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The Net Value of the
The Net Value of the Business and the Accounting Equation
Term | Definition |
---|---|
Small business | Any business where the owner is the same as the manager and which employs under 15 people. |
What is the purpose of accounting | To provide business owners with financial information that will assist them in making decisions about the other activities of their firm |
What is the accounting process | Involves collecting documents , recording financial data and then reporting financial information. Source documents -> records (journals) -> reports -> provides advice |
Types of reports | Balance sheets Income Statement Cash Flow Statement Statement of receipts and payments |
Types of records | Cash receipts journal Cash payments journal Sales journal Purchase journal |
What is accounting | An information service where the day to day operations of a small business, is summarised into a form which the owner an study to determine their next step. |
Qualitative characteristics of accounting reports | Comparibility: should be comparable over time Understandability: presented in a manner that is easy to understand Relevance: all info that is used for decision making Reliability: info is free from bias and thus accurate |
The Accounting Principles | Monetary unit Reporting period Conservatism Consistency Historical cost Entity Going concern |
Monetary unit | all items must be recorded and reported in a common unit of measurement (AUS dollar) |
Reporting Period | all life of the business must be divided into periods of time to allow reports to be prepared |
Conservatism | losses should be recorded when probable but gains should only be recorded when certain |
Consistency | accouting methods should be applied in a consistent manner to ensure that the reports are comparable between periods |
Historical | cost the recording of a transaction at its original cost, as this value is verifiable by a source document |
Entity | the business is assumed to be seperate from the owner and other business |
Going concern | the life of the business is assumed to be continuous |
Assets: | a resource controlled by an entity, which is believed to benefit the success of the business |
Liabilities: | an obligation of the entity, which is believed to benefit the success of the business |
Owner's Equity: | the amount of money the owner puts into the business, making it the left over when assests are deduced from liabilities |
Revenues: | an increase in assets or decrease in liailities, which results in the inflow of economic benefits |
Expenses: | decrease in assets or increase in liabilites, causing money to exit the business. |
Liquididty | The ability of the business ti meet its short-term debts as they fall due |
Working Capital Ratio (WCR) | A liquidity indicator that measures the ratio of current assets to current liabilities to assess the firm's ability to meet its short-term debts |
Stability | The ability of the business to meet its debts and continue its operations in the long-term |
Debt Ratio | Measures the proportion of the firm's assets that are funded by external sources |