MBU Economic Notes PDF

Economics 25/6/24 LI: To develop an understanding of economics. Definition: Economics is the study of how society uses limited resources to satisfy unlimited needs and wants about the production and consumption of goods and services If focuses on the choice of how resources of used, shared and cons...

Economics 25/6/24 LI: To develop an understanding of economics. Definition: Economics is the study of how society uses limited resources to satisfy unlimited needs and wants about the production and consumption of goods and services If focuses on the choice of how resources of used, shared and consumed, and the consequences of their choices Economy -When a country or a geographical region is defined in the context of its economic activity -Examples: Australia as a nation, Melbourne is a town, St Albans is a suburb Economics -All about how decision-making about the use and allocation of resources -Example: How the government allocates money in its budget Microeconomics Microeconomics focuses on the economic behaviour of individuals, households and companies Principles of microeconomics 1. Demand, Supply & Equilibrium: prices are determined by supply and demand 2. Production theory: how goods and services are created 3. Cost of production: price of goods and services is determined by the resources used during production 4. Labour economics: workers and patterns of wages, unemployment Macroeconomics Macroeconomics takes a wider view and looks at the economy on a larger scale such as; regional, national and global. Looking at the decisions of countries and government Examples: Interest rate, inflation, GDP, national income, unemployment rates, etc… Goods and services Goods are physical objects, natural or manufactured that command a price Examples: Food, clothing, land, cars Services are intangible (they can't be touched in the same way as goods are), and most are non-transferable Examples: Doctors, accountants, physio Economy An economy is an area in which economic ‘agents’ (people who are part of the economy), produce (make), and purchase and consume goods and services. Needs & Wants Needs: Things that are necessary for survival Wants: Not necessary for survival but that we desire to make our lives better. The economic problem First assumption -Human wants are unlimited Once our basic needs have been met we want something bigger and better Second assumption -Resources of limited Creates an economic problem of “relative scarcity”: Limited resources being available to satisfy unlimited wants Scarcity is the state of short supply Example: freshwater, natural resources of oil LI: To understand the different types of economic resources needed in the production process Economic resources Economic resources are the inputs required by the producer to complete the production process Production process -The actual making of goods and provision of services Classifying economic resources 1. Land 2. Labour 3. Capital 4. Enterprise (Management) 1. Land Refers to the natural resources including: -Fertile pastures for crops and farm animals -Mineral reserves, which could be used in the construction of buildings, bridges, motor vehicles and so on -Forests, which provide timber for buildings, specimens for medical research etc -Oceans, provide fish to eat, pearls to wear etc 2. Labour Is the people power made up of human skills and effort available in the production process? Examples- Builders, cleaners, accountants 3. Capital The machinery, technology, plant and buildings made by people to assist in the manufacture of goods and provision of services Increases the efficiency of the production process and includes computers, ladders, trucks, cranes, etc 4. Enterprise Refers to the quality individuals possess that makes them able to accurately perceive market opportunities and effectively coordinate the production process Entrepreneur Someone willing to take risks and start a new business venture to make money How chocolate is made Land: Cocoa, oil, mushroom, farmland Labour: Operating machines, farmers, packaging Capital: Mixer, roller: wrapper, juicer Enterprise: Recipe, promoting, supply chain, relationship with supermarkets, organisation or workforce How a burger is made Land: Whole grain, cow, beetroot, farmland, lettuce Labour: chef, farmers Capital: Oven, Frying pan, spatula Enterprise: Recipe, supply chain Opportunity cost 27/6/24 LI: To understand opportunity cost and its relationship to economics Opportunity cost is the value of the lost alternative to which the economic resources could have been allocated Opportunity cost goes beyond the monetary outlay, and due to the unlimited wants that may have been given up, it can often be hard to measure. (Not necessarily) Opportunity cost application example Opportunity cost for a cafe operating on Sunday Benefit: more customers Cost: Missing, day off work, paying staff more Production possibilities cafe Production possibilities in a one-hour time frame for a cafe Coffee $6 40 - $240 30 - $180 20 - $120 10 - $60 0 Toastie $11 0 5 - $55 10 - $110 15 - $165 20 - $220 Total $240 $235 $230 $225 $220 1.5 minutes/ coffee 3 minutes/ toasties Four categories of resources: McDonald's Land: Farm, cows, milk, egg Labour: Farmers, employees Capital: Fryer, Ice cream/ coffee machine, order machine Enterprise: Manager of the store- responsible for training, organise, serve customers promptly Circular Flow 15/7/24 LI: To understand how the circular flow represents the flow of resources from households to businesses Households provide resources needed for the production of goods and services, and then buy the goods and services produced by businesses Businesses buy resources from the households and turn them into goods and services via the production process (Buy resources, then turn them into products that customers purchase) 4 step relationship between households and businesses How do households and businesses interact? 1. Households provide resources to the production process. The resources are sold to the business sector. 2. Businesses’ in return for the resources, provide income to the households 3. Households are able to use the income they received from selling their resources to buy (spend money) goods and services from businesses 4. Businesses uses the resources they have purchased to produce goods and services Land-Rent Labour-Wages Capital-Interest Enterprise-Profit Circular Flow for Maccas Households - Resources | / Businesses - Maccas Households provide resources to Maccas: chicken, beef, potato, workers Maccas income to households: wages, salary Households expenditure to Maccas: soft serve, burgers, nuggets, fries Maccas production to households: producing what the customer orders Circular flow for SASC Households - resources - sasc: students, teachers, staffs Sasc - income - households: education Households - expenditure - sasc: English, Maths, MBU, EAL , Art, Music Sasc- production- households: to graduate, to have success, to pass all subjects Law of demand & law of supply 16/7/24 LI: To be able to explain the law of supply and law of demand Market is where goods and services are exchanged as a result of buyers and sellers being in contact with one another, either directly of through mediating agents or institutions How do markets work? Market work to determine the answer to the following questions: 1. What to produce? 2. How to produce? 3. Whom to produce? What to produce? It is the consumer who decides what the limited resources will be used for. The producer organises, land, labour and capital resources in the process to make the goods demanded and moves away from goods consumers do not want So, what to produce is decided by the level of consumer demanded How to produce? The producer must attempt to produce their goods or services in the most cost effective way. There are two types of choices: A labour - intensive technique which would employ relatively more labour (people) and capital resources. On the other hand, capital - intensive technique means more capital and less labour resources. Whom to produce? Deciding who is the end consumer of the goods and services that are produced. Every good produced is made for a specific section of society due to difference in the paying capacity of the consumer Law of demand The law of demand shows the relationship between the price and level of demand for a good or service So if price rises, the demand falls, and when price falls, demand rises What factors influence the demand? Demand Factors: events that change consumer willingness to pay without … Demand Factors - Level of income - Preferences and expectations - Price of substitutes - Price of complementary products Law of supply The law of supply states that if the price of a good or service rises, producers will be prepared to increase the amount produced to the market. The law of supply states that … Supply Factors Those events that change the willingness and ability of a supplier to supply goods and services without a change in the price of the product itself -Price of inputs and cost of production -price of other products Types of Economies LI: To learn about the different types of economic systems used by different countries Types of Economies 1. Traditional Economy 2. Command Economy 3. Market Economy 4. Mixed Economy Traditional Economy - Tend to be in second and third world countries that are dependent on land, particularly for farming. They lack adequate capital, and are only able to produce enough for subsistence living. Exchange of goods often involves bartering E.g. PNG, parts of Africa Command Economy - Controlled by the central government. Government creates an economic plan which determines how much is produced & prices Government owns all the significant industries like utilities, aviation and railroads E.g. Communist countries like China and North Korea Market Economy - Relies on free market & has no government involvement in the economy Private companies control resources There are no real world examples because all economies have some degree of government involvement. 1. What are the benefits for the state of Tasmania through building the stadium? Provide more jobs, more attraction, more tourist 2. What are the costs for the state by building the stadium? 375 million 3. If you were a resident in Tasmania do you think the stadium is a positive for the state as the economy of Tasmania? Justify your answer? If i was a resident in Tasmania I would not think the stadium would be positive because Economic Cycle LI: To be able to understand the different stages of the economic cycle Economic growth: Is an increase in the real value of output produced in the economy over time, usually measured by an increase in real GDP. GDP (Gross Domestic Product): A measure of the value of all goods and services produced in Australia during a year ; obtained by adding together the total amount in dollar terms. Inflation and GDP Inflation - an average rise in the general level of prices of goods and services over a period of time, leading to a reduction in the purchasing power of money What does this mean for GDP? If the nation's output value increases due to inflation this means there has been no increase in the real amount of actual output. Real GDP: The value of output produced in a country over time, after removing the effects of changes in prices Limitations of GDP 1. Doesn’t measure all the activity that contributes to peoples material standard of living. Does not include activity that improves lives such as home-cooked meals, unpaid care and home grown food. 2. Doesn’t consider the side-effects of increases in outputs such as pollution. 3. Doesn’t measure ‘black market’ activities, such as bartering and cash transactions that are not reported. Peak Economy has reached maximum growth. Characteristics: - featuring high demand and production of goods and services - low unemployment - high wages - Inflation - Low interest rates Contraction Slowing of an economy. Characteristics include: - declining demand and production - reduced inflation - rising unemployment - lower wages - Banks stop lending money (increase in interest rates) Trough (Recession) - The lowermost of a contraction before recovery occurs. - A prolonged contraction is called a recession (contraction for over 6 months) - A recession of more than one year is called a depression. Characteristics: - Interest rates high - Unemployment high - Demand and supply of goods and services declines significantly - Business’ begin to close - Consumer & business confidence rock bottom Expansion Economic growth Characteristics include - rising demand and production - declining unemployment - increasing wages - Inflation - People optimistic about spending money (consumer confidence rising) What drives the economic cycle? 1. Business Investment - The economy is expanding, sales and profit keep rising. This creates more jobs and more expansion 2. Interest Rates & Credit - Low interest rates encourage people, companies to borrow money. High rates slow borrowing 3. Consumer confidence - Forecast of expanding economy fuels spending, while fear of recession decreases consumer spending 4. External shocks - Disruptions through COVID, wars, natural disasters greatly influence output of the economy Economic Indicators LI: To understand different types of KPIs used to measure economic performance. AT IS HELD THURSDAY NEXT WEEK Key Performance Indicators - Quantifiable measure used to evaluate the level of success of an organisation or employee - These are used to measure the performance of the Australian economy. KPis 1. GDP: financial value of all goods and services produced in a country over a period of time. 2. GDP Growth: percentage increase in a country’s GDP over a period. 3. InflationL general increase in prices of goods and services 4. Unemployment: occurs when able people are looking for work but are unable to find it. 5. Interest rate: rate charged by the lender for the use of its money 6. Business confidence: how optimistic or pessimistic business’ feel about the company's prospects. 7. Consumer confidence: how confident individuals are feeling about the economy. What causes fluctuations in economic activity? 1. Consumer confidence - people’s willingness to spend money or save their money 2. Trade - if Australian consumers purchase products from overseas (imports) rather than from Australian producers this can cause GDP to fall 3. Trade - if foreign countries decide they like Australian products, exports may increase 4. Government - lower individual and business tax rates mean taxpayers will have more money to spend on products and services Unemployment - Unemployment is measured as a person over the age of 15 actively seeking work and not currently working. Types of Unemployment - Seasonal : relate to the climate that cause some workers to be out of work at certain times of the year. Ex. Cherry pickers - Structural : workers have skills but are not needed by jobs that are available. Ex manufacturing workers have been replaced by machines - Cyclical : changes in economic cycle, ie downturn. - Frictional : people leave one job for another, there is often a short period of unemployment - Long term : people out of work for longer than 12 months due to lack of skills, education or personal problems Inflation Reasons Reasons for Inflation: 1. Strong Economic Growth : economy is growing and production is at capacity so business’ may increase prices 2. Inflationary Expectations : workers may demand large pay rises to compensate for future high inflation rate 3. Cost of Inputs : rise in the cost of inputs, such as petrol or wages flow through to wider economy Inflation impact 1. Gap between rich and poor increases : inflation leads to redistribution of income, making some better off and some worse off. 2. Economic performance : in times of rising oil, grocery and energy prices consumer confidence may fall which can lead to consumers looking to spend less money Trade LI: To be able to explain the benefits and limitations of trade Trade - Exchange of goods and services between nations Globalisation Since 1980 a number of things have increased the level of trade between nations 1. Rapid advances in technology 2. Relaxation of laws regarding foreign investment in many countries. Ex German owned supermarket Aldi has over 500 Australian stores 3. Reduction in trade barriers through trade agreements between countries, making the exchange of goods and services between countries much easier. Multinational Corporations - Have evolved in the global economy and are not linked to one city or town, or a single nation. Exporting Selling goods or services to overseas consumers (countries, business’, individuals) Importing - Purchasing goods from overseas suppliers (countries, business’, individuals) Australia’s history of exports - Over time Australia has ceased producing a large variety of manufactured goods such as TV’s, fridges, consumer electronics etc. These goods are now largely manufactured overseas and imported to Australia. - The cheaper labour rates and lower set up costs associated with equipment make manufacturing in these countries more cost effective than here in Australia. Benefits of trade - Countries can specialise and export goods and services that they produce efficiently. For instance Australia focuses on natural resources. - Trade presents consumers with a wider range of goods and services - Greater competition has forced business’ to produce more efficiently. Impediments to trade - Major events ; terrorist attacks or economic collapse - Natural disasters affect the flow of production and availability of certain products that countries rely upon - Countries introduce tariffs, these are policies that make importing more expensive as the government is seeking to look after their own manufacturer and business’ - Fluctuations in the Australian dollar Australia’s trade with Asia - In the 21st century Asia will not only become the largest producer of goods and services but also the largest consumer of them. - Between 2002 - 2012 China’s economy grew at a rate of 10.5% each year. - Recently its still been growing 3% yearly. Australia’s trade performance - Balance of Trade : calculated by subtracting the value of imports from value of exports. - This leads to a surplus or deficit. Impact of currency on trade value - Exchange rate: the price at which one currency is exchanged for another. - It is important because when an Australian buyer wants to purchase a product from overseas, they may need to buy the currency of that country to use it to purchase the product. - The commonly quoted measure is the value of 1 Australian dollar to US dollar. CFT - 2 Business Introduction & Innovation LI: To understand what makes a business successful. Innovation - is either creating a new good, service or process, or significantly improving an existing one Importance of Innovation - If a business fails to innovate they risk falling behind competitors. - Innovation allows businesses to unlock new market opportunities and reach new consumers. Competitive Advantage - Factors that allow a company to produce goods or services better or more cheaply  than its competitors. Competitive advantage could come from - Quality (how long does it last, higher grade materials etc) - Cost (cheaper) - Supply chain Entrepreneurship - is the ability and willingness to start, operate and assume the risk of a business venture in the hope of making a profit. Australian Inventions: - Google maps - WiFi - Bionic ear - Dual flush toilet - The feature film - Splayds - Notepad - Wine cask - Aeroplane escape slide Business Opportunities LI: To be able to understand the different types of business opportunity. Business Opportunity - A set of circumstances that presents itself as an avenue to success. Type of business opportunities 1. Innovation 2. Market opportunities 3. Changing customer needs 4. Research and development 5. Technological development 6. Global markets Market opportunities - Example: A person may notice a good or service that is being consumed in one marketer, possibly overseas, but is not available locally. This presents an opportunity to import that good or service and start a business in their own country, if the product meet a need in their local area. Changing Customer Needs: - Level of income  - Tastes and fashion - Changing population - Market expectations - Number of customers Technological Development - Applications of knowledge that have changed people’s lives and changed the way in which business operate - For instance, the internet, mobile phones and electronic funds transfer have change and opened up the world we live in. Barbie Innovation: XBox Series 5 (Barbie Edition), GAP x Barbie hoodie Global Market: Show the Barbie movie all over the world Changing Customer Needs: The barbie movie provided all kinds of products ranging from gaming controllers (XBox) to clothes (GAP, Forever 21) to toys (dolls and shi) and even a holiday trip at the Barbie Dreamhouse. Technology: CGI used for the movie Research and Development: Selfie generator Legal Business Structures Learning Intention: To understand the characteristics of the 4 types of legal structures. Business Structures 1. Sole Trader 2. Partnership 3. Private Company (Pty Ltd) 4. Public Company Why is the ownership structure important? - Can impact upon the owner’s personal accountability for debts of the business - Owners tax liability - Ability to raise capital - Ability to shut down the business - Control over decision making - Costs of establishing the business and compliance with government Sole Trader - Business owned by a single individual, operating their business in their own right under their own name or a registered business name. Sole Proprietorship Advantages Disadvantages Easy and cheap to set up Unlimited liability Owner makes all decisions Limited access to funds, from savings or bank loan Owner receives all profit Owners skills may be limited Simple and easy to sell Owner is overworked and stressed Limited v Unlimited Liability - Unlimited liability : they are not recognised as separate legal entities, so the owner is personally liable for the debts of the business. - Limited liability - the company exists as a separate legal entity from the owners, so the owners have no responsibility for liabilities or debts incurred by the business Partnership - business owned by two or more persons (up to 20) with a view of making a profit Advantages Disadvantages Easy and cheap to set up Unlimited liability Greater access to skills and funds Decision making split between two leading to clashes Easy to wind up Profits are shared Partnership has limited life Private Limited Company (Pty Ltd) - business that exists as a separate legal entity that is entitled to do business in its own right. It can have up to 50 shareholders. Advantages Disadvantages Limited liability High establishment costs Greater access to skills and funds More difficult to attract additional capital as they can not publicly advertise for funds Life of business is ongoing Higher compliance costs Conduct business Australia wide Separate Tax return required Public Company (Ltd) - business that exists as a separate legal entity that is entitled to do business in its own right. It can publicly raise funds through the Australian Securities Exchange (ASX). - As members of the public can buy shares, its financial reports are made available to the public. Advantages Disadvantages Limited liability High establishment costs Greater access to skills and funds More reporting regulations ie. financial statements Life of business is ongoing Higher compliance costs Conduct business Australia wide and globally Separate Tax return required Can attract additional capital as they can publicly advertise for funds Business Size  Business No. of Decision Legal structure Market share Examples size employees making Small, usually Local corner Sole trader / Quick and Small < 20 local area. Ie St stores,hairdressing partnership simple Albans salon, mechanic Owner Medium, Partnership, responsible, dominant within a Hotel, motel, Medium 20 - 199 Private slower due to geographic area. engineering factory company influence of Ie. western directors Victoria Large, can Public or Complex, due connect with Woolworths, NAB, Large 200 + private to layers of overseas Qantas company management customers Social Enterprise - Social enterprise: a business that makes a profit but concentrates on a community/ environmental need​. - Profits are then reinvested back into the business so that it can continue to fulfil the social need​ ​ Examples:​ Services for unemployed people​ Providing vocational training for disadvantaged people​ Waste minimization and recycling Community needs Marketing LI: To understand the importance of your target customer. Target market - Group of customers with similar characteristics who currently purchase the product or who may purchase the product in the future Characteristics 1. Age 2. Gender  3. Income 4. Motives 5. Lifestyle 6. Behaviour (regular user, loyal customer) 7. Family size Promotion - The methods the business’ use in its promotional campaign. 1. Opinion leaders 2. Publicity and public relations 3. Advertising Opinion leaders - Person who influences others. - Actors, athletes, musicians and models are regarded as opinion leaders. - Advantage: 1. Large social media following, well known appeal 2. Disadvantage 3. Business’ brand and image aligned to their ambassador Publicity - Any free news story about a business’ products - Public relations (PR) is aimed at maintaining a favourable relationship between a business and its public. - This can be done by working with the media, making speeches on special occasions or by some attention seeking gesture such as a donation. Advertising - A paid, non personal message communicated through a mass medium. - TV, radio, internet banner, social influencers, leaflets, podcasts etc - Business’ spend more than 15.6 billion in advertising a year in Australia. Price setting strategies 1. Price leadership - setting prices at similar levels to competitors 2. Premium pricing - setting prices above competitors 3. Penetration pricing - setting prices lower than competitors when entering the market 4. Percentage markup - increase the cost price by set %  Strategy Advantages Disadvantages Price Leadership Good customer base Harsher competition Premium Pricing Attract high-end customers People less likely are going → good money to buy the product Penetration Pricing Attract more customer with Harder to make high profit low price Percentage mark up Product Life Cycle LI: To understand different stages of a product life cycle. The Product Life Cycle - The stages a product passes through ; introduction, growth, maturity, decline and extension. Introduction - Period in which the new product is launched into the market. - During this time the business tries to increase consumer awareness and build a market share for the new product 1. Sales - low 2. Price - lower than competitors 3. Product - brand and reliability established 4. Promotion - aimed at target market, features of the product Growth 1. Sales - begin to increase, market share grows 2. Price - price is maintained, increased 3. Product - quality is improved 4. Promotion - aimed at wider audience (capture more customers) Maturity 1. Sales - reach their peak 2. Price - may need to be adjusted downwards to hold off competitors 3. Product - features and packaging try to differentiate it from those of competitors 4. Promotion - continues to suggest the product is still the best Decline 1. Sales - decline  2. Price - reduced to sell remaining stock 3. Product - is discontinued 4. Promotion - discontinued over time, promotes sales Extension - Diversification : when business’ vary their range of products or field of operations - Product diversification : increase the range of products sold. Example John West expanded its tuna products to include cooked rice with tuna. - Geographic diversification : operating in different locations both domestically and globally What can cause products to decline? Changing public perception of what is fashionable - Technological advancements - Consumer behaviour (COVID, climate change) Finance Options for business owners 1. Personal savings 2. Friends and family 3. Loans - bank 4. Loans - investors Finance Option Advantages Disadvantages Personal savings Easy access to money Risky to spend savings as it is difficult to replenish Friends and family Easy access and convenience. One-time use if you fail at your More likely money because it’s business. Difficult questions to your family so there's pre-built deal with. trust. Loan - Bank Safe money, low interest. Loans comes with interest Private investors Easy to loan large amounts of Very high interest, likely illegal. money with no questions asked. Strengths: - Diversity of students - Quality of education Weakness: - Overpriced products (i.e uniform, canteen food, etc) - Lacking facilities\ Opportunities: Business Concept Development LI: To understand the relationship between business opportunities and business concept development. Inspiration for ideas (of opening a new business) - Listening to people - Reading magazines, books - Visiting displays and exhibitions - Identifying ‘gap Why would you invest in Supreme Incursions? The business would be successful if it expanded to other states and produced the same staff and products as NSW and VIC. Business Plan: LI to understand the components of a business plan. What does a feasibility study involve: 1. Assessment of the market; demand for a product, competitors, who are the potential customers 2. Consideration of the operations; what is the product that is solve, what resources are  needed 3. Analysis of commercial feasibility; financial aspects, price, how long before profit 4. Appraisal of owners management ability 5. Understanding whether others have tried this idea. Business Plan A written statement of the goals and objectives for the business, and the steps taken to achieve them. What is the structure of a business plan? 1. Executive Summary - One page file describing the business and its objectives 2. Operations Plan 3. Financial Plan 4. Marketing Plan Operations Plan This outlines how the business will be set up and the human resource needs What to include? - Location - Legal business structure - Staff required - SWOT analysis Financial Plan Details how the business will be financed, projected cash flow, revenue, expenses and profit. What to include? - Finance option; loan, personal savings, investors  - Cost of establishment estimate - Normal operating expenses - Selling price - Estimated profit/revenue Marketing Plan Will focus on the promotion, publicity and advertising What to include? - Target market characteristics; age, gender, income, lifestyle, motives etc - Opinion leaders used - Advertising methods; radio, TV, social media, billboards - Publicity; news stories, how could they be generated? MAC Director Ms Melissa Tamraz MAC Producer Mr Nick D' Aglas  Music Program Coordinator Ms Merose Tran Accounting LI: To understand the role of accounting from a business perspective. Accounting Overview - Assets, Liabilities, Owners Equity, Expenses & Revenue - The Accounting Equation - GST, - Source documents - Transactions and the effect on the Accounting Equation - Recording transactions in the journals - Preparing Balance Sheet, Income Statement, Statement of Receipts and Payments Accounting - The collecting and recording of financial data to produce and report financial information to assist business owners in decision making Producing the financial information doesn’t ensure that business owners will make the right decision but it enables them to make a more informed decision. What does accounting information reveal? - Profit or loss made - Value of a business’ assets - Value of a business’ liabilities - How a business is performing against other similar business’ - How a business is performing against other previous reporting periods Who are the users of accounting information 1. Customers 2. Suppliers 3. Banks 4. Employees  5. Prospective Owners 6. ATO (Aus. Tax Office) 7. Shareholders Accounting elements LI:To understand the different accounting elements Accounting elements 1. Asset 2. Liability 3. Owners Equity 4. Expenses 5. Revenue Assets - Present economic resource controlled by an entity (as a result of past events) that has the potential to produce future economic benefits Assets examples 1. Cash 2. Inventory 3. Buildings / Land 4. Equipment 5. Vehicles 6. Accounts Receivable Liabilities - Present obligation of an entity (as a result of past events) to transfer an economic resource Examples - Loans - Accounts Payable : (when a business purchases goods / services on credit, meaning that don’t pay cash straight away) Owners Equity - The residual interest in the assets of the entity after the liabilities are deducted Drawings - Owners withdraw cash or other assets (equipment / inventory) from a business for personal use. - This reduces Owners Equity. Capital contribution - Owners transferring or inputting cash or other assets (vehicles / equipment). - This increase Owner’s Equity in the Balance Sheet - Capital contribution tend to occur more frequently at the start of a businesses life. Expenses - Decrease in assets (or increase in liabilities) that reduces owners equity (except for drawings) Revenue - Increase in assets (or a decrease in liabilities) that leads to an increase in owners equity (except for capital contributions) - Most common form of revenue is cash and credit sales Profit - = Revenue - Expenses - The profit of a business is reflected as part of the Owner's Equity. - This is due to the owners keeping the profits of the business. Current and Non Current Assets & Liabilities LI: To be able to differentiate between current and non current assets and liabilities Current Asset v Non Current Asset - Current Asset - are with the business no longer than a year - Non Current Asset - are with a business longer than a year Current and Non Current Liabilities - Current Liability - are paid over a period no longer than a year - Non Current Liability - are paid over a period longer than a year Loans - Loans are both current and non current liabilities. - The sum that is due within 12 months is current, whilst the outstanding amount due after 12 months is non current. - For instance a business has taken out a loan for $900,000. This loan is to be paid back over 40 years. 900,000 /40 = 22,500 22,500 is current 877,500 is non current What Does accounting information reveal? - Profit or loss made - Value of a business assets - Value of a business liabilities - How a business is performing against other similar businesses - How a business is performing against other previous reporting periods. 1. To not make mistakes that previous business did. Predict what's going to happen next. 2. To help you manage your venture's financial statements, keep your books clean, and ensure you have the consistent positive cash flow or are on the road to achieving it. 3. CPA Australia, ICAI 4. To help monitor the progress of your business. GST LI: To be able to calculate GST and understand when GST is an asset or liability Goods and Services Tax - A 10% tax levied by the federal government on sales of goods and services. - The 10% charge is paid and collected by the Australian Tax Office (ATO).  - In order to verify the amount of GST owed to the ATO it is important the business has information pertaining to : 1. GST on its sales or services (which it owes to the ATO) 2. GST on its payments and purchases (which reduces the GST owed to the ATO) GST as an asset - GST is an asset when a company throughout a time period has paid more GST than it has collected. - In this case it is an asset because it reduces the amount of GST owed to the ATO. GST as a liability - GST is an liability when a company makes a sale. - GST collected > GST paid - In this case it is an liability because it increases the amount of GST owed to the ATO. Summary of GST - When a business pays GST this decreases the GST liability that the business owes the ATO. - When a business collects GST this increases the GST liability that the business owes the ATO. - If at the end of the financial year the business has paid more GST than it has collected it creates a GST asset. - If at the end of the financial year the business has collected more GST than it has paid it creates a GST liability. Accounting Equation LI: To be able to calculate the balances that pertain to the accounting equation Recap When do we have a GST asset? 1. GST paid > GST collected 2. GST collected > GST paid When do we have a GST liability?  3. GST paid > GST collected 4. GST collected > GST paid - Business receives $18,700 (GST included) for services provided. How much GST is there as part of this transaction? The Accounting Equation - Both of the liabilities and equities must be funded from the business assets Assets = Liabilities + Owners Equity Accounting Equation - The Accounting equation must always balance. - If the equation does not balance then an error must have occurred. a. 4000 b. 5350 c. 38450 d. 21500 Cash Receipts and Cash Payments Journals LI: To record accounting transactions in the cash receipts and cash payment journals. Source documents: - Sales invoice - Purchase invoice - Employee payslip - Bank statements - Memos Tax returns How to know from an invoice if business is the buyer or seller - The sellers name will be at the top of the invoice - Buyers name is in the middle What to do with the document? - The source document obtained by the business then needs to be recorded. - This is recorded in journals. What happens if a business does not record the details from the source documents? - Cash transactions are recorded in the following journals 1. Cash Receipts 2. Cash Payments Cash Receipts Journals - Record all cash received by a business such as revenue, asset sales, capital contributions, GST received from customers, and loans. Example Transactions - Sales - Capital contributions - Interest revenue received - Receipts from Accounts Receivable What does the cash receipts journal look like? - Cash Receipts Journal is set up with the following columns to record the cash received 1. Date - when did the transaction occur 2. Details - what is occurring ie sale 3. Receipt Numbers - what is the receipt number on the document 4. Bank - the total amount coming into the bank 5. Sales - the GST free amount of the transaction 6. Sundries - used to record unusual one off cash receipt transactions 7. GST - the GST as part of the sale - Note that the total Bank should equal the remaining columns within the journal. Cash Payments Journal - Records all cash paid by a business such as expenses, asset purchases, GST paid by a business on purchases, and drawings What does the cash payments journal look like?  - Cash Payments Journal is set up with the following columns to record the cash received 1. Date - when did the transaction occur 2. Details - what is occurring ie sale 3. Cheque Number - what is the cheque number on the document 4. Bank - the total amount coming into the bank 5. Wages 6. Equipment 7. Sundries - used to record unusual one off cash receipt transactions 8. GST - the GST as part of the sale - Note that the total Bank should equal the remaining columns within the journal Accounting reports - Balance sheet Learning Intention : I can prepare Balance Sheets The Balance Sheet - A balance sheet lists a business’ assets, liabilities and owner's equity at a point in time. - The Balance Sheet is used by stakeholders to analyse the health of a business Balance Sheet When presenting the Balance Sheet we need to remember our Accounting Equation → ASSETS = LIABILITIES + OWNERS EQUITY - The Balance Sheet will present all assets on the left hand side, while all liabilities and owners equity amounts will be on the right hand side. - Further, the Assets and Liabilities section is broken down into Current and Non Current. All current assets or liabilities are represented first in our balance sheet ahead of the non current assets or liabilities Trial Balance - BS & IS LI: I can use the trial balance to prepare the balance sheet and income statement Statement of receipts and payments Learning Intention : To be able to prepare a statement of receipts and payments Statement of receipts and payments - Accounting report that list cash receipts and payments during a reporting period, the change in bank balance, and the opening and closing bank balance Cash Surplus - An excess of cash receipts over cash payments, leading to an increase in a positive bank balance or decrease in a bank overdraft Cash deficit - An excess of cash payments over cash receipts, leading to a decrease in positive bank balance or an increase in bank overdraft  Cash Receipts $ Consulting fees $2020 Design fees $710 GST Collected $273 Total Cash Receipts $3003 Cash Payments $ Drawings $170 Wages $1240 Advertising $410 Telephone $160 Interest $55 Lease $250 GST $82 Total Cash Receipts $2367 3003 - 2367 = 636 Cash Surplus (Deficit): $636 (Receipt was more than payments so therefore its cash surplus) Balance at the start: $4,000 Balance at the end: $4,636 Inventory is an asset because it can generate value for a business, and when sold it can be converted to cash. Liabilities - Present obligation of an entity (as a result of past events) to transfer an economic resource. -