Topic 2 - Introduction to Financial Accounting and Terminology

Question 1

the accounting equation

Answer 1

A + E = L + OE + I

Question 2

double entry accounting

Answer 2

a system where every transaction is recorded in at least 2 accounts. eg, asset and liability, eg income and expense

Question 3

Perpetual Inventory System

Answer 3

Trading stock is recorded as inventory

Question 4

Advantages of perpetual inventory system

Answer 4

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.

Question 5

Periodic Inventory System

Answer 5

Trading stock purchased is recorded in a purchase (expense) ledger

Question 6

GST

Answer 6

goods and services tax

Question 7

do i need to register for GST?

Answer 7

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)

Question 8

GST (taxable) supplies

Answer 8

can claim gst, can charge gst

eg, most things, furniture, technology

Question 9

GST free supplies

Answer 9

can claim gst, cannot charge gst

eg, fruit, medical, education

Question 10

Input tax supplies

Answer 10

cannot claim gst, cannot charge gst

eg, rentals, donations, banks

Question 11

GST payable

Answer 11

collected from sales, business owes ATO
from selling goods
liability

Question 12

GST credit

Answer 12

when business buys, ATO owes business
from buying goods
asset

Question 13

GST formula

Answer 13

GST payable - GST credit = what business owes ATO

Question 14

Recognition Criteria

Answer 14

Relevance
Faithful Representation

Question 15

Relevance

Answer 15

relevant financial information is capable of making a difference to the decisions made by users

Question 16

Faithful representation

Answer 16

the information in a financial statement accurately presents the events that have occurred in a business for a period of time

Question 17

asset definition

Answer 17

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

Question 18

asset example

Answer 18

inventory, motor vehicle, cash at bank

Question 19

liability definition

Answer 19

present obligation of the entity to transfer an economic resource as a result of past events.
must have relevance and faithful representation.

Question 20

liability example

Answer 20

loan, bank overdraft, accounts payable

Question 21

owners / equity

Answer 21

the value of resources contributed to a business by the owner of that business.
assets - liabilities = owners equity
assets = liabilities + owners equity

Question 22

current asset

Answer 22

short term, can use up, convert into cash, or sell
UNDER 12 MONTHS
eg, inventory, accounts receivable, prepaid expenses

Question 23

non current asset

Answer 23

long term, can use up, convert into cash, or sell
OVER 12 MONTHS
eg, land, vehicles, investments

Question 24

current liability

Answer 24

short term
DUE UNDER 12 MONTHS
accounts payable, wages owed, short term debt

Question 25

non current liability

Answer 25

long term
DUE OVER 12 MONTHS
long term loans, bonds payable

Question 26

Income definition

Answer 26

flow of assets into business except loans or capital.
increases assets, decreases liabilities

Question 27

Income example

Answer 27

sale of inventory
sale of other asset
fees for services
interest or discount recieved

Question 28

expenses defintion

Answer 28

resources consumed by businesses
decrease assets, increase liabilities

Question 29

expense example

Answer 29

wages
rent
insurance
electricity
discount allowed (we give discount to x and lose money)

Question 30

purpose of financial statements

Answer 30

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