cash accounting for service and business

• Service business


  A small business that operates by providing its time, labour, assets or expertise in return for a fee or charge
• Cash recordings in service businesses


  • Majority of the transactions will be conducted using cash
  • It is important that the accounting system is able to generate information relating to the firm's cash position
• Information the accounting system should cover about the firm's cash position


  • Cash receipts
  • Cash payments
  • Bank balance
• Cash receipts


  The amount of cash the business has received from other entities during a period and sources of cash
• Cash payments


  The amount of cash the business has paid to other entities during a period and the uses of the cash
• Bank balance


  The level of cash on hand at a particular point in time
• Cash receipts


  Increase a firm's bank balance
• Cash payments


  Decrease a firm's bank balance
• Single entry accounting


  Accounting information is communicated to the owner via written reports but these reports are themselves based on information generated by the recording system
• Accounting process


  1. Collect source documents

  2. Record data in journals

  3. Prepare accounting reports
• Source documents


  Documents relating to the cash the business has received and paid during the reporting period
• Small businesses need to keep source documents to satisfy the ATO and verify the information they record in their cash journals
• Journals


  Accounting records in which transactions are written down in an organised format
• Cash transaction journals


  • Cash receipt journal
  • Cash payment journal
• Cash receipt journal


  Summarises all cash received by the business during a particular period
• Cash payment journal


  Summarises all cash paid by the business during a particular period
• Statement of receipts and payments


  Report showing the firm's cash receipts and payments and the consequent change in its bank balance over that period
• The process of recording transactions in journals and then using the summarised information to prepare reports is known as single entry accounting
• Recording in the cash receipts journal


  1. Classify transactions by date, details, receipt number

  2. Record amount in bank column

  3. Record in classification columns

  4. Record infrequent receipts in sundries column
• GST on cash fees


  The GST is a 10% tax on most goods and services sold in Australia, which the business collects from customers on behalf of the ATO
• Statement of receipts and payments


  Summarises the firm's cash receipts, cash payments, and the change in its bank balance over the period
• Cash surplus


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


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


  The amount of cash available in the firm's account at the start of the period, equal to the closing balance from the previous period
• Closing bank balance


  The amount of cash available in the firm's account at the end of the period, which will be reported as a current asset or liability in the next balance sheet
• Deficit


  A decrease in the firm's bank balance
• Overdraft


  A negative bank balance
• The statement of receipts and payments is more useful for decision making than the cash journals because it summarises all the information relating to the firm's cash position
• Cash flow statement


  Classifies cash flows into operating, investing, and financing activities to provide more detailed information about the firm's cash position
• Operating activities


  Cash flows related to day-to-day trading activities
• Investing activities


  Cash flows related to the purchase or sale of non-current assets
• Financing activities


  Cash flows that change the firm's financial structure, such as receiving or repaying loans, or owner contributions/drawings
• Net cash flows


  The net increase in cash position, calculated by adding the net cash flows from operating, investing, and financing activities
• Uses of the cash flow statement


  • Aids decision-making about cash activities
  • Assesses whether cash targets are being met
  • Assists in planning future cash activities
  • Identifies whether operating activities can fund investing and financing activities
• GST payable


  GST received on fees, which the business owes to the ATO
• GST receivable


  GST paid to suppliers that exceeds the GST received on fees, which the business can claim back from the ATO
• Cash flow cover


  A liquidity indicator that assesses the firm's ability to meet its short-term debts using its operating cash flow
• A cash flow cover of less than 1 time indicates unsatisfactory liquidity, as the business has insufficient cash flow from normal activities to cover its current liabilities