Glossary
Click on the letters
below to quickly find the term you're searching for:
A |
B |
C |
D
| E |
F |
G |
H |
I |
J | K |
L | M |
N | O
|
P | Q |
R |
S |
T |
U |
V | W | X | Y | Z
A
ABN
withholding tax
The amount withheld from a supplier who provides either an invoice
or tax invoice where the eleven-digit Australian Business Number (ABN)
has not been quoted. The payer is required to deduct and remit 46.5% of
the gross amount of the invoice to the ATO on the next Instalment
Activity Statement (IAS) or Business Activity Statement (BAS).
Account
Record of financial transactions relating to or associated with a
business.
Accounting
The process of identifying, measuring, recording, and communicating
economic information to permit informed judgments and decisions by users
of the information.
Accounting cycle
The process or sequence of accounting procedures that takes place
during the accounting period from the occurrence and recording of the
business transaction to the preparation of the financial statements.
Accounting entity assumption
The assumption that a business is a separate entity from its owner.
Accounting equation
An algebraic expression of the equality of assets to Liabilities and
members’ equity. It is expressed as: Assets = Liabilities + Equity.
Accounts list
Also referred to as the chart of accounts. This is a list of general
ledger accounts.
Accounts payable
Also known as trade creditors. This account represents amounts owed
by the business to suppliers for goods and services purchased on credit.
Usually shown as a current liability in the balance sheet.
Accounting period
A period of time covered by a set of financial statements.
Accounts receivable
Also known as trade debtors. This represents amounts owed by
customers for goods and services sold on credit. Usually shown as a
current asset in the balance sheet.
Accounting principles
Rules which guide in the measurement, classification and
interpretation of financial information.
Accrual basis of accounting
The method of accounting which states that transactions should be
recorded in the period in which they occur, rather in the period in
which the cash is received or paid.
Accumulated depreciation
The amount of depreciation that has been recorded and accumulated on
a non-current asset since it was acquired. It is usually recorded in a
contra account.
Adjusting entries
Entries made on the last day of the account period to ensure that
all revenues and expenses are recorded in the correct accounting period.
Adjusted trial balance
A trial balance prepared after adjusting entries have been
processed.
Aged
debtors analysis
The process of classifying accounts receivable on the basis of
length of time for which they have been outstanding.
Aged
creditors analysis
The process of classifying accounts payable on the basis of the
length of time for which they have remained unpaid.
Amortisation
Same concept as depreciation. However, applies to intangible assets
rather than tangible assets. The systematic allocation of the cost if an
intangible asset over its estimated useful life.
Annual Report
An annual document summarising information about the operations and
financial position of an organisation for the financial year.
Assets
Future economic benefits controlled by the entity as a result of
past transactions.
Attribution
Attribution rules determine the attribution of GST payable and GST
receivable to tax periods. An entity can choose one of two attribution
methods of accounting for the GST: the cash method and the non-cash (or
accruals) method.
Audit
A review of the annual accounts, usually carried out by an
independent person or firm of accountants.
Australian Accounting Standards Board
The standard setting body responsible for issuing AASB Accounting
Standards.
Australian Business Number
Abbreviated to ABN. A unique eleven-digit number assigned to each
business entity by the Australian Taxation Office. Must be quoted on all
invoices or tax invoices by the supplier of the goods or services,
otherwise the payer is required to withhold 46.5% of the invoiced
amount.
Australian Securities and Investments Commission
Abbreviated to ASIC. The regulatory body in Australia responsible
for overseeing the affairs of Australian companies.
Australian Taxation Office
Abbreviated to ATO. The regulatory body in Australia responsible for
administering income tax, superannuation, FBT and the GST in Australia.
Audit
The examination of the financial statements of an entity by an
auditor with a view to expressing an opinion as to whether the accounts
comply with AASB Accounting Standards and have been drawn up so as to
give a “true and fair” view.
Λ Back to Top
B
Bad
Debts
Also known as uncollectible debts. The amount of accounts receivable
that the entity’s management has concluded are uncollectible. Usually
written off in the profit and loss statement.
Balance sheet
Also known as the statement of financial position. The balance sheet
shows the entity’s assets, liabilities and members’ equity at the end of
the reporting period.
Bank
reconciliation
A statement showing the difference between bank account balances and
the cash at bank balance shown in the balance sheet.
Bookkeeping
A subset of accounting that is primarily concerned with the process
of identifying, measuring and recording business transactions.
Bookkeepers ensure these transactions are accurately recorded in the
accounting system.
Book
value
The amount at which an asset is carried in the balance sheet. In the
case of a depreciable asset, the book value is the cost of the asset
minus its accumulated depreciation.
Budget
A detailed estimate of the planned income and expenses for the next
financial period.
Business Activity Statement
Abbreviated to BAS. A pre-printed document issued by the ATO either
monthly or quarterly which summarises the amounts of GST payable and
receivable and a range of other taxes including PAYG withholding and ABN withholding.
Λ Back to Top
C
Cash
basis of accounting
The method of recording transactions which reports revenues in the
period in which the cash is received and expenses in the period in which
the cash has been paid.
Cash
flow statement
A financial statement which reports the cash inflows and outflows of
an entity during the financial year. These cash inflows and outflows are
classified into, operating, investing and financing activities.
Chart of accounts
A list of all the account names and account numbers.
Company
A form of business structure that is a separate legal entity under
the Corporations Act 2001. The ownership interest consists of
shareholders who hold shares in the company. Directors are appointed by
the shareholders and are entrusted with responsibility for managing the
business.
Contra account
An account that is deducted from a related account. For example,
“accumulated depreciation” (deducted from the asset account “motor
vehicles at cost”) or “provision for doubtful debts” (deducted from the
asset account “accounts receivable”).
Cost
centre
A program or organisation which has all its costs and income grouped
together in order to measure and monitor performance.
Creditor
See accounts payable.
Current assets
Cash and other types of assets of the entity that would reasonably
be expected to be converted to cash, sold or consumed by the business
entity within twelve months after the end of the last financial year of
the entity.
Current liabilities
Obligations of the entity that are reasonably expected to be settled
or paid within twelve months after the end of the last financial year of
the entity.
Λ Back to Top
D
Debit
An amount entered on the left-hand side or in the debit column of an
account.
Debtor
See accounts receivable.
Deficit
Also known as a net loss. The excess of total expenses over total
revenues for an entity over the reporting period.
Depreciable amount
The cost of an asset minus its estimated residual value.
Depreciable asset
A non-current asset having a limited useful life.
Depreciation
The allocation of the cost of an asset over its estimated useful
life. Depreciation recognises that an asset is subject to wear and tear
over its useful life. All non-current assets are depreciated, except
land.
Depreciation car cost limit
The maximum amount of depreciation that can be claimed for taxation
purposes in relation to a motor vehicle under the Income Tax
Assessment Act 1997. The depreciation car cost limit for cars first
held in the 2005/06 and 2006/07 financial year is $57,009. Any
depreciation in excess of this amount is not tax deductible.
Depreciation schedule
A schedule (usually a spreadsheet) showing the amount of
depreciation for each asset.
Diminishing value
A tax depreciation method. The diminishing value method involves
applying a percentage rate initially to the original cost of the item,
but subsequently to the base value (i.e. written down value) at the
commencement of each year thereafter. The diminishing value depreciation
rate is calculated by dividing 150% by the effective life of the item.
For assets acquitted on or after 10 May 2006, the rate is 200%. Similar
to the reducing value depreciation method used for accounting purposes.
Dividend
A distribution made to the shareholders (or owners) of a company
from the profits of a company in proportion to the ownership interest. A
dividend is declared by the directors.
Double-entry accounting
The accounting system whereby every transaction affects at least two
accounts in the accounting equation.
Drawings
A withdrawal of cash made by the owner of the business. Relevant for
sole traders and partnerships.
Λ Back to Top
E
Equity
The difference between total assets and total liabilities. Often
referred to as shareholders’ equity.
Expense
A loss or outgoing incurred by the entity during the reporting
period.
Λ Back to Top
F
Fair
value
The amount for which an asset could be exchanged between a
knowledgeable willing buyer and a knowledgeable willing seller in an
arm’s length transaction.
First-in, first-out (FIFO)
A cost flow assumption technique used in valuing inventory. It
assumes that the first inventory items purchased are the first inventory
items sold. The cost of ending inventory is therefore comprised of the
items of inventory most recently purchased before the end of the
relevant accounting period.
Finance lease
A lease under which substantially all of the risks and rewards
(benefits) incidental to ownership of the asset transfer from the lessor
to the lessee. Legal title may or may not eventually be transferred at
the end of the lease term.
Financial statements
Comprises the profit and loss statement, balance sheet, cash flow
statement and detailed notes.
Fringe benefits tax
Fringe benefits tax (FBT) is a tax payable by the employer on the
total value of fringe (or non-cash) benefits provided to employees or
their associates during the FBT year. The FBT year starts on 1 April and
ends on 31 March.
Fixed asset register
A schedule (usually a spreadsheet) showing each asset that is owned
by the entity.
Fund
An account set up to show monies received for specific purposes.
Λ Back to Top
G
Gain on sale
Where the sale proceeds are greater than the carrying amount of an
asset as at the date of disposal. A gain on sale is included as part of
revenue in the profit and loss statement. For taxation purposes,
referred to as an “assessable balancing adjustment”.
General Journal
A chronological record of the entity’s transactions during an
accounting period. It is based on the concept of double-entry
accounting.
General Ledger
A collection of accounts maintained by an entity (i.e. all assets,
liabilities, equity, revenues and expenses) which enables the
preparation of the entity’s financial statements. Accounts contained in
the general ledger are usually organised in the order in which they
appear in the balance sheet and profit and loss statement.
General purpose financial report
A financial report consisting of financial statements that is
intended to meet the information needs of a range of users. A general
purpose financial report is prepared in accordance with all AASB
Accounting Standards.
Going concern assumption
The assumption that a business entity will continue to operate in
the future – as distinct from closing its operations.
Goods and services tax
GST is a broad-based tax of 10% on the supply of most goods,
services and anything else consumed in Australia, and the importation of
goods into Australia.
Gross profit
The difference between net sales revenue (sales minus sales returns
and allowances) and cost of goods sold.
GST-free supply
A GST-free supply is one in which the supplier is not required to
charge the 10% GST to the customer. However, the supplier can claim back
the GST paid on any purchases made in making the supply.
GST
payable
The amount of GST collected by the entity from the sale of the goods
and services to customers.
GST
receivable
Also known as an input tax credit. The amount of GST paid by the
entity on the acquisition of goods and services from suppliers.
Λ Back to Top
H
Hire
purchase
An arrangement whereby the goods are purchased by the hirer by
making instalments. The hirer has the use of the goods while payment is
being made, but does not become the legal owner until the final
instalment is paid.
Horizontal analysis
An analysis of the change in an account balance over two reporting
periods. Usually expressed as a percentage increase or decrease.
Λ Back to Top
I
Income statement
Refers to the profit and loss statement.
Income Tax
The amount of tax payable based on taxable income.
Instalment Activity Statement
Abbreviated to IAS. A form used by taxpayers who are not registered
for the GST. The IAS is also the form required to be lodged by entities
who prepare a quarterly BAS but are required to remit their PAYG
withholding tax on a monthly basis because they are a medium withholder.
The IAS is a pre-printed document issued by the ATO monthly which
summarises the amounts of PAYG instalments, PAYG withholding and ABN
withholding.
Input tax
The GST paid or payable on the inputs of a business, i.e.
acquisitions of goods and services in the course of operating the
business.
Input tax credit
The credit claimed for the GST component of the price of goods or
services acquired in carrying on an enterprise is called an input tax
credit. You will need to have a tax invoice to claim an input tax credit
on the inputs used to produce the input taxed supply.
Intangible asset
An asset controlled by the entity which does not have a physical
substance. Examples include purchased goodwill, licences, brand names,
trademarks, franchise agreements, customer lists, patents, etc.
Internal controls
Methods and procedures collectively adopted by an entity to
safeguard its assets and to ensure that the financial information is
accurate and reliable.
Inventory (also known as stock on hand)
Goods or property acquired by the entity for the purposes of resale
within the ordinary course of business.
Inventory turnover
A ratio that indicates the number of times inventory has been sold
during the period.
Invoice
A document issued by the supplier who is not registered for the GST.
This document must still have an ABN, otherwise the payer is required to
withhold 46.5% of the gross amount and remit it to the ATO on the next
IAS or BAS. See also tax invoice.
Investments
Assets held by the entity for investment purposes, rather than for
use in the operating activities of the entity.
Λ Back to Top
J
Journal
A record in which transactions are initially recorded. The process
of entering transactions into a journal is called “journalising”.
Λ Back to Top
L
Lease
A lease arrangement is one under which one party (the lessee) has
the use of property for a specified period in return for a series of
payments. The entity who grants the lease (the lessor) remains the legal
owner of the property. The duties and obligations of both the lessor
and the lessee are usually detailed in a legal document called the lease
agreement.
Liabilities
Future sacrifices of economic benefits that an entity is presently
obliged to make to other external entities as a result of past
transactions.
Liquidity
The ability of an entity to satisfy its short-term financial
obligations.
Liquidity ratios
Ratios which provide a measure of an entity’s ability to pay its
short-term obligations as and when the fall due.
Long-term stability ratios
Ratios which provide a measure of an entity’s ability to meet its
long-term commitments.
Loss
on sale
Occurs when the sale proceeds are less than the carrying amount of
an asset as at the date of disposal. A loss on sale is included as an
expense in the profit and loss statement. For taxation purposes,
referred to as a “deductible balancing adjustment”.
Luxury car limit
The maximum input tax credit that can be claimed for GST purposes on
a motor vehicle under the A New Tax System (Goods and Services Tax)
Act 1999. The luxury car limit is the same as the car depreciation
limit. The maximum input tax credit that can be claimed is $5,182 (i.e.
$57,009 x 1/11th). Any input tax credit in excess of this
amount cannot be claimed.
Λ Back to Top
N
Net loss
See deficit.
Net profit
See surplus
Net
amount
The net amount of GST that must be paid to the ATO on the BAS.
Calculated as the difference between GST payable and GST receivable.
Net assets
Total of assets minus total liabilities. Also equals total equity.
Net realisable value
The selling price of inventory minus the costs to sell.
Non-current assets
Assets other than current assets. Assets of the entity which would
not be expected to be converted to cash, sold or consumed by the
business entity within twelve months after the end of the last financial
year of the entity.
Non-current liabilities
Liabilities other than current liabilities. Obligations of the
entity that do not require payment within twelve months after the end of
the last financial year of the entity.
Λ Back to Top
O
Operating lease
Any lease other than a finance lease. A lease under which
substantially all of the risks and rewards (benefits) incidental to
ownership of the asset remain with the lessor.
Λ Back to Top
P
Pay-AS-You-Go (PAYG) instalments
The PAYG instalment system requires the payment of income tax on the
entity’s profit progressively over the financial year. This amount is
based on the sales of the relevant quarter multiplied by a predetermined
instalment rate advised by the ATO. Not applicable for entities that are
exempt from income tax.
Pay-AS-You-Go (PAYG) withholding
PAYG withholding is the amount withheld in respect of payments made
to employees in the form of salaries and wages, commission, bonuses or
allowances and directors’ fees, payments for a supply (goods or
services) to another business that does not quote an ABN, and certain
dividend, interest and royalty payments.
Payroll tax
Payroll tax is a state-based tax which is levied by the various
states and territories on the annual Australian taxable wages of an
employer or group of related employers, subject to various thresholds.
Periodic inventory system
Under a periodic inventory system, every time an entity buys
inventory, it records that purchase in the profit and loss statement as
an expense. There is no continuous record or how much inventory is on
hand at any particular point in time. The amount of inventory can only
be ascertained by performing a physical stocktake (i.e. by actually
counting the inventory).
Perpetual inventory system
Under a perpetual inventory system, an inventory account is
maintained to record increases and decreases in inventory.
Posting
The process of transferring information in the general journal to
the individual accounts contained in the general ledger.
Prepayment
A payment in advance for goods or services that will be consumed by
the entity in the next reporting period. For example, prepaid insurance
and prepaid advertising. Usually shown as a current asset in the balance
sheet.
Prime cost
A tax depreciation method. The prime cost of depreciation rate is
calculated by dividing 100% by the effective life of the item. Similar
to the straight-line depreciation method used for accounting purposes.
Profit and loss statement
A financial report listing the revenues, expenses and net
profit/surplus or net loss/deficit of an entity for the reporting
period. Also known as the statement of financial performance.
Profit margin
A ratio which measures the percentage of net profit derived by the
business from each dollar of sales revenue. Expressed as a percentage.
Λ Back to Top
R
Receivables turnover
A ratio which measures the number of times that receivables are
converted into cash during the period.
Reconciliation
Ensuring two or more balances agree, often used in reference to
checking bank balances with the accounting system.
Reducing balance
An accounting depreciation method. The reducing balance method of
depreciation involves applying a percentage rate initially to the
original cost of the item, but subsequently to the written down value at
the commencement of each year thereafter. The reducing balance
depreciation rate is calculated by dividing 200% by the useful life of
the item.
Reserves
Amounts set aside to provide for future programs or to act as a
buffer against changing circumstances.
Residual value
The estimated sales proceeds from the disposal of a non-current
asset at the end of its useful life.
Retained profits
The accumulated profits of a company that have been retained rather
than distributed to shareholders as dividends. Also known as retained
earnings.
Revaluation
The increase or decrease in the value of a non-current asset. Often
the result of comparing its book value with its market value. This
increase or decrease is recorded in the asset revaluation reserve.
Revenue
Income derived by the entity from the sale of goods or services
during the reporting period.
Λ Back to Top
S
Salary
A fixed amount paid to an employee, rather than payment on an hourly
basis.
Simplified tax system
An optional taxation system available to small businesses with a
turnover of less than $1 million per annum, as of 1 July 2007 this
increased to $2 million per annum. A small business taxpayer notifies
the Commissioner of Taxation of its decision to move into the STS by
ticking a box in its income tax return,
Sole trader
A form of business structure operated by a single proprietor.
Specific identification
A cost flow assumption technique used in valuing inventory. It
assumes that the cost of each item of inventory on hand at the end of
the reporting period can be specifically identified.
Statement of financial performance
See profit and loss statement.
Statement of financial position
See balance sheet.
Stocktake
A physical count of inventory on hand at the end of the reporting
period.
Straight-line
An accounting depreciation method. The straight-line depreciation
method involves applying a percentage rate to the original cost of the
item and continuing on the same basis each year until fully written off.
The straight-line depreciation rate is calculated by dividing 100% by
the effective life of the item.
Superannuation Guarantee Scheme
The scheme requiring every Australian employer to make
employer-sponsored superannuation contributions on behalf of its
employees equivalent to a minimum of 9% of each employee’s earnings
base.
Superannuation Guarantee Charge
Abbreviated to SGC, A charge levied by the Australian Taxation
Office if the employer fails to pay the 9% employer-sponsored
superannuation contribution by the due date. The charge involves a
combination of an administrative penalty, a shortfall penalty and
interest calculated at a flat 10% of the shortfall. The SGC is not
tax-deductible to the employer.
Supply
For GST purposes, the term supply is very broad and includes the
supply if services, provision of advice or information, a grant,
assignment or surrender of real property, a creation, grant, transfer,
assignment, a financial supply and an entry into or release from, an
obligation to do anything, to refrain from an act, or to tolerate an act
or situation. Not all supplies are taxable.
Surplus
Otherwise known as a net profit. The excess of total revenues over
total expenses for the entity over the reporting period.
Λ Back to Top
T
Taxable income
The entity’s net profit for tax purposes. Calculated under the
ITAA36 and ITAA97 as the difference between an entity’s assessable
income and its allowable deductions. Tax is payable of taxable income.
Taxable supply
A taxable supply is one where the supplier is required to charge the
10% GST to the customer. However, the supplier can claim back the GST
paid on any purchases incurred in making the supply.
Tax
invoice
A document issued by a supplier who is registered for the GST. This
document should have the suppliers ABN and the amount of GST included in
the supply. See also invoice.
Tax
period
A tax period is a period for which an entity calculates its GST and
lodges its BAS. A tax period is either quarterly or monthly depending on
the entity’s annual turnover. Quarterly tax periods of three months end
on 30 September, 31 December, 31 March and 30 June. Monthly tax periods
end on the last day of each calendar month. A quarterly BAS must be
lodged within 28 days after the end of the relevant quarter (except the
December quarter); a monthly BAS must be lodged within 21 days after the
end of the relevant month.
Transaction
A financial event which results in an entry in the accounts.
Trial balance
A statement listing all of the accounts in the general ledger and
their respective debit and credit balances. A trial balance is prepared
to verify the equality of debits and credits made to the accounts.
Λ Back to Top
U
Unadjusted trial balance
A trial balance prepared before adjusting entries have been
processed.
Unearned income
Cash received and recorded as a liability before income is earned.
Useful life
The estimated period of time (usually expressed in years) that a
non-current asset is expected to be used by the entity. This is used in
determining the amount of depreciation of non-current assets.
Λ Back to Top
V
Vertical analysis
An analysis of each item in the financial statements expressed
vertically as a percentage of a specific item on the same statement,
referred to as the bas amount. In the case of the profit and loss
statement, revenue is usually set at a base of 100%. In the case of the
balance sheet, total assets are set at a base of 100%.
Λ Back to Top
W
Wages
Amounts paid to an employee based on an hourly rate.
Weighted average
A cost flow assumption technique used in valuing inventory. It uses
an average cost of inventory determined by dividing the total inventory
purchases during a period (including the value of opening inventory) by
the number of inventory items purchased during the period (including the
number of items in opening inventory). This average cost is multiplied
by the number of items in ending inventory to arrive at a closing
inventory value.
Workers compensation
In Australia, each state and territory has its own compulsory
workers compensation arrangements which are known as WorkCover. Under
the legislation, it is compulsory for all employers to take out a
WorkCover insurance policy in respect of workers to compensate them for
work-related injuries, loss of limbs, illnesses and loss of life whilst
at work.
Written down value
The difference between a non-current asset’s cost and its
accumulated depreciation. Also known as “book value” or carrying
amount”. For taxation purposes, referred to as the “adjustable amount”.
Λ Back to Top
|
