Accounting process, theory and principles

Accounting process

• All transactions, whether buying or selling, require documentation
• Transaction documentation needs a source document, like a tax invoice or purchase receipt
• Journal recordings are for sales or purchases, categorized as a general journal
• Information from a general journal is processed in a general ledger
• Reports go to people, there are two types
• Income statement: Reflects profit and loss
• Balance sheet: Financial position or net worth

Accounting Theory

• Consists of Accounting Principles
• AASB Accounting Standards
• Conceptual Framework for Financial Reporting

Accounting Principles

• Monetary Principle stipulates that all reported items have a monetary value and are recorded with a $ sign
• Accounting Entity Principle (Business Entity Principle) defines a business as separate from its owner and states that the owner's personal financial transactions are not recorded in business statements
• Accounting Period Principle is usually the fiscal year, which runs from July 1 to June 30
• Going Concern Principle assumes the business will operate in the foreseeable future
• Historical Cost Principle indicates that asset value is recorded at its purchase value
• Materiality Principle stipulates that all information must be included to avoid misleading investors

AASB Accounting Standards

• The Australian Accounting Standards Board was established in 1985
• Issues accounting rules for companies listed on the Australian Securities Exchange
• Accounting principles do not need to be followed if you are one of these companies
• In 2005, they were modified to align with international accounting standards

The Conceptual Framework for Financial Reporting

• Refer to documents on the connect page
• Sets qualities of good accounting
• Defines accounting terms

The Balance Sheet

• A balance sheet shows the financial worth of a business
• There are three components to a balance sheet:
• Assets
• Liabilities
• Equity

Structure of a Balance Sheet

• Balance sheets show current assets, current liabilities, non-current assets, non-current liabilities, and equity
• Sample balance sheet: A Business Balance Sheet as at 30 June 2019

Assets

• Assets are items owned by a business that have value
• Examples include cash at bank, accounts receivable/debtors, property, and vehicles

Conceptual Framework Definition - Asset

• An asset is a present economic resource which is controlled by an entity as a result of past events
• An economic resource is something with value, such as money
• An entity is an organization such as a business

Liabilities

• Liabilities are the value owed by the business
• Examples include accounts payable or creditors, loans, overdrafts, and telephone bills

Conceptual Framework Definition - Liabilities

• A liability is a present obligation of the entity to transfer an economic resource as a result of past events
• It is a business’s financial obligation to pay

Equity

• Equity is the value of resources the owner has contributed to the business
• Equity is calculated by subtracting the value of liabilities from the value of assets

Conceptual Framework - Equity

• Equity is the residual interest in the assets of the entity after deducting all its liabilities

Accounting Equation

• The accounting equation is A - L = Eq
• Alternatively, A = L + Eq

Sample Accounting Equation

• Assets can equal $25,000 (car) = Liabilities $6,000 (house) + Equity $19,000 (savings)

The Income Statement

• The income statement has two elements: income and expenses
• When income exceeds expenses, it's a profit
• Conversely, when income is less than expenses, it's a loss

Income

• Income comes from sales of stock or inventory, sales of assets, fees from services, interest, and discount received

Conceptual Framework Definition - Income

• Income is increases in assets or decreases in liabilities that result in increases in equity, not relating to contributions from holders of equity claims

Expenses

• Expenses are resources consumed by the business
• Examples include rent, electricity or phone bills, wages, and advertising

Conceptual Framework Definition - Expenses

• Expenses are decreases in assets or increases in liabilities that result in decreases in equity, not related to distributions to holders of equity claims

Double Entry Accounting

• Every transaction affects two accounts
• For example, purchasing a computer for $3000 increases the asset "computer" by $3000 and decreases the asset "cash at bank" by $3000

The Accounting Cycle

• Collect collection of raw data from source documents such as receipts and cheque butts
• Record data in financial records within the General Journal
• Transfer information from the General Journal to the General Ledger
• Close the income and expense accounts and transfer the totals to the Income Statement, the final profit or loss is transferred to the Balance Sheet
• Once those are done, you need to balance the equity, assets, and liability accounts

Source Documents

• Examples include original records of a transaction, order forms, delivery notes, receipts, cheques, and invoices

Journals

• Are individual accounts classified as assets, liabilities, equity, income, or expenses
• For example, cash is classified as an asset

General Ledger

• It is an accounting record with individual business accounts
• Includes details of transactions within the accounting period

Debit and Credit

• In double-entry accounting, debits and credits must balance
• Debit is on the left, and credit is on the right

Rules of Debit and Credit

• The rules for debits and credits increase Asset and Expense
• The rules for debits and credits decrease Liability, Income, and Capital

Purpose of Financial Statements - Informing Decision-Making

• Readers, including investors, creditors, and management, use financial statements for decisions
• The Income Statement indicates profit-generating ability, sales volume, and expense details for trend analysis
• The Balance Sheet provides the business's financial status and assesses liquidity, funding, and debt
• Statement of Cash Flows presents cash receipts and disbursements across segments, which may not align with the income statement

Credit Decisions

• Lenders use statements to decide whether to lend or restrict credit, and even terminate loans

Investment Decisions

• Investors use information from sources to determine share prices
• Acquirers use financial data to set acquisition prices

Taxation Decisions

• Government entities use financial statements to get tax information based on assets or income

Legislation for Sole Traders and Partnerships

• GST Act 1999 (WA)
• Business Names Registration Act 2011 (Cth)
• Partnership Act 1895 (WA)

GST Act 1999 (WA)

• GST is a broad-based tax of 10% on most goods and services
• Businesses must register for GST if their annual turnover is over $75,000

Business Names Registration Act 2011 (Cth)

• Commonwealth law sets out the registration, renewal, and cancellation of business names in Australia
• All Australian businesses must apply for a business name

Partnership Act 1895 (WA)

• Governs the legal framework for partnerships
• Includes The Nature of the partnership, Execution of Partnership Agreements, and Liability for wrongful acts

Australian Business Number (ABN)

• Businesses use the ABN for the Australian Taxation Office (ATO) to identify them
• Entities may withhold tax if an ABN is not provided

Principles and Features of GST

• Taxable supplies: GST must be charged when invoicing for registered businesses
• GST-free supplies: GST is not charged, such as for cars used by disabled people and child care
• Input taxed supplies: Refers to sales of goods and services that do not include GST in their price, for example, financial supplies and selling residential properties

Accounting and Reporting for GST

• Business Activity Statement, BAS, must be submitted either monthly or quarterly
• A business must accurately record all GST paid and collected

Who Lodges a BAS?

• Small businesses registered for GST must lodge a Business Activity Statement
• You must register for GST if
• Your business has a GST turnover (gross income minus GST) of $75,000, or more per financial year
• Your non-profit organization has a GST turnover of $150,000, or more per financial year
• You are a taxi driver/rideshare driver, regardless of turnover

BAS Lodgement Dates

• If turnover is less than $20 million you can choose between monthly or quarterly lodgement
• January - December monthly lodgement is the 21st of the following month
• Quarterly lodgement periods are:
• July, August, September: 28 October
• October, November, December: 28 February
• January, February, March: 28 April
• April, May, June: 28 July

How to do a BAS Statement

• There are three steps:
• Prepare your information - Reconcile accounts to ensure information accuracy and ensure source documents are available
• Calculate your totals and enter figures, if calculating manually, you can use a GST Calculation worksheet
• Lodge and update. Via mail to the ATO, online through ATO portal, or through a Tax agent

Calculation of the GST

• GST is calculated on the sale price of goods and services, there are two ways to advertise a price:
• GST inclusive: the tax is already factored into the advertised price
• Plus GST: the tax hasn't been added yet and will be added to the advertised price

Plus GST

• To add GST, multiply the total by 0.1 (or 10%)
• Alternatively, for the total price, multiply the original price by 1.1 (110%)
• For example, if the price excluding GST is $100, the GST amount is $10 and the price including GST is $110

Price Includes GST

• Work out how much GST is included, or the pre-GST price
• Multiply the total price by 11
• Divide by 1.1 for the total price before GST
• For example, if the price including GST is $110, the GST amount is $10, and the price excluding GST is $100