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The Net Value of the

The Net Value of the Business and the Accounting Equation

TermDefinition
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
Created by: rudolph.beukes