepared at any time
possibility running out of stock is reduced
fast and slow moving inventory lines can be easily identified.
Periodic Inventory System
Trading stock purchased is recorded in a purchase (expense) ledger
GST
goods and services tax
do i need to register for GST?
yes if,
- business annual sales over $75,000
- must have Australian business number ABN
- must have insurance
- must register with ATO (unless exempt from gst)
GST (taxable) supplies
can claim gst, can charge gst
eg, most things, furniture, technology
GST free supplies
can claim gst, cannot charge gst
eg, fruit, medical, education
Input tax supplies
cannot claim gst, cannot charge gst
eg, rentals, donations, banks
GST payable
collected from sales, business owes ATO
from selling goods
liability
GST credit
when business buys, ATO owes business
from buying goods
asset
GST formula
GST payable - GST credit = what business owes ATO
Recognition Criteria
Relevance
Faithful Representation
Relevance
relevant financial information is capable of making a difference to the decisions made by users
Faithful representation
the information in a financial statement accurately presents the events that have occurred in a business for a period of time
asset definition
present economic resource controlled by the entity as a result of past events.
must have relevance and faithful representation.
has to be 1/3,
right, business has right to asset
potential, to produce economic benefits
control, business must have control over asset
asset example
inventory, motor vehicle, cash at bank
liability definition
present obligation of the entity to transfer an economic resource as a result of past events.
must have relevance and faithful representation.
liability example
loan, bank overdraft, accounts payable
owners / equity
the value of resources contributed to a business by the owner of that business.
assets - liabilities = owners equity
assets = liabilities + owners equity
current asset
short term, can use up, convert into cash, or sell
UNDER 12 MONTHS
eg, inventory, accounts receivable, prepaid expenses
non current asset
long term, can use up, convert into cash, or sell
OVER 12 MONTHS
eg, land, vehicles, investments
current liability
short term
DUE UNDER 12 MONTHS
accounts payable, wages owed, short term debt
non current liability
long term
DUE OVER 12 MONTHS
long term loans, bonds payable
Income definition
flow of assets into business except loans or capital.
increases assets, decreases liabilities
Income example
sale of inventory
sale of other asset
fees for services
interest or discount recieved
expenses defintion
resources consumed by businesses
decrease assets, increase liabilities
expense example
wages
rent
insurance
electricity
discount allowed (we give discount to x and lose money)
purpose of financial statements
income statement shows income and expenses
balance statement sets out a,l and e of bus at any given day
performance - how well bus uses assets to make revenue
financial position - the current record of a,l,e in a bus
liquidity - efficiency of asset being turned into cash
