tlip5035a presentation 2
TRANSCRIPT
PRESENTATION 2 OUTLINE
The following areas are covered in this presentation:
• Types of Business Structures
• Business Categories
• Accounting Terms and Concepts
• Accounting Reports
• Chart of Accounts
• Double Entry Accounting
• Depreciation
TYPES OF BUSINESS STRUCTURES
Sole traders (or sole proprietorships)
Owned and controlled by one person
Sole owner provides all capital for the business and in turn receives all profit
made.
Advantage: simplicity
Disadvantage: no limit to the owner’s liability
Have limited ability to raise finance, as they are usually the sole source of funds
and working capital.
TYPES OF BUSINESS STRUCTURES
Partnerships
Two or more people own and run the business. Generally able to raise more
capital than sole traders Advantage: partners contribute multiple
skills, contacts and knowledge to the business. Factors such as level of
ownership, control and shares of profits are discussed and decided upon by partnersDisadvantage: need scrupulous setting up to allow for eventualities such as the death of a partner, a partner becoming
bankrupt or a partner wishing to leave or retire
Examples: legal firms, accountancy practices, consultants, engineering
practices and insurance brokers
TYPES OF BUSINESS STRUCTURES
Corporations
One or more person owns the business through shareholding and the liability of members is
limited to how much that have contributed to the business. Advantage: No member is liable for all the
debts of the company, and a corporation can continue business if any member passes away
or wishes the leave. Raising finance is also easier for corporations than it is for sole traders
and partnerships.Disadvantage: may be limited in that shares in the company cannot be traded to the public and
must remain with the original members. The regulations required for public corporations are
strict and the reporting requirement to the authorities can be a burden for smaller public
companies.
Examples: Linfox, and Toll Holdings
BUSINESS CATEGORIES
• All business can be broadly categorised into one or a combination
of the following:
Trading CompaniesBusinesses that buy and sell
goods. E.g. supermarkets, new car sellers and office suppliers.
Service CompaniesBusinesses that provide a service. E.g. warehouses, transport, waste disposal,
medical and legal services, accountants and tradesmen.
Manufacturing Companies Businesses that take raw
materials and turn them into manufactured goods for sale. E.g. new car manufacturers, white goods manufacturers,
furniture manufacturers. Market gardens and farms can also be
placed in this category.
ACCOUNTING TERMS AND CONCEPTS
• All organisations, regardless of type or size, adopt a standard
accounting process. This can be simplified by the accounting
equation:
OR
Assets = Liabilities + Owner’s Equity
Owner’s Equity = Assets – Liabilities
ACCOUNTING TERMS AND CONCEPTS
Assets are what a business owns. They are classified into two areas:
Current AssetsCash and other assets that can be easily converted into cash
within a short period (such as 12 months). E.g. stock, debtors (customers owing money)
Non-Current AssetsLong life items such as property, machinery and equipment. They won’t be consumed during the
current accounting term and are acquired with the intent to be
used in business for a long period. These are also known as fixed assets or long-term assets.
ACCOUNTING TERMS AND CONCEPTS
Liabilities are what the business owes to others. Subdivisions of
liabilities are:
• Liabilities also include owner’s equity, which is made up of any
money introduced into the business to start it up plus any after
tax profit
Current LiabilitiesDebts owed by a business to outsiders e.g. trade creditors,
short-term loans. They are usually due for immediate
payment or within a year of the accounting date.
Non-Current LiabilitiesAmounts owed by the business that are payable over more than
one calendar year from the accounting date. Non-current
liabilities can include mortgages, which are long-term secured
loans.
ACCOUNTING TERMS AND CONCEPTS
There are a number of types of profit to be aware of:
Gross ProfitThe difference between sales revenue and the cost of the
good sold
Net ProfitThe excess of revenue over both the cost of sales and other expenses. If cost of sales and expenses are
greater than sales than it is a net loss, which decreases
owner’s equity as opposed to increasing it
ACCOUNTING TERMS AND CONCEPTS
Accountants sometimes differentiate between costs and expenses.
• The two terms are often interchangeable, but it is best to be aware
of the difference. CostsDefined as a sacrifice of cash
assets to purchase something that enables a sale or to make something
else. E.g. raw materials would be considered a cost
as these are used to produce something that is sold.
ExpensesDefined as a reduction in
owner’s equity that is used to produce a service or
manufactured good. The expense is the cost of doing
your business. E.g. fixed expenses such as rent,
power, and salaries.
ACCOUNTING REPORTS
• There are three main reports that are used to prepare a budget
and to ascertain the health of a business. These are:
1. Profit and Loss Statement
2. Balance Sheet
3. Cash Flow Statement
• Sometimes a report called the aged trial balance is included
with these three.
• These three reports are also referred to as the company’s financial
reports. Reading them and having a basic understanding of what
they contain is important if budgets are to be prepared accurately.
CHART OF ACCOUNTS
• In the chart of accounts a business’s various accounts are given
numbers to aid in referencing and facilitate processing. Accounting
data is collected and classified or coded into one of the following
categories:
Assets 1.000
Liabilities 2.000
Owner’s Equity 3.000
Income 4.000
Cost of Sales 5.000
Expenses 6.000
Other Income 7.000
CHART OF ACCOUNTS• This coding system is not universal, it is up to companies what
system they choose to use.
• Within each category or account further categorisation is made and
numbered.
• All accounts that have the number 1.XXX are asset accounts and all
accounts starting with a 6 are expense accounts.
• For example, with an expenses account you might have 6.001 as rent
and 6.002 as electricity. Whereas in the assets account you might
have 1.001 assigned to a truck.
• Liabilities can be further divided into current and non-current
liabilities but will still have account numbers beginning with 2.
• Similarly with assets, account numbers will still start with 1. For
example 1.100 would be current assets while 1.200 would be non-
current assets.
CHART OF ACCOUNTS
Example
Current Assets 1.100
Cash at bank 1.110
Accounts receivable
1.111
Petty Cash 1.112
Stock 1.120
GST input credit 1.115
Other Income 7.000
Non-Current Assets 1.200
Plant and equipment 1.201
Less depreciation 1.202
Motor vehicle –Hino 1.230
Less depreciation 1.231
Motor vehicle – Toyota 1.240
Less depreciation 1.241
Office equipment 1.270
Less depreciation 1.271
CHART OF ACCOUNTS
• The Other Income category is for income from bank interest or
interest-bearing investments. It is income not derived from selling
a product or service. A tax return would fit into this category.
• Every company will have their own chart of accounts specific for
them. A farm for example will have sales revenue from crops or
livestock or stud fees, expenses from fending, feed, veterinary
bills etc.
• Any expense, revenue, cost of business or income stream can be
given or assigned into one of the seven main account codes, then
further divided into an account code within that main category.
DOUBLE ENTRY ACCOUNTING
• System of recording financial transactions.
• When a debit is made to one account, a corresponding credit must
occur on an opposing account.
Example
• Buying a newspaper adds an asset, which is a debit account, and
the cost is taken from cash reserves and becomes a credit account
(an expense).
• Another way of looking at it is to debit the account that
receives and credit the account that gives.
• The newspaper example debits the account that receives (i.e. the
asset account) and credits the account that gives (i.e. the expense
account).
DOUBLE ENTRY ACCOUNTING• Each accounting transaction affects at least two accounts. One account is
debited with an amount and one or more accounts are credited with an equal
amount, and vice versa.
• In the following examples note how the DR (debit accounts) equal the credit
accounts (CR) for each transaction.
Example 1
• On 1st June, 2015, SJC Logistics Logistics purchased a second-hand vehicle
from Great Western Motors for $11,000 (GST inclusive) on credit.
• The chart of accounts number will be 1.230 as it is a motor vehicle and a non-
current asset, with a value of $10,000.
• The GST input credit of $1000 is a CR, credit account liability code for the GST
will be 2.115. The liability account has a $10,000 entry with the code 2.300
(credit) has a $10,000 entry. So the total DR amount is now balanced by a CR
amount of $11,000. This is presented in the table in the following slide
DOUBLE ENTRY ACCOUNTING
Example 1
Example 2
• SJC Logistics receives bank interest of $1000. The DR entry is for
code 1.100, which is cash at bank. The CR code is 7.100, revenue
from interest.
Date Transaction Accounts Type Nature Account Codes
DR/CR $
1/6 Purchased second-hand vehicle from Great Western Motors for $11,000 on credit (GST included)
Motor Vehicles
AssetLiability
Liability
DebitCredit
Credit
1.2301.115
2.115
DRDR
CR
10 0001 00011 000
DOUBLE ENTRY ACCOUNTING
Example 3
• SJC Logistics pays its rent of $2000. The DR code is rent 6.100 (an
expense code). The CR code is the cash at bank code 1.100.
Remember debit the receiver (the landlord getting the rent) credit
the giver (SJC Logistics Logistics)
• A trial balance will report the above transactions over any period
of time as total debits and total credits with the credit column
total exactly equal to the debit column total.
DOUBLE ENTRY ACCOUNTING• GST is levied on many sales items (exemptions include fresh food) and is
a tax paid by all purchasers, paid to the Australian Taxation Office (ATO)
• Its role in a chart of accounts is usually as a liability. When you make a
sale you will have to add 10%, the current GST rate, to the value of the
item sold. The purchaser pays for the items with the 10% GST. This
amount will be recorded in the accounts as a liability, as it has to be
remitted to the ATO.
• GST you have paid when making purchases is credited against GST you
have raised from sales and the difference is paid at whatever period is
applicable.
• Large corporations collecting large amounts of GST pay weekly while
smaller businesses can pay either quarterly or annually; it all depends on
the business’ turnover. GST is a tax collected on behalf of the
government by consumers. GST really plays little role in budgeting, as it
is money passing through the company on its journey to the ATO.
DEPRECIATION
• The loss in the value of assets
• Considered a legitimate expense to the business.
• Methods of calculating depreciation include an agreed rate
applied, (for computers for example it is five years or 20%) to the
purchase price of the asset. This is the straight-line approach.
For example:
If a computer worth $1000 is depreciated at 20% per annum, it means that the computer loses $200 in value every year. At the end of five years, the value of this asset will be zero.
Depreciation can be calculated at any time before the period is up
For this computer, after 2 years the accumulated depreciation is:
2 x $200 = $400
DEPRECIATION
• Alternate methods of calculation include applying different rates
over different periods, and allowing for an asset to have some
value at the end of the depreciation period giving the asset what
is known as a right down value.
• For example for small businesses, for assets worth an excess of
$20,000, they can be pooled together and the lot depreciated by
15% in the first years and at 30% thereafter.
The timing of expenditure on a capital purchase, i.e. something large and expensive for which depreciation can be
claimed is important and can have an major effect on the budget
DEPRECIATION
• Phasing in simply means spreading an expense, if feasible, over
a broader time period or waiting for an opportune time to incur
the expense.
• Depreciation is subtracted as a separate operating expense from
the gross profit figure, on the profit and loss report. Tax is paid on
what is left so this is a definite consideration to the budget and
must be allowed for by any section of the workforce that has
budget items requiring expenditure during the year.
• Depreciation rates vary but can be as high as 20 to 25% per
annum depending on the type of assets. If this expenditure has
not been allowed for in the budget then the number of months
over which the extra expense is to be spread is an important
consideration with the timing of the asset purchase.
DEPRECIATION
Example
In SJC Logistics Logistics, it is decided to upgrade the pallet racking in the warehouse to enable an extra layer of storage from three high to four high. The cost of the new racking is $150,000.00. The racking can be depreciated over five years, which is a 20% (5 x 20 = 100) deduction rate.
So 20% of $150,000 is $30,000.
If the racking is purchased in July then each month for the rest of the financial year will have an expense of:
30,000/12 = $2,500
If the racking is purchased in June or May then the effect on the budget is only $5,000 for a May purchase or $2,500 for a purchase in June.
The next year’s budget can fully incorporate this added expense item during the budget preparation.