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Accounting Glossary

Purpose of accounting to provide business owners with financial information that will assist them in making decisions about the activities of their firm Users of Accounting Information - Debtors and other customers - Creditors and other suppliers - Banks and other financial institutions - Employees - Prospective owners - Australian Tax Office (ATO) Accounting Principles: Entity the business is assumed to be separate from the owner and other businesses, and its records should be kept on this basis Going concern the life of the business is assumed to be continuous, and its records are kept on that basis Reporting period the life of the business must be divided into periods of time to allow reports to be prepared, and the accounting records should reflect the Reporting period in which a transaction occurs Historical cost transactions should be recorded at their original cost or value, as this value is verifiable by reference to the source document Conservatism losses should be recorded when probable, but gains only when certain so that liabilities and expenses are not understated and assets and revenues are not overstated Consistency accounting methods should be applied in a consistent manner to ensure that reports are comparable between periods Monetary unit all items must be recorded and reported in the currency of the country of location Qualitative Characteristics (Refer to REPORTS) Relevance reports should include all information that is useful for decision-making Reliability reports should contain information that is free from bias Comparability reports should be able to compared over time Understandability reports should be presented in a manner that makes it easy for the user to comprehend their meaning

Accounting Elements Assets resources controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity Liabilities present obligations of the entity as a result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Owners equity the residual interest in the assets of the entity after the deduction of its liabilities Revenue inflows of economic benefits (or savings in outflows) in the form of increases in assets (or decreases in liabilities) that increase owners equity (except for capital contributions by the owner) Expenses outflows or consumptions of economic benefits (or reductions in inflows) in the form of decreases in assets (or increases in liabilities) that reduce owners equity (except for drawings by the owner) Double Entry Accounting Trial Balance a list of all the accounts in the General Ledger, and their balances, to determine if total debits equal total credits Footing an informal process used to determine the balance of a ledger account Business Documents (Reliability) Source documents the pieces of paper that provide both the evidence that a transaction has occurred, and the details of the transaction itself Memo a source document used to verify an internal transaction Statement of account a summary (NOT evidence) of the transactions a firm has had with a particular debtor/creditor over a certain period of time (usually a month) **Order Form (NOT evidence, NO transaction has been made) a document requesting the supply of stock or other goods Benefits of Paying with Cheque (Source Document: CHEQUE BUTT) - 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 in 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. GST (Look for Settlement/Refund)

When a business charges GST on its sales, it does so on behalf of the government, so the business owes that GST to the ATO. However, if a business has incurred any GST on its purchases, it is allowed to deduct this from the GST it owes. That is, because the GST will be forwarded to the ATO by the firms suppliers, it is treated as if the business had actually paid the GST straight to the government. If GST received and charged on sales is greater than GST received and charged (on purchases), then GST Clearing will have a credit balance, as it is a current liability. The business will be required to make a GST payment to the ATO called a GST Settlement. On the other hand, if GST paid and incurred is greater than GST received and charged, the GST Clearing account will be an asset with a debit balance, and the business will be due a GST refund from the ATO. Special Journals Benefits of Special Journals - Special journals summarise similar transactions allowing totals to be posted to the ledger, reducing the number of ledger entries required. They omit insignificant details and ensure Relevance in the Balance Sheet, increasing the efficiency of the recording system. - Journals provide a direct and permanent link between the ledger entries and the source documents that provide the details of the transaction. Control account an account in the General Ledger summarising the transactions recorded in the subsidiary ledger accounts Subsidiary ledger an additional set of ledger accounts kept outside the General Ledger, recording individual transactions for each individual debtor or creditor Benefits of Using Control Accounts & Subsidiary Ledgers - Detection of errors Having two sets of records on the same information gives us a built-in checking (or control) mechanism. The balance of the control account should match the sum of the balances of the subsidiary ledger accounts (which would be detailed in the Schedule). - Ease of reporting By preparing a Schedule/using subsidiary ledgers which are then posted to Control Accounts, only one figure needs to be reported in the Balance Sheet, with insignificant details omitted. These details, such as the names and balances of individual debtors or creditors, would not affect decision making, so in reporting just the total, Relevance is upheld. - Allocation of responsibility Because two sets of records are kept, responsibility for maintaining the subsidiary ledger can be allocated to a particular employee who could then be responsible for all dealings with debtors or creditors or the management of the General Ledger, while also decreasing the likelihood of fraud (Specialise in certain area of duty) Double-checking Mechanism

At the end of the Reporting period, each column in the Cash Receipts/Payments Journal should be totalled. As a double-checking mechanism, the total of the Bank column should equal the sum of the totals of the other columns (except COS). Recording GST in Special Journals In the Cash Payments Journal, GST Settlement is not recorded in the GST column, as this column is only for GST paid to suppliers, on purchases. A GST settlement is paid to the ATO to settle a GST debt. As a result, it must be identified separately, and so is recorded in the Sundries column. In the Cash Receipts Journal, the GST column is only for GST received from customers for cash sales, whereas the GST refund is received from the ATO itself. Consequently, it is recorded separately in the Sundries column Discounts Discount revenue it is a reduction in an outflow of economic benefits (less cash is paid to creditors) in the form of a reduction in liabilities (creditors) that increases owners equity, when creditors are paid early does not need to be paid but reduces debt (C) Discount expense it is a reduction in an inflow of economic benefits (less cash is received from debtors) in the form of a reduction in assets (debtors) that decreases owners equity isnt received be reduces debt (D) Benefits of Discounts - Cash is received faster from debtors. This will allow the business to: pay its own debts on time, allowing it to take advantage of any discounts offered by creditors make other payments such as wages or other expenses. - The possibility of bad debts is reduced. The longer a debt goes unpaid, the more likely it is the debtor will not actually pay at all. - Greater sales may be encouraged. Customers may be more willing to buy from a firm which offers discounts than one which does not, knowing that the amount they end up paying will be less. Costs of Discounts - Less cash is received from debtors. Because a discount reduces the amount the debtor has to pay, less cash is received. - Net profit is reduced. The amount of the discount is an expense, and thus reduces Net profit. Of course, if the discount is received from a creditor (rather than given to a debtor), then these costs become benefits a discount means less cash is paid to creditors, and as the discount is revenue, profit increases. *Note: A settlement discount does not reduce the amount of revenue earned from the sale it reduces the cash received from the debtor, and because it is an expense (to the seller), also reduces profit.

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