Unit 1 Outline

• Module 1: Innovations and Entrepreneurs

• Module 2: Small Business

• Module 3: Marketing

• Module 4: Accounting
 3. Cash
Accounting
Module 4
2. Accounting
1.Accounting
5.
Role
4.Sales
Cash
of Accounting
Forecast
Budget
Equation
Session 1: Role of accounting

• Define accounting, financial data, financial information,

source documents, recording, reporting, and advice.

• Explain why accounting is important for businesses.

 Why is accounting important?
• Business is not just about making and selling; it is
about managing – managing people, managing stock,
managing customers and suppliers – and, last but not
least, managing cash.
• If a business owner is to manage their business
effectively, then they will need accurate
information that can be relied upon to assist them in
the decisions they make.
• The purpose of accounting then is to provide business
owners with financial information that will assist them
in making decisions about the activities of their firm.
 What is accounting?

Accounting is the collection, recording

and reporting of financial information to
assist business owners in decision-
making
 Financial data and financial information

Accounting is about providing info; but that info has to

come from a source and actually begins its life as raw
facts (source documents) before being transformed
into a form that is useful for decision-making (financial
reports). Therefore we need to distinguish between
financial data and financial information.

Financial Data Financial Information

• raw facts and figures • financial data which has
upon which financial been sorted, classified
information is based and summarised into a
more usable and
understandable form
What are the 4 stages of the accounting
process?

The process of turning financial data into financial

information is facilitated by what is known as the
accounting process.

Source Provide
Record Report
Documents Advice
 Accounting Process
Stage 1: Collect source documents
• Business collects the source documents relating to its
transactions.
• Source documents are the pieces of paper that
provide both the evidence that a transaction has
occurred, and the details of the transaction itself.
Examples include:
• Receipts, provide evidence of cash received by the business
• Cheque butts, provide evidence of cash paid by the business
• Invoices, provide evidence of credit transactions
• Memos, provide evidence of transactions within the firm
itself
 Accounting Process
Stage 2: Recording
• Recording involves sorting, classifying and
summarising the information contained in the source
documents so that it is more usable.

• Common accounting records include:

• journals, which record daily transactions of a common type
(such as all cash paid, all cash received, or all stock
purchased on credit)
• stock cards, which record all the movements of stock in and
out of the business.
 Accounting Process
Stage 3: Reporting
• Reporting involves the preparation of financial
statements that communicate financial information
to the owner, so that decisions can be made.
• There are three general-purpose reports that all
businesses should prepare:
• a Statement of Receipts and Payments to report on the cash the
firm has received and paid, and the change in its bank balance
over a period
• an Income Statement to report on the firm’s revenues and
expenses over a period
• a Balance Sheet to report on the firm’s assets and liabilities at a
particular point in time.
 Accounting Process
Stage 4: Advice
• Advice is the provision to the owner of a range of
options appropriate to their aims/objectives, and
recommendations as to their suitability.

• This is where the real skill of an accountant comes

into play! Without proper advice, the information in
the reports is as good as useless, but if the reports
are explained carefully and the accountant provides
the owner with a range of options, a more informed
decision – and a better outcome for the business –
should occur.
 Practice Exam Questions
1. Reorder the following stages of the accounting
process:
• recording transactions in journals and stock cards
• collecting source documents like receipts and cheque butts
• providing advice to the owner of the business
• preparing financial reports.

2. Identify which stage of the accounting process is

performed by each of the following actions:
• preparing an Income Statement
• filing sales invoices
• entering transactions in a cash journal
• presenting the owner with alternative sources of finance.
 APs vs QCs

APs QCs
• Accounting • Qualitative
principles are the characteristics are
generally accepted the qualities we
rules governing the would like our
way accounting accounting reports
information is to possess, and
recorded include.

MCCHERG Red Rooster’s Ugly Chickens

 Accounting Principles

• Monetary Unit – all items must be recorded and

reported in a common unit of measurement; that
is, Australian dollars
• Consistency – accounting methods should be
applied in a consistent manner to ensure that
reports are comparable between periods
• Conservatism – losses should be recorded when
probable but gains should only be recorded when
certain. This is so liabilities and expenses are not
understated and assets and revenues are not
overstated.
 Accounting Principles
• Historical Cost – the recording of a transaction at its
original cost or value, as this value is verifiable by
reference to the source document
• Entity – the business is assumed to be separate
from the owner and other businesses, and its
records should be kept on this basis
• Reporting Period – the life of the business must be
divided into periods of time to allow reports to be
prepared
• Going Concern – the life of the business is assumed
to be continuous, and its records are kept on that
basis.
 Qualitative Characteristics
• Relevance - Reports should include all information
that is useful for decision-making.
• Reliability - Reports should contain information
verified by source document evidence so that it is
free from bias.
• Understandability - Reports should be presented in
a manner that makes it easy for the user to
comprehend their meaning.
• Comparability - Reports should be able to be
matched up to each other over time through the
use of consistent accounting procedures.
Activity
• Complete the AP and QC mix and match!
Session 2: Accounting equation

• Describe the accounting equation.

• Identify and define assets, liabilities and owners’ equity.

• Explain the relationship between elements of the

accounting equation.

• Calculate owner’s equity using the accounting equation.

Accounting Elements

• These are absolutely critical to understand.

• If you misclassify something, you will record it

incorrectly, which will throw out your reports
and render your results incorrect.

• Each element has particular ‘criteria’ to be met

to be classified as a given element.
Accounting Elements

5 Accounting Elements:
• Assets
• Liabilities
• Owner’s Equity
• Revenues
• Expenses
For now, we will focus of A, L + OE
1. Assets
• Asset = a resource controlled by an entity,
as a result of a past event, that is expected to
provide a future economic benefit to the
entity.

• For an item to be recognised as an asset, it

must meet all parts of the definition:

1. Resources
2. Control
3. Future economic benefits
 1. Assets

• RESOURCE = items capable of generating

economic gain for a business.

• What are some examples of resources?

 Bank (cash held there, not the building)

 Stock
 Vehicles
 Premises
 1. Assets
• CONTROL = firm must be in a position to
determine how and when the item is used.

• This is NOT NECESSARILY the same as owning

something. Control is broader (so it includes, but
is not restricted to, what the firm owns)

• What is an example of something NOT under the

firm’s control?
 1. Assets

• What is an example of something NOT under the

firm’s control?

The business owner’s home cannot be

classified as a business asset because it is
not under business control.

This is where the ENTITY principle comes

into play!
 APs vs QCs

APs QCs
• Accounting principles are • Qualitative characteristics are
the generally accepted the qualities we would like
rules governing the way our accounting reports to
accounting information is possess, and include.
recorded
MCCHERG Red Rooster’s Ugly Chickens
 APs

Monetary unit
The entity principle states that
Conservatism
the BUSINESS is separate
Consistency from its OWNER.
Historical cost Essentially, if you own a
Entity business, those records are
kept separate to your own
Reporting period personal records.
Going concern
 1. Assets

• FUTURE ECONOMIC BENEFIT = some sort

of benefit that is yet to be received.
• Think-pair-share: Which principle does this
relate to?
 Going Concern principle

Example:
Cash in the bank = asset  b/c it can be spent at
some point in the future.
Cash paid for this month’s wages ≠ asset  b/c
there is no future benefit (the benefit has already
been received).
 2. Liabilities

• Liability = Future sacrifice in economic

benefits (outflow) that the organisation
has the present obligation to make.

• For an item to be recognised as a liability,

it must meet all parts of the definition:

1. Future sacrifice in economic benefits

2. Present obligations
 2. Liabilities

Future sacrifice in economic benefits (outflow)

• FUTURE = the sacrifice has not yet occurred, but

the liability is “expected to result in” this sacrifice.

• SACRIFICE / OUTFLOW = giving up something for

the sake of something else.

• ECONOMIC BENEFITS = usually a future cash

payment, but not necessarily (eg. unearned
accounts)
2. Liabilities
So, what does a future sacrifice / outflow in
economic benefits actually look like?

Cash as the economic benefit

• Eg. cash, the expected outflow (sacrifice) occurs when
Luke’s Tournament Masters pays its debts.

Non-cash economic benefit

• Luke’s Tournament Masters has just received cash in
advance for a job (a summer riding camp) which will
not occur for another 2 weeks. It is not a cash
payment that is required to extinguish this liability, it
is the completion of work.
 2. Liabilities
• PRESENT OBLIGATION = a legal responsibility
(obligation) to settle a debt.

• Debt = something (money, goods or services) owed

to someone else.

If Luke’s Tournament Masters has a legal obligation to

settle a debt, it is very likely that this debt is a liability.

Think about it … if a business has a present

obligation to settle a debt then they will likely
have to make a future sacrifice of economics
benefits in order to settle this debt.
2. Liabilities

What does a present obligation look like?

Demi’s Beauty Studio has a mortgage on

the premises of the recording studio.

The contract with the bank means that

Demi’s Beauty Studio is obligated to repay
the bank the amount owing on the
premises.
 2. Liabilities

What is not a present obligation?

Demi’s business expects to pay for

advertising in 2015.

This cannot be reported as a liability b/c

right now there is no obligation to pay
for the ads.

The obligation only occurs once the firm

has signed a contract or the advertising
itself has been provided.
Recall
• Assets = resources controlled by an entity,
from which future economic benefits will
flow to the entity.

• Liabilities = present obligations of the

entity, the settlement of which is expected to
result in an outflow of resources
embodying economic benefits.
Activity

1. Research and provide a definition for each of the following

items
2. Classify the items as an asset or a liability

• Creditors
• Stock of supplies
• Equipment
• Mortgage
• Bank overdraft
• Cash at bank
• Vehicle
• Debtors • Furniture
• Loan
• Premises
Activity: Answers

ASSETS LIABILITES
• Stock of supplies • Mortgage
• Cash at bank • Bank overdraft
• Debtors • Creditors
• Premises • Loan
• Equipment
• Vehicle
• Furniture
 3. Owner’s Equity

• Owner’s Equity = the Residual Interest in the

assets of the entity after deducting liabilities

How else can we think of this concept?

3 ways:
 What’s left over for the owner once the
firm has met all its obligations (liabilities).
 The amount the business ‘owes the owner’
 Owner’s equity = Assets – Liabilities
 3. Owner’s Equity
So, owner’s equity is the amount the business
‘owes the owner’. How can a business owe its
owner?
Think-pair-share: What principle does this
relate to?
 Recall the entity principle – the business and the
owner are separate. So, the assets and liabilities of
the firm are not the owner’s they are the firm’s.

 BUT assets > liabilities (b/c of the accounting

equation), so there must be something left over!
This left over (i.e. residual) is what the firm owes to
the owner.
 The accounting equation

• Both LIABILITIES and OE represent CLAIMS on

the ASSETS of the business
• Liabilities are what the business owes to external
parties
• OE is what the business ‘owes’ the owner

• This relationship between assets, liabilities and

owners equity is what is described as the
ACCOUNTING EQUATION.
The Accounting Equation

A beautiful (and easy) thing about Accounting is that the

Accounting Equation must always balance.

A L OE
The Accounting Equation

Why does it have to balance?

Consider this …

A L OE
= = =
$100,0 $60,00 $10,00
00 0 0

We have $30,000 leftover. This means $30,000 has not been

claimed by liabilities or the owner! It is not possible for an
amount to remain unclaimed.
The Accounting Equation

Liabiliti
Assets OE
es
= =
=
$100,0 $40,00
$60,00
00 0
0

Who would be entitled to the unclaimed amount?

The owner! So, owner’s equity would have to be $40,000 not

$10,000.
 Activity
For each of the following examples, use the accounting equation to
calculate the value of owner’s equity:

1. Mark’s Dog Washing Service has $4500 in assets, but owes

$500 to the local newspaper for advertising.

2. Bianca owns and operates Bianca for Hair. The firm has $5 600
in assets, but owes a supplier $250.
Activity 1: Answers

• Mark’s Dog Washing Service has $4500 in

assets, but owes $500 to the local newspaper
for advertising.
Activity 2: Answers

• Bianca owns and operates Bianca for Hair.

The firm has $5 600 in assets, but owes a
supplier $250.
 Activity
For each of the following examples, use the accounting equation to
calculate the value of owner’s equity:

3. Andrew is the owner of an accounting firm. He owns a car worth

$1 500, a stereo worth $800, clothing worth $750 and other
assets worth $1 000. His firm owns office equipment worth $15
000 and a vehicle worth $20 000, but owes $600 to an
employee.

4. Sasha Enterprises has $4 500 in the bank, but owes $1 000 on a

loan it took out to buy equipment. The equipment is worth $1
500, and a company car is worth $17 000. A client still owes
$500 for work done by the firm, and Sasha owes $150 on her
Visa card.
 Activity 3: Answers
• Andrew is the owner of an accounting firm. He owns a car
worth $1 500, a stereo worth $800, clothing worth $750 and
other assets worth $1 000. His firm owns office equipment
worth $15 000 and a vehicle worth $20 000, but owes $600
to an employee.
 Activity 4: Answers
• Sasha Enterprises has $4 500 in the bank, but owes $1 000
on a loan it took out to buy equipment. The equipment is
worth $1 500, and a company car is worth $17 000. A client
still owes $500 for work done by the firm, and Sasha owes
$150 on her Visa card.
Activity
For each of the following examples, use the
accounting equation to calculate the value of the
assets.

1. John knows that his equity in his firm is $3000,

and that his firm owes $600 to a supplier.

2. Ella has equity of $10 000 in her business, and

has $5 000 worth of personal assets. She owes
Branko $500, and the firm has debts of $3
000.
Activity 1: Answers

• John knows that his equity in his firm is $3

000, and that his firm owes $600 to a
supplier.
Activity 2: Answers

• Ella has equity of $10 000 in her business, and

has $5 000 worth of personal assets. She owes
Branko $500, and the firm has debts of $3 000.
The Balance Sheet
• Balance Sheet = accounting report that
details the first three accounting elements –
ASSETS, LIABILITIES and OWNER’S EQUITY

• It is a reflection of the firm’s accounting

equation

• Memory Tool  the accounting equation must

balance on the balance sheet
The Balance Sheet

• The balance sheet is a financial report that

represents the firm’s POSITION (with
respect to A, L and OE) AT a particular
point in time

• Also known as the Statement of Financial

POSITION
How the Accounting Equation looks in the
Balance Sheet

Assets = Liabilities + Owner’s Equity

Current Assets Current Liabilities

Non-Current Assets Non-Current Liabilities

+ Owner’s Equity

TOTAL ASSETS TOTAL LIABILITIES &

EQUITY
What do we notice about the Balance Sheet?

Assets = Liabilities + Owner’s The assets

Equity are listed on
Current Assets Current Liabilities the left-hand
side and the
Non-Current Assets Non-Current Liabilities equities (L +
OE) are listed
+ Owner’s Equity
on the right,
TOTAL LIABILITIES & just like in the
TOTAL ASSETS
EQUITY accounting
equation.
Current vs. Non Current
• Assets and Liabilities can be further
classified into Current and Non-Current.

• Determined by a 12 month test.

Current vs. Non Current ASSETS
• CURRENT ASSET = those assets that are
expected to be consumed within 12
months (i.e. asset provides an economic
benefit only in the next 12 months).

• NON CURRENT ASSET = those assets that are

expected to provide economic benefits for
more than 12 months.
Current vs. Non Current LIABILITIES
• CURRENT LIABILITIES = those liabilities that
are expected to be settled within 12
months.

• NON CURRENT LIABILITIES = those liabilities

that are expected to be settled after 12
months.
Task: Classification of accounting elements

Classify each of the following items as a current asset,

non-current asset, current liability or non-current liability

• Cash in bank • Mortgage (remainder)

• Creditors • Stock of supplies
• Loans due in next 12 • Wages owing to
months employees
• Mortgage (this year) • Loans due in next 12
• Debtors months
• Bank overdraft
• Premises
• Equipment
• Vehicles
• Shop fittings
 Task: Answers

Assets Liabilities
Current NC Current NC
• Cash in • Premises • Creditors • Longer-
bank • Vehicles • Wages owing to term
• Stock of • Shop employees loans
supplies fittings • Loans due in next • Mortgage
• Debtors • Equipme 12 months (remaind
nt • Mortgage (this er)
year)
• Bank overdraft (not
b/c it will be met in
the next 12 months
but b/c it can be)
 A closer look at loans

• Some of the amount owing on the loan may be current

and some non-current.

Example:
• Brittany has a mortgage on the building premises for his
business Brittany’s Art Studios.
• The Bank expects Brittany to make gradual repayments off
the principal rather than repay one ginormous amount at
the end of the loan.
• Here, the amount of Brittany’s loan due for repayment in
the next 12 months = current liability.
• The remainder (which is due after 12 months) = non-
current liability.
 How does this look on the balance sheet?
BRITTANY’S ART STUDIOS
Balance Sheet as at 30 January 2014
Current Assets $ $ Current Liabilities $ $
Bank 5,000 Creditors 6,000

Stock 34,000 Loan – ANZ Bank 12,000 18,000

Debtors 12,000 51,000

Non-Current
Liabilities
Non-Current Loan – ANZ Bank 24,000
Assets
Vehicles 45,000

Owner’s Equity
Capital - Brittany 54,000

Total Assets 96,000 Total Equities 96,000

Task

Complete the Classified Balance Sheet

worksheet
Double Entry Accounting

• Every business has transactions.

• These transactions have to be stored somewhere to

prove they have occurred (apart from simply keeping
the source documents).

• Regardless of the nature of the business transaction,

there will always be TWO items affected in the firm’s
accounting equation and therefore its Balance Sheet

•  Hence, the name DOUBLE entry.

Double Entry Accounting rules

Two rules:
1. Every transaction will affect at least two
items in the accounting equation.
2. After recording these changes, the
accounting equation must still balance.

Because the Balance Sheet is based on the

accounting equation, the same two rules of
double-entry accounting also apply to the
Balance Sheet.
Double Entry Accounting

• But why are there two entries?

• Essentially, ‘every action has a reaction’ so

that this equation constantly balances.

LIABI
ASSE
LITIE OE
TS
S
Double Entry Accounting

Transaction First Effect Second Effect

Owner deposited
 cash at bank (asset)  capital (owner’s
$80,000 to commence
by $80,000 equity) by $80,000
business
Double Entry Accounting

Transaction First Effect Second Effect

Took out an interest-  cash at bank (asset)  loan (liability) by

only loan $20,000 by $20,000 $20,000
 Double Entry Accounting

Transaction First Effect Second Effect

 shop fittings (asset)

Bought shop fittings by $10,000
 cash at bank (asset)
for cash $10,000 +
 GST liability by by $11,000
GST of $1,000
$1,000
 Double Entry Accounting

Transaction First Effect Second Effect

 Stock (asset) by
Purchased stock on $15,000  Creditors (liability)
credit for $15,000 + by $16,500
GST of $1,500  GST liability
by$1,500
 Double Entry Accounting

Transaction First Effect Second Effect

 Cash at bank (asset)

 GST liability by
by $2,200
$200 (*)
Sold goods for $2,000  Stock (asset) by
cash + GST of $200  Capital (OE) by
$1,200
(cost price of goods $800 (**)
sold $1,200)  Total overall
 Total increase
increase in assets
$1,000
$1,000

* B/c the business collected $200 on its sale on behalf of the governme
** B/c Profit = Revenue (2000) – Expenses (1200) = $800
 Double Entry Accounting

Transaction First Effect Second Effect

 Cash at bank (asset)  Capital (OE) by

Paid wages for the
by $500 $500, as wages is an
week $500
expense
DOUBLE ENTRY ACCOUNTING
Memory Tool:

• Revenue items   OE

• Expense items   OE
DOUBLE ENTRY ACCOUNTING
2 Rules:

1. Every transaction will affect at least two items in

the accounting equation.

2. After recording these changes, the accounting

equation must still balance.
Session 3: Cash Accounting

Learning intentions:

• Explain the operation of a single-entry accounting system

to account for cash.

• Record transactions in cash journals, including GST

 SYSTEMS OF ACCOUNTING

Single Entry Double Entry

• An accounting system • An accounting system
which records only a which requires both a
single journal entry for debit and a credit entry
each transaction, for each transaction, so
meaning that only the that the accounting
personal and cash equation balances.
aspects of transaction
are recorded. • Suitable for most
businesses.
• Suitable for very small,
cash-based businesses.
Service Businesses
• Service businesses operate by providing their time,
labour or expertise (or a combination of all three) in
return for a fee or charge
• Most of these transactions are for cash.
• Hence, a single-entry accounting system is
appropriate for small service businesses!
Service Businesses

• ‘Cash’ includes notes and coins, cheques, and the

balance of the firm’s bank account
Cash Recording
The accounting system must be able to generate information
relating to the firm’s cash position, including:

Cash Receipts Cash Payment Bank Balance

= Amount of cash = Amount of cash the

= Level of cash on
business has received business has paid to
from other entities during hand at a particular
other entities during
the reporting period. the reporting period
point in time.

Verified by receipts,
Verified by cheque
cash register rolls Verified by the Bank
butts and the Bank
and the Bank Statement.
Statement.
Statement.
ACCOUNTING PROCESS

Sourc
e Recor Repo Advic
Docu ds rts e
ments
Once the relevant source documents have been
collected and sorted, it is necessary to record the data in
journals.

Recording = writing down raw financial data from source

documents in an organised format, so that it becomes
financial information that can be presented in accounting
reports
ACCOUNTING PROCESS: Recording

• Journal = accounting record in which transactions

are written down in an organised format (e.g. a
ruled book)

• Cash transactions are recorded in one of two journals:

• Cash Receipts Journal = journal summarising all cash
received by the business during a particular reporting
period.
• Cash Payments Journal = journal that summarises all cash
paid by the business during a particular reporting period.
ACCOUNTING PROCESS: Recording
• Frequent transactions are recorded in their own
classification column
• Infrequent transactions are recorded in the sundries
column
CASH RECEIPTS JOURNAL

Each receipt must be recorded twice:

1. Bank column (records cash received)
2. Classification column (records source of the cash)

Details that must be recorded in the Cash Receipts

Journal:
3. Date of transaction
4. Details of transaction
5. Receipt Number
6. Bank = amount of cash received
7. Classification Columns = any frequent receipts (e.g.
painting fees for a paint shop)
8. Sundries = any infrequent receipts (e.g. capital
contribution)
ACCOUNTING PROCESS: Recording

Double-checking mechanism
At the end of the reporting period, each column in
the Cash Receipts Journal should be totalled

Sum of totals
of all the other
Total of Bank columns (i.e.
classification
+ sundries
CASH PAYMENTS JOURNAL

Each receipt must be recorded twice:

1. Bank column (records cash received)
2. Classification column (records source of the cash)

Details that must be recorded in the Cash Receipts

Journal:
3. Date of transaction
4. Details of transaction
5. Cheque Number
6. Bank = amount of cash paid
7. Classification Columns = any frequent receipts (e.g.
wages, drawings)
8. Sundries = any infrequent receipts (e.g. purchase of
vehicle)
ACCOUNTING PROCESS: Recording

Double-checking mechanism
At the end of the reporting period, each column in
the Cash Payments Journal should be totalled

Sum of totals
of all the other
Total of Bank columns (i.e.
classification
+ sundries
ACCOUNTING PROCESS: reporting

• Cash transactions are reported in the Statement of

Receipts and Payments.

• Statement of Receipts and Payments = an accounting

report that shows the firm’s cash receipts and
payments and the consequent change in its
bank balance over a reporting period.
ACCOUNTING PROCESS: reporting
The Cash Receipts and Cash Payments Journals do not
provide a comprehensive assessment of the firm’s cash
situation because they do not show …
• The firm’s bank balance at the start of the period
• The firm’s bank balance at the end of the period
• The overall change (increase or decrease) in the
firm’s bank balance.

So, we need to take the info contained in the cash

journals and present it in an understandable form via
the Statement of Receipts and Payments
ACCOUNTING PROCESS: reporting

Gogh’ Painting Service

Statement of Receipts and Payments for March 2016

$ $
Cash Receipts
Less Cash Payments
Cash Surplus (deficit)
add Opening Bank Balance
Closing Bank Balance
 ACCOUNTING PROCESS: reporting
Item Description

Cash Receipts
Totals of classification columns and individual
Less Cash amounts from sundries columns, including GST
Payments
Overall change in firm’s bank balance
Cash Surplus
(Surplus or Deficit = Cash Receipts – Cash
(deficit)
Payments)
add Opening Bank How much cash was in the firm’s bank account
Balance at the start of the reporting period
How much cash was in the firm’s bank account
Closing Bank at the end of the reporting period (i.e. now)
Balance This gets reported as Bank in the next Balance
Sheet.
 Cash surplus vs cash deficit

• Cash surplus – will lead to an increase in the

bank balance
• Cash deficit – will lead to a decrease in the bank
balance

But, a cash deficit does not mean a negative bank

balance!
• Bank overdraft = negative bank balance (current
liability)
• Bank = positive bank balance (current asset)
 Uses of the statement of receipts and payments

• Useful for decision-making because it summarises all the

information relating to the firm’s cash position.
• Help the owner make decisions about the firm’s:
• Cash receipts;
• Cash payments; and
• Level of cash on hand.
• A high bank balance means the owner may wish to use
the excess cash to pay off loans, take extra drawings or
purchase newer non-current assets.
• A low bank balance means the owner may need to
make lower loan repayments, lower drawings, use credit
for some purchases, or perhaps make a capital
contribution.
The GST
• GST received on fees creates a GST liability

• GST paid to suppliers reduces that liability

The GST

• If GST received is greater than GST paid, the business

will have a GST liability, and a GST settlement will be
required

• If GST paid is greater than GST received, the business

will have a GST asset, and a GST refund will be due.

• As selling prices are generally higher than cost prices,

most firms will end up with a GST liability
The GST
• As selling prices are generally higher than cost prices,
most firms will end up with a GST liability
Session 4: Sources of Finances

Learning intentions:

• Distinguish between internal and external sources of

finance

• Describe the various forms of finance available to small

businesses
 Internal and External Sources of Finance
The accounting equation identified that the assets of a
business are funded from one of two sources:

1. Internal sources of finance (owner’s equity)

• This could be in the form of a capital contribution or using
previously generated profits. However, as a start-up you will
not have any retained profits.
2. External sources of finance (liabilities)
• Bank overdraft (bank that allows the account holder to
withdraw more than their current account balance)
• Term Loan (a form of external finance provided by banks
and other lenders for a specific purpose and repaid over
time, such as a mortgage or a general bank loan)
Option 1: Capital Contribution
Advantages:
• no set repayment date
• no interest charge.

Disadvantages:
• limited to the resources of the owner.
Option 2: Bank overdraft
Advantages:
• readily accessible
• flexible – can be used for a variety of purposes.

Disadvantages:
• high interest charge
• can be recalled at short notice.
Option 3: Term Loan
Advantages:
• makes possible the purchase of expensive assets
• flexible – can be used for a variety of purposes
• secured loans attract a lower interest rate.

Disadvantages:
• interest charges
• requires commitment by business to make
repayments for the term of the loan
• principal and interest repayments can put pressure
on cash flows.
Why do you need internal or external
finance?
• Startup costs for a new business can be
significant. Without an initial source of finance
the business would be unable to purchase assets
needed to start the business in the first place!
• Example start up costs:
• Computer • Rent
• Computer software • Advertising material (flyers,
• Printer business cards)
• Mobile phone • Fees for website designer
• Equipment • Fees for graphic design agency
• Tools • Insurance
• Uniforms • Accountant
• Electricity • Wages
• Telephone bill • Recruitment costs / fees
• Internet connection
Session 5: Budgets

Learning intentions:

• Define budgeting

• Distinguish between budgeted and actual reports

• Prepare budgeted reports for cash and profit

What is budgeting?
• There is a saying in business circles that ‘failing
to plan is planning to fail’. At its heart is the idea
that a business cannot be successful if it does not
prepare early for what it may face in the future.

Budgeting is the process of preparing reports that

estimate or predict the financial consequences of
likely future transactions.
What is budgeting?
Budgets are different from normal accounting
reports in two main ways:

• Budgets report future events rather than

historical events; they focus on what might
happen rather than what has already happened.

• As a consequence, budgets use estimates or

predictions rather than actual, verifiable data.
Purpose of budgeting
Like all accounting reports, budgeted reports have a
role in both planning and decision- making:

• Budgeting assists planning by predicting what is

likely to occur in the future.

• Budgeting aids decision-making by providing a

standard (a benchmark or yardstick) against
which actual performance can be measured.
The budgeting process
The Cash Budget
In order to survive into the future, a small business
must have sufficient cash to meet its obligations.
The Cash Budget attempts to estimate all future
cash receipts and payments, and thus predict the
firm’s cash balance at the end of the budgeted
period.

The Cash Budget is an accounting report which

predicts future cash receipts and payments,
determines the expected cash surplus or deficit, and
thus estimates the bank balance at the end of the
budget period.
Cash Budget
What report does this sound similar to?

The Statement of Receipts and Payments!

In fact, the headings are identical! The only

differences are those outlined earlier: rather than
actual historical data, the Cash Budget uses
estimates of future transactions.

The only actual figure in the Cash Budget is the

bank balance at start (as this figure is already
known when the budget is prepared).
 Cash Budget

Expected Cash Receipts Expected Cash Payments

• Cash Fees/takings • Expenses paid (e.g. wages,
• GST received rent or advertising)

• GST refund • GST paid

• Other revenue received • GST settlement

(e.g. interest revenue) • Cash drawings by the owner
• Cash contributions by the • Loan repayments
owner • Cash paid for non-current
• Loans received assets.
• Cash received from the sale
of a non-current asset.
Example: Perfect Portraits
How can the budget be used for planning?
The owner could prepare for a cash deficit by:
• increasing advertising; changing prices; or offering other
services in order to increase Cash Fees
• making a cash capital contribution
• reducing cash payments for expenses (but not necessarily
advertising or wages … why not?)
• deferring the purchase of non-current assets, or using
credit facilities or a loan for their purchase
• deferring loan repayments (on existing loans)
• taking less cash drawings
• organising (or extending) an overdraft facility.
Example: Perfect Portraits
How can the budget be used for planning?
The owner could prepare for a cash surplus by
using the extra cash to:
• purchase more or newer non-current assets
• increase loan repayments
• increase cash drawings
• expand operating activities by increasing advertising,
employing more staff etc.

For example, Perfect Portraits predicted a cash surplus of $12

540, so the owner can start planning how this extra cash can
be used. The owner had already made plans to use $10 000 to
contribute to the purchase of a company car later in the year.
 Example: Perfect Portraits
How can the budget be used for decision-making?
• The Cash Budget sets a standard (a target or benchmark)
that can be used to assess actual cash receipts and
payments.
• By comparing actual cash flows against the budgeted figures,
the owner can identify problems areas (where performance was
below expectation), and then act to correct the situation.
• Examples:
• PP set a target for Cash Fees of $16 000: should actual Cash
Fees not meet this expectation, corrective action (in the form of
more/better advertising, or a review of prices) can be taken.
• Should payments for Photographic Supplies exceed the
budgeted figure of $7 000, the owner may wish to review
handling procedures, or even change suppliers (for a cheaper
price).
Cash Budgets in Consecutive Periods
• In general, more frequent budgets will be more
accurate, and therefore more useful as
benchmarks for comparison.
• To show the effect of monthly variations it would
be wise for a business to prepare budgets for
consecutive months.
• That is, separate budgets for October, November
and December 2016 could be prepared and
presented side-by-side to show trends in receipts
and payments from month to month.
Cash Budgets in Consecutive Periods
Sales Forecast
• A sales forecast shows the level of sales revenue
in a future reporting period based on the
expected selling price and number of sales.

• Sales might be expected to increase steadily over

time or they could be cyclical.
• For example, a book store will likely sell many more
books in Nov-Dec because of Christmas.
 Sales Forecast
Example:
• Harriet’s Hats is a new hat store opening in Jan
2016. Harriet expects that sales will steadily
increase throughout the first year of operation.
• However, she expects a spike in October. Why?
• What will happen after the spike?

2016 J F M A M J J A S O N D
Number of
sales 1 7 10 15 20 25 30 35 45 90 50 60

Selling Price 120 120 120 120 120 120 120 120 120 120 120 120

Revenue 120 840 1200 1800 2400 3000 3600 4200 5400 10800 6000 7200
 Sales Forecast
What has Harriet assumed in her prediction?
• Very few sales in the first month of operation
• Steady increase of approximately 5 clients thereafter.
• Big spike during racing season due to high demand for
hats.
• Slightly higher demand in December due to Christmas
and summer (high sun exposure)

2016 J F M A M J J A S O N D
Number of
sales 1 7 10 15 20 25 30 35 45 90 50 60

Selling Price 120 120 120 120 120 120 120 120 120 120 120 120

Revenue 120 840 1200 1800 2400 3000 3600 4200 5400 10800 6000 7200