Theory

Question 1

What is a manufacturing business

Answer 1

businesses that use raw materials and resources to produce a final product

Question 2

What is a trading business -both types

Answer 2

Retail- business that recieve final products from the wholesalers and sells the products to the consumer at a final price
-wholesaler- businesses that buy from a manufacturer in bulk to sell to the retailers and at times directly to the consumer at discounted prices

Question 3

What is a service business

Answer 3

Businesses that provide a service or perform an action in return for a charged fee.

Question 4

What are the characteristics of a sole trader business

Answer 4

• 1 owner
• unlimited liability. The business name isn’t seperated from the owner
• it is difficultto raise capital and is limited as it is only a single person
• owner gets all the profit
• transferring ownership is difficult and can only be done through a will or some form of legal process to secure the passing on of the business
• the accounting entity- business records must be kept seperate and distict from the owners personal records
• the legal entity states that the owner is totally responsibile for the businesses debts
• the continuity of existance of a sole trader is that if the owner dies or retires the business collapses

Question 5

What are the characteristics of a partnership business

Answer 5

• 2-20 opartners
• unlimited liability.
• it is easier to raise capital as up to 20 contributing
• profit must be shared among partners depending on partnership agreement
• transferring ownership is difficult because there must be an unanimous agreement ot agreed terms to leave partnership or accept new partners otherwise partnership ceases
• the accounting entity- business records must be kept seperate and distict from the owners personal records
• the legal entity states that the partners are totally responsibile for the businesses debts (shared according to partnership act or agreement)
• doesn’t exist by law but can be changed if an agreement is made to change the law about continuity.

Question 6

What are the characteristics of a proprietary company

Answer 6

• 1-50 shareholders
• Debts that are created are limited. Shareholders are not responsible for company debts. They are protected by law. The company name itself is regarded as a seperate person and is responsible for debts.
• Raising capital is much easier but can be limiting if business is growing fast and only have up to 50 people
• when distributing profit the shareholders recieve profit in the form of dividends. The size will depend on size of investment .
• when transferring ownership the shareholders can enter and leave the company without any effect on the compnay itself
• business records must be seperate and distinct from owner’s personal records
• the company itself is responsible for all debts becasue the law has createcd a seperate person with its own identity
• the company survives and isn’t interupted by shareholders entering and leaving the company

Question 7

Define Asset + recognition criteria

Answer 7

An asset is a RESOURCE CONTROLLED by the entity as a result of PAST EVENTS from which FUTURE ECONOMIC BENIFITS are expected to flow to the entity.

1. It is probable that an inflow of future economic benifits will occur.
2. The value of the asset can be measured reliably

Question 8

Define Liability + recognition criteria

Answer 8

A liability is a PRESENT OBLIGATION of the entity ARISING FROM PAST EVENTS settlemeny pf which is expected to result in an OUTFLOW from the entity of RESOURCES embodying ECONOMIC BENIFITS

1. It is probable that an outflow of future economic benifits will occur.
2. The value of the liability can be measured reliably

Question 9

Define Equity

Answer 9

Equity is the RESIDUAL (remaining) interest in the ASSETS of the entity after DEDUCTING all its liabilities

Question 10

What steps must you do to prove an element

Answer 10

1. State Definition
2. Prove Definition
3. State Recognition criteria
4. Prove recognition criteria
5. Summary

Question 11

What is the Accounting Equation + when would you use each

Answer 11

A=L+EQ-sole trader
L=A-EQ- Financial Institutions
EQ= A-L- Companies, Shareholders

Question 12

What does the current ratio assess

Answer 12

The liquidity of the business in the short term- how many current assests available to be converted to cover current liabilities

Question 13

What does the quick asset ratio assess

Answer 13

how many highly liquid assets are available to cover urgent costs- the liquidity of the business in the very short term

Question 14

What does the debt to equity ratio assess

Answer 14

the level of gearing or leverage (outside funding) gearing is referred to as positive if the owner funds the business more than outsiders and negative is opposite
negative = high gearing

Question 15

What does the accounting period assumption state

Answer 15

It assumes that the life of the business can be divided into intevials of time known as periods. This is necessary for regular reporting to outsiders.

Question 16

What does the accounting entity assumption state

Answer 16

That the records of the business are kept seperate and distinct fromt the owner’s personal record. Records are kept from the point of view of the business NOT the owner

Question 17

What does the monetary assumption state

Answer 17

Financial transactions are recorded in the monetary unit of the country.

Question 18

What does the continutiy assumption state

Answer 18

It is assumed that the life of the business will continue into the forseeable future which allows for the regular reporting. This allows account values to be reported to be reported in historical terms. If the business isn’t assumed to survive in the forseeable future, the values are reported at their current market valuations.

Question 19

What does the historical cost principle state

Answer 19

An asset is recorded in an accounting system at its acquistition value and this value is NOT changed as time passes. The aquistion value means the purchase price plus additional cost in getting the asset ready for use.

Question 20

What does the concept of materiality state

Answer 20

Items of significance that will affect the docision making ability of users must be reported. It is termed as material. The size of the item and its significance will be determined by the size and nature of the business. What is material for one business may not be for another.

Question 21

What are internal sources of finance

Answer 21

Capital by owner, retained earnings (reinvesting profit instead of withdrawing them)

Question 22

What are advantages and disadvantages of internal sources of finance

Answer 22

Advantages- doesn’t have to be paid back, no ongoing costs, immediate return on investment isn’t needed)
Disadvantages- limited resource, benifits of leveraging (getting more money to buy something of better quality) is lost, exapansion is limited

Question 23

What are external sources of finance

Answer 23

Overdraft (temporary, interest charges occur, not sutiable for the purchase if non currrent assets)
Bill of exchange (type of loan where bank gets the finance from an outside investor, available for 180 days or less, interest rate is high)
Term Loan- (long term, fixed number of years, interest applies, can be secured or non-secured)
Lease Finance- (renting an item which isn’t money, asset is returned as the end of the term, regular payments)
Trade Credit- ( Creditors, buy now pay later)
Credit cards- (interest rate high, debt can spiral if not managed appropriatly)

Question 24

Define General Journal

Answer 24

A book of original entry. Transactions are first recorded into this book

Question 25

Define Ledger Accounts

Answer 25

The name of an element found in the balance sheet. The left side of this account is called debit and the right side is called credit.

Question 26

Define General Ledger

Answer 26

A book that houses all the ledger accounts

Question 27

Define Narration

Answer 27

A sentence that records the reason for the double entru recorded in the general journal

Question 28

Define Posting

Answer 28

The transferring of information from the general journal to the general ledger.

Question 29

Define Chart of Accounts

Answer 29

A system of numbering accounts in the general ledger to provide authoritive access to the general ledger. It serves as a protection to enetering the accounting systems and provides classification of accounts into their elements.

Question 30

Define Balancing Accounts

Answer 30

The process of determining the balance of the ledger account by using the balance carried down and brought down method.

Question 31

Define Double Entry Accounting

Answer 31

A system used in the general ledger where every account that is debited with an amount. a corresponding account is credited with the same ammount.

Question 32

Define Cross Refrencing

Answer 32

The process of recording the corresponding account name in the particulars column of a ledger account to ensure an account was debited and another account was credited. It serves as a tracking system for errors and ensuring that double entry accounting rules are followed in the general ledger.

Question 33

Define Trial Balance

Answer 33

A statement that list ledger accounts and their final values after they are balanced. The purpose is to check the accuracy of the general ledger before reports are prepared.

Question 34

Define Internal Control

Answer 34

This is the set of business rules/ policies and regulations/procedures designed to protect the assets of the business to prevent fraud and ensure the business operates efficiantly

Question 35

Why is Internal Control important

Answer 35

-helps to achieve the objective of providing timely qnd accurat information for users to make decisions and assisting in settling accounability(responsabilities). When a business is small the owner can effectivly control all aspects of the business, As the business grows this becomes for difficult, necessitating great reliance on employees

Question 36

What are the objectives of Internal Control

Answer 36

To safeguard the assets of the business, check the accuracy and reliability of the accounting data, promote organisational effeciency within the business, esure correct procedures, policies and regulations are followed

Question 37

What are the two types of Internal Controls

Answer 37

Administrative and Accounting Controls

Question 38

What do Accounting Controls do and how is it done

Answer 38

Safe guard assets and ensure accurate and reliable accounting data Reliable and com[etent personal, verification, authorisation, responsibility, seperation of duties, serialisation of documents, physical controls/ security

Question 39

What do Administrative Controls do and how is it done

Answer 39

``` Imporve Operational efficiancy and ensure there are compliance to business policies Personal control (appopriate staff selection and performance results), Quality control, Supervisory control, other controls (risk managment procedures) ```

Question 40

What are some limitations of internal control

Answer 40

- staff sze - Not all errors are easily detectable - False reporting- staff who conspire to do the wrong thing are not easily detectable - Unusual transaction aren't easily detectable - Supervisors-people in authority can override an internal control system - Review- systems require regular review to pick up inefficiencies - Cost

Question 41

How do you control cash

Answer 41

-have a safe -bank regualarly -record payments -regular bank reconcilliation -acoounting procedures (reciepts, cheque butts, invoices 0 have several people in the process of handaling cash -have a supervisor checking processes -credit cards + other cards eliminate error -cameras and other electronic equiptment

Question 42

How do you control debtors

Answer 42

-check credit history, credit rating, protect money owing with collateral, put procedures in place to folllow customers, make sure they have a regular source of income, remind customers to pay, keep records of money owed, give variety of payment options, provide reward systems for prompt payment

Question 43

How do you control stock

Answer 43

record, count amount of stock left on shelves, ordering stock needs to be recorded, avoid wastage, make sure deliveries are correct, segregate duties to avoid theft

Question 44

How do you control non-current assets

Answer 44

Have security, regular stock take on non-current assets, train staff to use them properly, record them and insure them

Question 45

How do you control creditors

Answer 45

pay on time, file invoices and other statements related to them, segregate duties, budget, inform creditors of financial situation,

Question 46

What should you consider when supplying credit to customers

Answer 46

Credit history Past borrowings, repayment history, all personal & business informantion, credit lines they currently have, bankrupty history (last 7 years) Employment history- employment level, income and work stability Security- Collateral and Guarantors Bad Debts- Assessing the likelihood of becoming a bad debt, the extent of the effect on your businesses case flow

Question 47

What is Input Tax credit

Answer 47

Asset- when businesess buys things for themsleves get money back from government

Question 48

What is GST Payable

Answer 48

Liability- when consumers purchase things from the business, it is a liability because it doesn't belong to the business. Must be passed onto ATO

Question 49

What is GST

Answer 49

It is a national tax -> 10% however you need an ABN and if not businesses that trade with you must pay 45% of GST on product.

Question 50

What is BAS

Answer 50

Business Activity statement- summary of GST and determines if you owe money or will get a refund from ATO

Question 51

Define Taxable supply

Answer 51

a product in which GST can be charged

Question 52

What are GST exempt products

Answer 52

Fresh food, medical services, education, child care, exports

Question 53

What are input taxed supplies

Answer 53

products that GST is not charged on and it isn't possible to claim GST input tax credit on these items e.g bank loans

Question 54

Define Income + recognition criteria

Answer 54

INFLOWS or ENHANCEMENTS of ECONOMIC BENIFIT that result in an INCREASE in assets and a DECREASE in liabilities and an INCREASE in equity (other than contributions by equity participants) 1. It is probable that inflows or enhancement will flow to the entity 2. Can the inflow or enhancement be measured reliabily

Question 55

Define Expense + recognition criteria

Answer 55

CONSUMPTIONS of ECONOMIC BENIFIT that result in an DECREASE in assets and a INCREASE in liabilities and an DECREASE in equity (other than contributions by equity participants) 1. It is probable that outflows of economic benifit will occur 2. Can the outflow be measured reliabily

Question 56

What are the difference in the system in perpetual v Periodic

Answer 56

computerised v manual

Question 57

What are the difference in the stock lines (detail) in perpetual v Periodic

Answer 57

detailed v simple

Question 58

What are the difference in the recording of sale price and cost price in perpetual v Periodic

Answer 58

Records both v only sale price

Question 59

What are the difference in the cost of sales account in perpetual v Periodic

Answer 59

Cost of sales in ledger v doesn't exist

Question 60

What are the difference in the inventory account (updating) in perpetual v Periodic

Answer 60

updated continuously v only updated once a year/ when stock take is done

Question 61

What are the difference in the gross profit in perpetual v Periodic

Answer 61

can be detemined at anytime v only when stock take is done becasue it requires both opening and closing stock figures

Question 62

What are the difference in the recording of stock movements in perpetual v Periodic

Answer 62

recorded through inventory account/ uses many seperate accounts ie purchases ac, purchases return ac. Inventory account not touched

Question 63

What are the difference in the stock take in perpetual v Periodic

Answer 63

determined anytime v only done when closing stock is required

Question 64

What are the difference in the shrinkage in perpetual v Periodic

Answer 64

easily determined v only be determined when stock take is done

Question 65

What are the difference in the stock lines (speed) in perpetual v Periodic

Answer 65

best or slow stock line can be determined readily v only done when stock take is done

Question 66

What are the difference in the gross profit reports in perpetual v Periodic

Answer 66

reports produced readily v only can be determined once stock take is done

Question 67

What are the difference in how cost of sales is determined in perpetual v Periodic

Answer 67

determined through account of cost of sales v calculated as opening stock + purchases - purchase returns - closing stock.

Question 68

What are the difference in the purpose of stock take in perpetual v Periodic

Answer 68

main purpose is to determine shrinkage v main purpose to determine closing stock and calculate cost of sales

Question 69

What are the difference in the expense and training in perpetual v Periodic

Answer 69

more training and more expensive v simple to operate and less expensive

Question 70

What must a partnership follow if there is no partnership agreement

Answer 70

Partnership act (1895)