Cash accounting

Question 1

Single entry accounting system

Answer 1

A system that allows financial data to be sorted, classified and recorded so that financial information needed to complete accounting reports (such as a balance sheet) can be generated.

Question 2

Service business

e.g

Answer 2

A small business that operates by providing its time, labour or expertise in return for a fee.

(e.g accounting firms, hairdressers)

Question 3

Cash

Answer 3

The business immediately receives or makes payment for the transaction that just occurred

Question 4

Credit

Answer 4

Payment is not made until a later date

Question 5

Journal:

Answer 5

An accounting record that classifies and summarises transactions during a particular reporting period (Journals are key tools in any single entry system)

Question 6

Cash receipts journal

Answer 6

Accounting record that summarises all transaction where cash is received from other entities during a particular reporting period.

Question 7

Cash payments journal

Answer 7

Accounting record which classifies and summaries all transactions where cash is paid to other entities during particular reporting period.

Question 8

Common errors in cash journals

Answer 8

credit transactions are not recorded
Contributions of owner (other than cash) are not recorded
Drawing of assets (other than cash) not recorded

Question 9

A statement of receipts and payments

Answer 9

Is a report that summarises the financial information that has been sorted, classified and recorded in cash journals

Question 10

Opening bank balance

Answer 10

The figure represents how much cash was available in the business’s bank account at the start of the reporting period

Question 11

Closing bank balance

Answer 11

The figure represents how much cash should be available in the business’s bank account at the end of the reporting period

Question 12

Cash surplus

Answer 12

An excess of cash receipts over cash payments, leading to an increase in a positive bank balance or a decrease in bank overdraft

Question 13

Cash deficit

Answer 13

An excess of cash payments over cash receipts leading to a decrease in bank balance or an increase in bank overdraft

Question 14

Advice for cash deficit/ low closing bank balance

Answer 14

1. Effective advertising to boost cash fees/sales
2. Reduce loan repayments
3. Reduce drawings
4. Purchase more inventory of supplies using credit facilities
5. Ask the owner to make a cash capital contribution
6. Borrow cash from a bank (a loan)
7. Organise a bank overdraft facility

Question 15

Advice for a cash surplus/ high closing bank balance

Answer 15

1. Higher loan repayments to reduce debt
2. Owner can take greater drawings in cash from the business
3. Upgrade/ purchase newer non-current assets
4. Expand the businesses operations or open a new store in a new location

Question 16

GST:

Answer 16

Goods and service tax

A 10% tax levied by the federal government on sales of goods and services

Question 17

GST Received

Answer 17

GST received from customers on cash transactions

Question 18

GST paid

Answer 18

GST paid by the business to suppliers on cash transactions

Question 19

What is GST payable?

What is it classified as?

Answer 19

GST owed by the business to the ATO when the amount of GST the business has received on its fees is greater than the GST it has paid to its suppliers

Current liability

Question 20

What is GST receivable?

What is it classified as?

Answer 20

GST owed to the business by the ATO when the amount of GST the business has paid to its suppliers is greater than the GST it has received from customers.

Current asset

Question 21

GST settlement:

Answer 21

A payment made to the ATO by the business to settle GST payment (cash payment)

Question 22

GST Refund:

Answer 22

A cash receipt from the ATO to clear GST receivable (cash receipt)

Question 23

GST payable / GST receivable

Answer 23

Opening balance of GST:
\+ GST received from customers
- GST paid to suppliers
\+ GST refund (to settle previous GST payable) OR -GST settlement (to settle previous GST paybale)
= GST balance

Question 24

How to calculate profit:

Answer 24

Profit = revenue - expenses

Question 25

What is revenue?

Answer 25

An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for capital contribution)

Question 26

What is an expense?

Answer 26

A decrease in assets (or increase in liabilities) that reduces owner’s equity (except for drawings

Question 27

Income statement:

Answer 27

An accounting report that details the revenue earned and expenses incurred during the reporting period

Question 28

How to set up owner’s equity on a balance sheet?

Answer 28

Owner’s equity:
Capital $____
Plus net profit / less net loss $_____

Less drawings $_____. $_______

Question 29

Net profit margin

Answer 29

(Net profit / net sales) x 100

Question 30

How to evaluate NPM

Answer 30

1) Past performances (helps determine trends)
2) Industry averages
3) Budgeted performance/ targets or KPIs

Question 31

How to improve NPM

Answer 31

1) Effective advertising that will boost sales by a greater amount than spent on advertising
2) Renegotiate with existing suppliers to secure a cheaper price for supplies
3) Change suppliers to excess a cheaper price for supplies/materials
4) Buy materials in bulk in order to access a discount marking materials
5) Review staff rostering in order to minimise wage expense
6) Improve service delivery in order to build positive word of mouth in the market which boosts sales

Question 32

Cash payments that are not expenses

examples and effect

Answer 32

Therefore contribute to cash deficit and not effect net profit

Cash drawings
Loan repayments
Cash purchase of non-current assets
GST settlement

Question 33

Cash recipets that are not revenue

Examples and effect

Answer 33

Therefore contribute to a cash surplus and not effect/prevent net loss

Capital contribution
Loan received
GST received
GST refund

Question 34

Structure for (explain a net profit whist cash deficit) and (explain a net loss whilst cash surplus)

Answer 34

Cash and profit are two different measures of performance

Net profit is revenues earned minus expenses incurred, whilst net cash is cash receipts minus cash payments. There are some items that will impact net profit but not net cash and vice versa.

One example is…

Another example is…

(e.g: Capital contribution of $4000 as this is a cash receipt that has contributed to net surplus however is not classified as revenue and therefore would not have the same positive impact on the net loss.)

Question 35

Return on assets

Answer 35

(net profit/total average assets) x 100

Question 36

Average total assets

Answer 36

(Total assets at start + total assets at end) / 2

Question 37

Is a higher return on assets better or lower?

Answer 37

Higher return on assets

indicates efficient use of the businesses assets to earn profit

Question 38

How to improve return on assets?

Answer 38

Same as improving net profit:

1) Effective advertising that will boost sales by a greater amount than spent on advertising
2) Renegotiate with existing suppliers to secure a cheaper price for supplies
3) Change suppliers to excess a cheaper price for supplies/materials
4) Buy materials in bulk in order to access a discount marking materials
5) Review staff rostering in order to minimise wage expense
6) Improve service delivery in order to build positive word of mouth in the market which boosts sales

OR

Reduce average total assets:

1) Sell IDLE/UNPRODUCTIVE assets
2) Sell assets and then lease them back