accounting

• accounting entity

  • the owner and business are seen as separate entities
  • business activities are recorded separately
• going concern assumption

  • Financial reports are prepared on the assumption that the business is a going concern
• monetary assumption

  • Assumptions that only transactions, which can be, expressed in monetary units i.e dollars and cents are to be recorded in accounting records
  • The assumption requires that daily transactions are not valued in terms of a bartering system
• accounting period assumption

  • Owners want to know how the business is doing (performing)
  • Regular reporting allows the results from one period to the next to be compared
• historical cost

  • Assumes that business transactions are recorded in terms of their cost at the time the transaction occurred
  • Assets will normally be valued in a business’s accounts at they actually cost (historical cost) rather than any estimated current value
  • Any assets purchased years ago are still recorded at their original cost even though their value may be considerably higher now
• service businesses: businesses that provide services to customers, such as restaurants, hotels, and retail stores
• bankruptcy

  • A person is insolvent if they cannot pay their debts when they become due
  • Personal insolvency is covered under the Bankruptcy Act 1966
  • Bankruptcy is declared when an individual is unable to pay either private or business debts owing
• profit ratio

  • profit/net sales
• expense ratio

  • operating expenses/net sales
• debt to equity

  • total liabilities/ total equity
• current ratio

  • current assets/ current liabilities
• quick asset ratio

  • current assets - inventory - prepayments/ current liabilities - bank overdraft
• gross profit

  • gross profit/ net sales
• rate of return on assets

  • profit/average assets
• sole trader: a business owned by one person, who is responsible for all decisions and has unlimited liability

  • easy to establish
  • profits all earned
  • losses can't be shared
• partnership

  • owned by two or more people
  • contribution of skills
  • share risks
  • limited life
  • conflict
  • partnership act of 1895
• proprietary company

  • a company owned by shareholders who have a share in the profits
  • must have Pty
  • limited liability
• sources of finance

  • loan from family
  • credit card
  • bank overdraft
  • term loan
  • lease
• current ratio

  • below 100% = business may find it difficult to pay short term debts
  • 100+ business can pay short term debts
  • ++ business can pay debts with extra current assets available
• gross profit

  • increase in gross profit could be sales price greater than inventory purchase price
  • purchasing inventory at a lower price

  decrease in gross profit

  • new competitors
  • price war