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Accounting def.
Accounting definitions ch 1 - 4
| Term | Definition |
|---|---|
| Assets | A present economic resource controlled by the entity that has the potential to produce a future economic benefit within 12 months or for longer than 12 months |
| Liabilities | A present obligation of the entity that will result in the transfer of an economic resource within 12 months or after 12 months |
| Ethical considerations | A business must consider the consequences of a decision on the environment and its various stakeholders and have a moral obligation to act with honesty and integrity in all human and financial dealings. |
| Owner’s Equity | The residual interest in the assets of the entity after deducting all its liabilities. The amount left over for the owner. |
| Going Concern Assumption | Financial reports are prepared on the assumption that the existing entity will continue to operate into the future and records are kept on this basis |
| Accounting Entity Assumption | The records of the entity are to be kept completely separate from those of the owner of the entity as well as from those of other entities. A separate set of accounting records is maintained for each entity. |
| Accrual Basis Assumption | Revenue is recognised when earned and expenses are recognised when incurred regardless of whether cash has been received or paid so that an accurate profit or loss can be calculated |
| Period Assumption | Reports are prepared for a particular period of time such as a months or a year, in order to obtain comparability of results |
| Qualitative characteristics | Accounting concepts which govern the qualities of the information in reports |
| Relevance | Reports must include all information which is useful for decision making, excluding information that is not. |
| Faithful Representation | The information reported must be a true representation of the real-world economic event it represents, complete, free from material error and neutral. |
| Verifiability | Reports are based on verified source documents so that informed and impartial observers can determine that they accurately represent what they are supposed to |
| Comparability | Reports should be able to be compared period to period and business to business |
| Timeliness | Information is available to decision-makers in time to be capable of influencing their decisions |
| Understandability | Information needs to be comprehensible to users with reasonable knowledge within clear and concise reports |
| Liquidity | the ability of the business to meet its short term debts as they fall due |
| Working Capital Ratio Equation | CURRENT ASSETS/CURRENT LIABILITIES = RATIO |
| Working Capital Ratio | A liquidity indicator which measures the ratio of current assets to current liabilities to assess the firm’s ability to meet its short term debts as they fall due |
| Debt Ratio | A stability indicator that measures the proportion of a firm’s assets that are funded by external sources |
| Stability | Ability of the business to meet its debts and continue its operations into the future |
| Debt Ratio Equation | (TOTAL LIABILITIES / TOTAL ASSETS) x 100 |
| Sole Proprietorship | Owned and operated by a single individual, operated in their own name or a business name, owner pays tax on their profit |
| Partnership | Owned by 2-20 people in their own names or a business name, governed by a partnership agreement, each partner earns a share of profits or losses and pays tax individually |
| Proprietary Company | Listed as a separate legal entity, 1-50 stakeholders, has letters Pty Ltd after the name, pays tax in its own name at 30% fixed rate |
| Public Company | Listed as a separate legal entity, has unlimited shareholders and is listed on the Australian stock exchange, has the letters Ltd after name and pays tax in its own name at 30% fixed rate |
| Capital contribution | Funds contributed by the owners |
| Retained earnings | Funds generated by the business through past profit |
| Trade credit | Buying goods on credit |
| Bank overdraft | Facility provided by the bank where they allow a business to withdraw more than the funds they have available in the account |
| Term loan | Money lended by the bank for a major purchase |
| Leasing | A form of rental agreement so that the business can have use of an asset without owning it |
| Goods and Services Tax (GST) | A 10% tax levied by the federal government on sales of most goods and services and is classified as a current liability because it needs to be paid to the Australian Tax Office within 12 months |
| Return on Owner’s Investment | A profitability indicator that measures how effectively a business has used owner’s capital to earn profit |
| ROI equation | (Net Profit/Average owner's equity) x 100 |
| Source Documents | Printed or electronic documents that provide evidence that a transaction has occurred |
| Limited Liability | Shareholders have no responsibility for liabilities or losses of the company so their personal assets are safe should the business go bankrupt |
| Unlimited Liability | Owner is personally responsible for all debts and losses and can lose all personal assets registered in their name |
Created by:
SCP006
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