Topic 4 - 10 Accounting

Sales Allowance

Occurs when a customer agrees to keep the merchandise they wish to return, and the company refunds a portion of the original sales price.

Sales Return

Occurs when a customer returns previously purchased merchandise.

annual depreciation expense

(cost of asset - expected residual value)/total estimated units x unit production

Annual depreciation expense =

(cost of asset -expected residual value) / asset's expected useful life

Examples of Liabilities

- Accounts payable - Notes payable - Wages payable - Interest payable

Examples of Assets

- Cash - Accounts receivable - Supplies - Inventory - Buildings

Examples of Revenues

- Fees earned - Commissions Revenue - Rent Revenue

GST-Free Supplies

- Fresh food - Educational supplies - Medical products & services - Wages & salaries - Capital contributions and withdrawals - Exported goods.

Examples of Expenses

- Wages Expense - Rent Expense - Miscellaneous Expense

Revenues

Inflows from ordinary activities, money earned by selling goods/services to customers that result in an increase in assets or a decrease in liabilities.

Cost of Goods Sold Calculation

beginning inventory + purchases - ending inventory

Accounting Period

A period of time covered by an accounting report, conventionally reports are made yearly for external users.

What 3 factors determine the depreciation expense for a fixed asset?

1. Asset's initial cost. 2. Asset's expected useful life. 3. Asset's estimated residual value.

What are the 3 depreciation methods?

1. Straight-line 2. Units of output 3. Double-declining balance

Straight line rate =

1/useful life in years

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Net Sales

Initial sales revenue - sales returns and allowances, and sales (cash) discounts taken. Reported on business' income statement.

Goods and Services Tax (GST)

A broad-based tax of 10 per cent on the supply of most goods and services consumed in Australia.

Credit Memo

A business document listing the information for sales return or allowance.

Entity Concept

A business is considered to be separate from it's owners and any other business.

Historical Cost Concept

A business records its transactions based on the amount exchanged at the time the transaction first occurred.

Financial Flexibility

A business' ability to manage cash flows in such a manner that the company can respond appropriately to unexpected change in opportunities & needs.

Perpetual Inventory System

A continuous record of the cost of inventory on hand and cost of inventory sold.

Statement of Comprehensive Income

A financial document showing a company's income and expenditure over a particular time period, usually one year, required by the AASB.

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

GST Collected

A liabilitiy obtained through tax collected by a business from its customers on goods and services provided.

Drawing Account

Account representing the amount of withdrawals made by the owner.

Sales Revenue Account

Account retail businesses record customer purchases of goods on cash or credit, source documents may include sales invoice, cash register tape or credit card receipt.

GST Paid

An asset obtained through tax paid by a business on goods and services purchased.

Business Activity Statement

An entity must complete a statement reporting their tax obligations to the ATO at regular intervals (monthly, quarterly or annually) to accompany their tax payments/claims.

Assets

An entity's economic resources, controlled by the entity, that will provide future benefits to the business.

The Accounting Equation

Assets = Liabilities + Owner's Equity

Balance Sheet Accounts

Assets, Liabilities, Owner's Equity

Closing Temporary accounts of an Income Statement

At the end of the period all income and expense accounts are cleared/reduced to 0 balance, and the difference between the revenues and expense accounts is transferred to Equity so you can start each period with no balance in income and expense accounts.

Balance of Inventory account is included at the end of an accounting period on the __________ ___________.

Balance Sheet.

Where does accumulated depreciation go?

Balance sheet.

Operating Capability

Business' ability to continue a given level of operations in the future.

Sales Policies

Business' policies related to sales of their goods or services, such as discount policies, sales return policies, & sales allowance policies.

Reducing-balance method

Calculates depreciation by subtracting a fixed percentage from the previous year's net book value

Examples of income transactions

Cash and credit sales.

Other Comprehensive Income (OCI)

Certain gains and losses that are excluded from the calculation of net income, but included in the calculation of comprehensive income

Selling Expenses Examples

Consulting expense, advertising expense, sales salaries expense, sales telephone expense, sales utilities expense, rent expense, depreciation expense.

General and Administration Expenses Examples

Consulting expense, office salaries expense, office telephone expense, office utilities expense, office supplies expense, rent expense.

Cost Base

Cost of an asset when first purchased, includes costs of acquiring, holding and disposing of the asset.

Cost of Goods Sold

Cost of the inventory that was sold during the period

Operating Expenses

Costs [other than cost of goods sold] a business incurs in daily operations, including having sales staff, occupying building space and running adverts in the newspaper.

Gross Profit Margin %

Gross profit/sales revenue x 100

Unit of production depreciation

Depreciates the assets based on the actual usage of the asset

Source Documents

Evidence of transactions that have occurred.

Income

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets, or decreases in liabilities, that result in increases in equity.

Transaction

Exchanges with another entity/individual that affect the assets, liaibilities and equity items in an entity.

Depreciation

Expense created by the systematic allocation of the cost of tangible assets (like plant and equipment) to periods in which they are used; represents the expense of using the asset.

Ratio Analysis

Expresses the relationship among selected items of financial statement data, used to compare entity performance to other periods, businesses and benchmarks.

Gains

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Balance of the Cost of Goods Sold account is included on the ____________ ____________.

Income Statement.

When a business purchases inventory it _____________ Inventory by the invoice cost of the merchandise (plus freight charges).

Increases

Why is land not depreciated?

It has an infinite (unlimited) useful life.

Income statement is important because...?

It shows the net profit, which largely defines the financial health of a business.

Net Income

Makes up part of the owner's equity.

Matching Principle

Matching income earned with expenses incurred in earning the revenues in a reporting period.

Net Income/Profit/Earnings

Money remaining after operating expenses are subtracted from gross profit.

Profit Margin %

Net Income/Net Sales x 100

Sales Discount

Percentage reduction of the invoice price if the customer pays the invoice within a specified period, expressed as 5/N30 for a 5% discount if paid within 30 days.

Two Main Systems in Recording Inventories

Perpetual inventory system and periodic inventory system.

When the business sells merchandise it ____________ Inventory and _______________ Cost of Goods Sold by the cost of the inventory it sold.

Reduces; Increases.

Quantity Discount

Reduction in the sales price of a good or service because of the number of items purchased or because of a sales promotion. This discount is not recorded in the accounting system.

Statement of changes in equity

Reports the transactions that affected the owner's equity during the accounting period, linking the income statement and the amount of owner's capital reported on the balance sheet.

Income Calculation =

Revenue + Gains

Accrual Accounting

Revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands, financial statements must be prepared on this basis by accounting standards.

Income Statement Accounts

Revenue, Expenses

Net Income Calculation

Revenues - Expenses

Revenue Recognition Concept

Revenues are recorded when they are realized and can be measured, where there is an exchange of goods or services and assets received can be measured.

Operating expenses can be divided in to ______ and ________ on income statements

Selling expenses; General and administrative expenses

What depreciation method is simplest?

Straight line

When is the expected useful life and residual value of a fixed asset estimated?

When the asset is placed into service.

What happens if a fixed asset has no residual value?

The assets entire cost should be allocated to depreciation.

Going Concern Assumption

The assumption an entity will continue viably for the forseeable future.

Expenses

The cost of providing goods/services to customers, resulting in a decrease in assets or an increase in liabilities.

Monetary Unit Concept

The currency used where the business operates.

Net Loss

The difference between total revenue and total expenses when total expenses are greater.

Liabilities

The economic obligations (debts) of a business.

Owner's Equity

The owner's rights to, and current investment in the entity's assets after all liabilities have been paid.

Risk

The uncertainty about the future earnings potential of a business.

Uses of the income statement for evaluation

To evaluate risk, operating capability and financial flexibility of a business.

Investors use of the income statement

To help judge their return on investment

Creditors use of the income statement

To help make loan decision

End-of-Period Adjustments

Updating and adjusting account transactions that do not have a source document to reflect changes over time at the end of an accounting period.

Carrying value

the value of a non-current asset that is yet to be consumed/allocated as an expense, plus any residual value