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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.
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. This is usually
carried out by an independent person or firm of accountants.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Journal
A record in which transactions are initially recorded. The
process of entering transactions into a journal is called
"journalising".
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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%.
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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".
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