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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).
Record of financial transactions relating to or associated with a business.
The process of identifying, measuring, recording, and communicating economic information to permit informed judgments and decisions by users of the information.
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.
An algebraic expression of the equality of assets to Liabilities and members’ equity. It is expressed as: Assets = Liabilities + Equity.
Also referred to as the chart of accounts. This is a list of general ledger accounts.
A category of balance-sheet liabilities representing funds owed by company to suppliers and other short-term creditors.
A period of time covered by a set of financial statements.
A category of balance-sheet assets representing funds owed to the company by customers and others.
Rules which guide in the measurement, classification and interpretation of financial information.
Accrual basis of accounting
An accounting practice that records transactions as they occur, whether or not cash trades hands.
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.
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.
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.
An annual document summarising information about the operations and financial position of an organisation for the financial year.
The balance-sheet items in which a company invests so that it can conduct business. Examples include cash and financial instruments, inventories of raw materials and finished goods, land, buildings, and equipment. Assets also include funds owed to the company by customers and others – an asset category referred to as accounts receivable.
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.
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.
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.
A financial statement that describes the assets owned by the business and how those assets are financed – with the funds of creditors (liabilities), the equity of the owners, or both. Also known as the statement of financial position.
A statement showing the difference between bank account balances and the cash at bank balance shown in the balance sheet.
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.
A balance-sheet valuation method that calculates value as total assets less total liabilities.
A form of analysis that helps determine how much (or how much more) a company needs to sell in order to pay for the fixed investment – in other words, at what point the company will break even on its cash flow.
A document that translates strategic plans into measurable quantities that express the expected resources required and anticipated returns
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.
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 that details the reasons for changes in cash (and cash equivalents) during the accounting period. More specifically, it reflects all changes in cash relating to operating activities, investment, and financing.
Chart of accounts
A list of all the account names and account numbers.
A security that represents a fractional ownership interest in the corporation that issued it.
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.
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”).
In cost accounting, the contribution by each unit of production to overhead and profits, or net revenue less direct cost per unit.
A form of analysis that evaluates whether, over a given time frame, the benefits of a new investment or business opportunity will outweigh the associated costs.
A program or organisation which has all its costs and income grouped together in order to measure and monitor performance.
Cost of Capital
The opportunity cost that shareholders and lenders could earn on their capital if they invested in the next-best opportunity available to them at the same level of risk, calculated as the weighted average cost of the organization’s different sources of capital.
Cost of Goods Sold (COGS)
On the income statement, what it costs a company to produce its goods and services. This figure at a minimum includes raw materials and direct labor costs.
See accounts payable.
Assets that are most easily converted to cash: cash, equivalents such as certificates of deposit and U.S. Treasury bills, receivables, and inventory. Under generally accepted accounting principles, current assets are those that can be converted into cash within one year.
Current assets divided by current liabilities. This ratio is often used as a measure of a company’s ability to meet currently maturing obligations.
Days Receivables Outstanding
The average time it takes to collect on sales.
The ratio of debt to either assets or equity in a company’s financial structure.
See accounts receivable.
Also known as a net loss. The excess of total expenses over total revenues for an entity over the reporting period.
The cost of an asset minus its estimated residual value.
A non-current asset having a limited useful life.
A noncash charge that effectively reduces the balance sheet value of an asset over its useful life.
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.
A schedule (usually a spreadsheet) showing the amount of depreciation for each asset.
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.
Cost incurred as a direct consequence of producing a good or service – as opposed to overhead, or indirect costs.
Discounted Cash Flow (DCF)
A method based on time-value-of-money concepts that calculates value by finding the present value of a business’s furniture cash flows.
The annual rate, expressed as a percentage, at which a future payment or series of payments is reduced to its present value.
A withdrawal of cash made by the owner of the business. Relevant for sole traders and partnerships.
Earnings Per Share (EPS)
A company’s net earnings divided by the total number of shares outstanding.
Economic Value Added (EVA)
The value of total assets less total liabilities.
A loss or outgoing incurred by the entity during the reporting period.
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.
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.
The degree to which borrowed money is used in acquiring assets. A corporation is said to be highly leveraged when its balance-sheet debt is much greater than its owners equity.
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
Assets that are difficult to convert to cash – for example, buildings and equipment. Sometimes called plant assets.
Future Value (FV)
The amount to which a present value, or series of payments, will increase over a specific period at a specific compounding rate.
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”.
A chronological record of the entity’s transactions during an accounting period. It is based on the concept of double-entry accounting.
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.
Generally Accepted Accounting Principles (GAAP)
In the United States, a body of conventions, rules, and procedures sanctioned by the Financial Accounting Standards Board, an independent, self-regulating body. All entities must follow GAAP in accounting for transactions and representing their results in financial statements.
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.
The difference between net sales revenue (sales minus sales returns and allowances) and cost of goods sold.
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.
Also known as an input tax credit. The amount of GST paid by the entity on the acquisition of goods and services from suppliers.
An analysis of the change in an account balance over two reporting periods. Usually expressed as a percentage increase or decrease.
Refers to the profit and loss statement.
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.
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.
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.
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.
A ratio that indicates the number of times inventory has been sold during the period.
Assets held by the entity for investment purposes, rather than for use in the operating activities of the entity.
A record in which transactions are initially recorded. The process of entering transactions into a journal is called “journalising”.
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.
Future sacrifices of economic benefits that an entity is presently obliged to make to other external entities as a result of past transactions.
The ability of an entity to satisfy its short-term financial obligations.
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”.
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.
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.
Total of assets minus total liabilities. Also equals total equity.
Net realisable value
The selling price of inventory minus the costs to sell.
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
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.
A projected target for performance in revenues, expenses, and operating income.
On the income statement, gross margin less operating expenses and depreciation. Often called earnings before interest and taxes, or ebit.
On the income statement, a category that includes administrative expenses, employee salaries, rents, sales and marketing costs, and other costs of business not directly attributed to the cost of manufacturing a product.
The extent to which a company’s operating costs are fixed versus variable. For example, a company that relies heavily on machinery and uses very few workers to produce its goods as high operating leverage.
A financial ratio used by many analysts to gauge the profitability of a company’s operating activities. It is calculated as earnings before interest and taxes (EBIT) divided by net sales.
Any lease other than a finance lease. A lease under which substantially all of the risks and rewards (benefits) incidental to ownership of
What, if anything, is left over after total liabilities are deducted from total assets. Owners equity is the sum of capital contributed by owners plus the company’s total retained earnings over time. Also known as shareholders’ equity.
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.
The length of time it will take a particular investment to pay for itself.
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.
The process of transferring information in the general journal to the individual accounts contained in the general ledger.
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.
Present Value (PV)
The monetary value today of a future payment discounted at some annual compound interest rate.
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
The percentage of every dollar of sales that makes it to the bottom line. Profit margin is net income after tax discounted at some annual compound interest rate.
A ratio which measures the number of times that receivables are converted into cash during the period.
Ensuring two or more balances agree, often used in reference to checking bank balances with the accounting system.
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.
Amounts set aside to provide for future programs or to act as a buffer against changing circumstances.
The estimated sales proceeds from the disposal of a non-current asset at the end of its useful life.
Annual net profits left after payment of dividends that accumulate on a company’s balance sheet.
The accumulated profits of a company that have been retained rather than distributed to shareholders as dividends. Also known as retained earnings.
Return on Assets (ROA)
Relates net income to the company’s total asset base and is calculated as net income divided by total assets.
Return on Equity (ROE)
Relates net income to the amount invested by shareholders (both initially and through retained earnings). It is a measure of the productivity of the shareholders’ stake in the business and is calculated as net income divided by shareholders’ equity.
The amount of money that results from selling products or services to customers.
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.
A form of business structure operated by a single proprietor.
A situation in which a company’s assets outweigh its liabilities – that is, owners’ equity is positive.
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.
A physical count of inventory on hand at the end of the reporting period.
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.
For GST purposes, the term supply is very broad and includes the supply if services, provision of advice or information, a grant, assignment
Otherwise known as a net profit. The excess of total revenues over total expenses for the entity over the reporting period.
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.
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.
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.
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.
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.
Unadjusted trial balance
A trial balance prepared before adjusting entries have been processed.
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.
The difference between actual and expected results in the budget. A variance can be favorable, when the actual results are better than expected, or unfavorable, when the actual results are worse than expected.
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%.
Amounts paid to an employee based on an hourly rate.
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.
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
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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