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Accounting 3_4 Notes-2

The document outlines key accounting skills and concepts, including the use of accounting terminology, recording financial data, and understanding the purpose of a Trial Balance. It also covers qualitative characteristics and accounting assumptions, liquidity and stability measures, and the importance of source documents in ensuring verifiable financial records. Additionally, it addresses ethical considerations in accounting practices.

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17 views4 pages

Accounting 3_4 Notes-2

The document outlines key accounting skills and concepts, including the use of accounting terminology, recording financial data, and understanding the purpose of a Trial Balance. It also covers qualitative characteristics and accounting assumptions, liquidity and stability measures, and the importance of source documents in ensuring verifiable financial records. Additionally, it addresses ethical considerations in accounting practices.

Uploaded by

voiceofthestudentsofscotch
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 3

AOS1
Key skills
• use correct accounting terminology
• explain and apply relevant qualitative characteristics and accounting assumptions
• apply theoretical knowledge to simulated situations identify and manually record
financial data in the General Journal, General Ledger, and inventory cards
• use ICT to record financial data in the General Journal, General Ledger, and inventory
cards and to construct graphical representations
• distinguish between current and noncurrent assets and current and non-current liabilities
• explain the purpose of a Trial Balance
• explain and apply appropriate internal control procedures
• analyze the effects of financial transactions on the accounting equation
• distinguish between product and period costs about inventory valuation
• use ICT, including spreadsheets, to model and analyze the effects of alternative
inventory valuation methods and cost assignment methods

Assets

An increase OR a decrease in liabilities

That results in an increase in owners’ equity

Can ONLY be during usual business activities

TRIAL BALANCE
A trial balance’s purpose is to ensure a corresponding credit entry for every debit entry. It does
not confirm that all transactions have been recorded correctly. Still, it does provide an important
check before starting the process of preparing the financial reports (eg. balance sheet and
income statement).

If the Trial Balance does not balance,


- Two entries may have been recorded on the same side
- Only one entry was recorded
- Different amounts have been recorded for each side

------------------------------------------------------------------------------------------------------------
Glossary:

D|C ADE|LER
D - Debit
C - Credit
A - Asset
D - Drawing
E - Expenses
L - liabilities
oE - Owner’s Equity/Capital
R - Revenue

TURF VC - Qualitative Characteristics


T - Timeliness
- Financial information should be available to decision-makers in time to be capable of influencing their
decisions.
U - Understandability
- Financial information should be understandable or comprehensive to users with a reasonable knowledge of
business and economic activities and presented clearly and concisely.
R - Relevance
- Financial information must be capable of making a difference in the decisions made by users by helping
them form predictions and/or confirm or change their previous evaluations.
F - Faithful representation
- Financial information should be a faithful representation of the real-world economic event it claims to
represent: complete, free from material error, and neutral (without bias)
V - Verifiability
- The premise is that financial information is supported by evidence that can be used to check its accuracy.
C - Comparability
- Financial information should enable users to identify and understand similarities and differences among
items when compared with similar information about other entities and with similar information about the
same entity for another period or another date.
PAGE - Accounting Assumptions
P - Period
- Reports are prepared for a particular period such as a month of the year, to obtain comparability of results. A
reporting period can be as short as the owner requires, but in most cases, it is not longer than a year to
meet tax requirements.
A - Accrual Basis
- Revenues are recognized when earned and expenses when incurred, so profit is calculated as revenues
earned in a particular period less costs incurred in that period.
G - Going concern
- The business will continue to operate in the future, and its records are kept on that basis.
E - Entity
- The records of the entity’s assets, liabilities, and business activities are kept completely separate from those
of the entity’s owner and those of other entities.

(A=L+oE)(R-E)
A - Assets
- Cash
- Accounts Receivable
- Inventory
- Motor Vehicles
- Buildings
L - Liabilities
- Bank Overdraft
- Accounts Payable
- GST Owed to the Government
- Loans/Mortgage Owed to the Bank
oE - Owners equity
- Starting Capital given TO the business (Money and non-cash contributions such as a computer)
- Drawings (Capital taken OUT of the business is a Negative oE)
- Profit or Loss (Revenue - Expenses
R - Revenue
- Sales
- Interest Received
- Sales returns are in negative revenue
E - Expense
- Cost of Sales
- Rent
- Wages

Liquidity
The ability of a business to meet its short-term debts as they fall due, is essential to survival.

Working Capital Ratio

Current assets
———————
Current liabilities

Should be at least 1:1. Compares a firm’s current assets to current liabilities to determine whether the business has
sufficient economic resources to cover its present obligations.

Quick Asset Ratio

Current assets (excluding inventory and prepaid expenses)


——————————————————————————
Current Liabilities

Stability
The ability of a business to meet its long-term debts as they fall due.

Debt Ratio

Total Liabilities
–—————— x100
Total Assets

Measures what percentage of the firm's assets are funded by external sources. In this way, it measures the firm's
reliance on outside finance.

Double Entry Accounting


1. Each transaction is recorded as a change to at least 2 items in the accounting equation.
2. After recording a transaction, the accounting equation must always balance.

There must be a separate ledger account for each item in the reports.

Credit Terms
Terms: discount/within x days

Memos
Memos are source documents but are made internally by the company mad to share important financial information
to employees and owners.
Source Documents
Source documents provide evidence of the details of every transaction, they are integral in ensuring that the data in
the Accounting records is Verifiable (that is, supported by evidence and can be checked). In turn, this ensures that
the Accounting reports provide a Faithful representation of the firm’s transactions: complete, neutral (without bias)
and free from material error.

With GST there is an additional incentive to keep source documents because the Government will only accept
claims for GST paid with a Tax Invoice.

GST Clearing
At the end of the current period, the GST Clearing account must be balanced and reported as either a current asset,
or current liability, depending on whether it has a debit or credit balance. After the end if its Business Activity
Statement (BAS) period, when it must complete and submit its BAS, each business must then pay any GST owing to
the ATO as a GST settlement or will receive a GST refund from the ATO for excess GST.

Ethics
Not everything is about money making or saving, it has to be ethical too. Ethical considerations can be split into
environmental (chemicals, waste, carbon emissions etc) and social (employees, customers and suppliers).

GST Free Receipts


● Loans (When they come in)
● Capital contributed
● Interest income
● Receipts from accounts receivable

GST Free Payments


● Loans (When you make a repayment)
● Drawings
● Interest expense
● Payments to accounts payable
● Wages

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