Accounting IA2 Gloassary

Financial Statement Reporting Glossary

• Accounting period: A 12-month period, typically from July 1 to June 30 in Australia.

• Accounting entity concept: Separates the business owner from the business for accounting purposes.

• Accounting period concept: Divides the business's life into arbitrary time periods for accounting.

• Accrued expenses: Expenses incurred in a period but not yet paid.

• Accrued revenue: Revenue earned in a period but not yet received.

• Assets: Items a business owns or controls.

• Bad debts: Accounts receivable that cannot pay their debts.

• Bad debts recovered: When a previously written-off bad debt is paid.

• Balance Day Adjustments: Entries made at the end of an accounting period to match revenues and expenses accurately to determine profit and to account for previously unrecorded assets/liabilities.

• Comparative financial statements: Compare current financial statements with previous periods.

• Current Ratio: The liquidity ratio (current assets/current liabilities), used to assess a company's ability to pay its short-term debts. A current ratio greater than 2:1 is generally considered favourable.

• Depreciation: The allocation of an asset's cost over its useful life. Used typically for physical assets.

• Doubtful debts: Estimates of debts expected to be bad from past sales; used because of the matching principle.

• Expenses: Resource outflows from business operations.

• Going concern principle: Assumes a business will continue operating indefinitely.

• Gross profit ratio: Gross profit / net sales x 100; Measures how much gross profit is generated for each dollar of sales.

• GST credits received: GST paid on expenses and asset acquisition.

• GST collected: GST collected from sales of inventory, assets, and services, payable to the Australian Tax Office (ATO).

• GST clearing: A ledger account to calculate GST owed to/by the ATO at the end of the accounting period.

• Historical cost principle: All assets are initially recorded at the cash price paid at acquisition.

Additional Concepts (Page 2)

• Inventory adjustment: Ensures inventory count equals accounting records, handling shortages/surpluses.

• Liabilities: Amounts owed to external parties.

• Limitations of financial reports: Accounting reports rely on concepts and principles; may have limitations in accuracy and reliability.

• Matching principle: Matches revenues in one period to expenses incurred in earning those revenues.

• Materiality: Importance of an item relative to a particular entity; only material costs are included in the cost price of an asset.

• Monetary principle: All transactions are recorded in a common monetary unit.

• Net profit ratio: Calculated as net profit / net sales, measures profitability per dollar of sales.

• Non-current assets: Assets used in business operations longer than one accounting period.

• Over-provision for doubtful debts: Opening balance of provision for doubtful debts is higher than bad debts during the period.

• Owner's Equity: The difference between a business's assets and liabilities representing owner investment.

• Prepaid expenses: Cash payments recorded as assets until their benefit is used.

• Provision for doubtful debts: Estimates of debts unlikely to be paid in the next period; helps with the matching principle.

• Qualitative characteristics of financial information: Characteristics like relevance, reliability, comparability, and understandability for financial reports.

• Quick ratio: Indicates a company's ability to meet immediate debts using quick assets (cash, near cash, receivables) / current liabilities. A ratio > 1:1 is favorable.

• Revenue: Inflows of resources from business operations.

• Return on owner's equity: A measure of profitability related to owner investment. =(net profit / avg owner's equity) * 100

• Return on total assets: Measure of profitability relative to total assets, a measure of how well a company uses its assets to generate profit. =(net profit/ avg total assets)*100

Additional Concepts (Page 3)

• Statement of Financial Position: Shows a company's assets, liabilities, and owner's equity at a specific time.

• Statement of Profit or Loss: Summarizes a company's revenues and expenses over a period, resulting in profit or loss.

• Turnover of accounts receivable Effectiveness of collections, evaluates if accounts receivable are too high. Calculated as (Net Credit Sales) / (Average Accounts Receivable)

• Turnover of inventory: Measures how quickly inventory is sold, indicating inventory liquidity = (Cost of Goods Sold) / (Average Inventory)

• Under-provision for doubtful debts: Opening balance of provision for doubtful debts is lower than bad debts written-off during the period.

• Unearned revenue: Revenue received in advance for future services.

• Write-off debt: When a debt is marked as no longer collectible.