Week 2

Question 1

define ‘business transactions’

Answer 1

“economic events” of a business. Is an event that has a financial impact on equity e.g. paid wages $25,000

Transactions need to be
•	Classified
•	Analyzed; and
•	Summarized
in order to prepare financial statements

Question 2

examples of ‘source documents’

Answer 2

• Sales receipt
• Bank statement
• EFT printout
• Employee timesheet
• Credit note
• Invoice (or bill) sent to a customer
• Invoice (or bill) received from a supplier

Question 3

explain cash accounting

Answer 3

All business transactions are recorded on the basis of when the cash is actually received or paid
Profit based on the ‘cash accounting’ system is the difference between cash received as income and cash paid as expenses.
Cash accounting = cash received – cash paid

Question 4

problems with cash accounting method

Answer 4

Advance payments or delays in payment mean the timing of cash receipts and payments has the potential to distort recorded performance when using this approach. The cash basis often leads to misleading financial statements, as it fails to record revenue that has been earned but for which the cash has not been received. In addition, it only recognises expenses when they are actually paid. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP); hence, most large companies and government entities are required to use accrual-basis accounting instead. Individuals and some small businesses, however, do use cash-basis accounting.The cash basis is justified for small businesses because they often have few receivable and payable amounts owing from customers or to suppliers.

Question 5

explain the accrual accounting method

Answer 5

Records revenues when they have been EARNED
Records expenses when they have been

*even if the related cash has not yet changed hands
• Provides the most accurate profit or loss for a period
• Because it reflects all business transactions completed during the period
• Profit based on the ‘accrual accounting’ system is the difference between revenue earned and expenses incurred for the accounting period
* revenue recorded when g+s’s have been delivered

The way these sorts of situations are often accounted for involves recording a temporary asset or liability

E.G When the customer pays the business in the following month, that asset is replaced with cash

Question 6

What defines an asset

Answer 6

1. Resources controlled by the entity
2. Result of past transactions or events
3. Provide a future economic benefit

Question 7

examples of assets

Answer 7

• Cash at bank
• Inventory / supplies
• Accounts receivable
• GST paid
• Prepayments
• Investments in shares
• Land and buildings
• Plant and equipment

Question 8

What defines a liability

Answer 8

1. Debts and obligations of the entity
2. Owned to an external party
3. Will result in future economic sacrifice

Question 9

examples of liabilities

Answer 9

• Bank overdraft
• Accounts payable
• Accrued expenses
• Gst collected
• Loans
• Mortgages

Question 10

What is owners equity

Answer 10

• Basically remaining / residual interest in the assets of the entity, after deducting all it’s liabilities.
• Represents the owners claim on the net assets of the entity

Question 11

What is revenue

Answer 11

gross increases in Owner’s equity resulting from business activities entered into to yield a profit

1. The value of transactions with the customers or clients of the business.
2. Amounts earned from the sale of goods or services

Question 12

Examples of revenue

Answer 12

• Sales revenue
• Fee income from providing services
• Interest revenue
• Commissions

Question 13

What defines ‘expenses’

Answer 13

Decreases in owner’s equity that result from operating the business.

1. Costs incurred in running the business in order to earn income
2. Value of goods consumed
3. Values of services “used up”

Question 14

examples of expenses

Answer 14

• Costs of goods sold
• Depreciation
• Interest
• Rent Utilities
• Wages and salaries

Question 15

explain concept of duality

Answer 15

Every business transaction effects two accounts
• must always balance
• ensures that the Statement of Financial Position will always balance

e.g.Softbyte purchased supplies for $1,600 on credit.
= +1,600 (assets) supplies / inventory
= -1,600 (liabilities) accounts payable

Softbyte received a bill for $250 from The Asian Financial Times, for advertising in the newspaper. Assume that this amount has not been paid
= +250 liabilities (accounts payable)
= - 250 owners equity

Question 16

What is the extended accounting equation

Answer 16

Assets = Liabilities + Owner’s Equity + (Revenue –Expenses)

Question 17

We can extend the accounting equation by decomposing Owner’s Equity into (5)

Answer 17

Contributions
Withdrawals
Revenues
Expenses

Question 18

Steps in transaction analysis

Answer 18

Three questions must be answered:

1.	Which element is affected?
Asset, Liability, Owner’s Equity
2.	Which specific item is affected?
Cash at Bank, Wages, Loan, etc.
3.	Are the items increasing or decreasing?

Question 19

Explain how GST paid is classified

Answer 19

GST is paid when acquiring goods or receiving a service.
• The ATO provides a refund to the business for all GST Paid.
• GST Paid is classified as a Current Asset.
> can be CLAIMED BACK

Question 20

Explain how GST collected be classified

Answer 20

GST Collected (Current Liability)
e.g. apple have to pass onto ATO
GST must be collected from customers when selling goods or providing a service.
• The business has an obligation to pay the GST Collected to the ATO
• GST Collected is classified as a Current Liability.
In practice GST Paid is deducted from GST Collected and the net amount paid to the ATO.

Question 21

What is GSTq

Answer 21

GST was introduced on 1st July 2000.
GST is a 10% tax on the supply (sale) of goods or the provision of services within Australia.
Businesses collect GST from their customers and send the amounts collected to the Australian Tax Office (ATO) at regular intervals (e.g. Quarterly).

Question 22

How to calculate GST

Answer 22

purchase price / 11

To figure out how much GST was included in the price you have to divide the price by 11 ($220/11=$20);

To work out the price without GST you have to divide the amount by 1.1 ($220/1.1=$200)