Under the traditional approach assets are shown as debit balances and liabilities and equities are shown as credit balances. Increases in assets are recorded as debits and decreases as credits; reverse for liabilities and equities.
The finance used (debt finance or equity finance), and the period of the finance, should be matched to the period which it required and for the purpose which it is to be used.
Trade credit is a form of short-term finance provided by a business by suppliers. It has few costs and security is not required.
Factoring provides short-term finance. Costs include an interest charge and debt management charge.
Bank overdrafte also provide finance for short-term cash flow issues. Usually includes a interest charge and perhaps a set-up fee. Some security is usually required.
The cost of a non-current asset includes all reasonable and necessary costs incurred to place the asset in a position and condition ready for use, plus all costs incurred which enhance the future econmic benefits of an asset beyond the initial acquisition.
Materiality is a term used to indicate the relative importance of a non-current asset to an entity. In general, an item is material if it is sufficiently important to influence the economic decisions of users on the basis of financial statements.
Prepayments are payments in advance. If the benefit has been already consumed then it counts as an expense. Otherwise it is an current asset.
Inventories can be a significant investment and asset for more entities. There is an opportunity cost between the expense of holding an excessive inventory and the prospect of lost sales when an inventory is not available.
Raw materials are the inputs in a productive process whilst work in progress are incomplete goods. Finished good are ready for immediate sale.
Raw Materials -> Work in Progress -> Finished Goods -> Sales
|Transaction||Assets||Liabilities||Equity||Revenue||Expenses||Profit and Loss|
The income statement (statement of performance) relates to a period of time. The regular production of an income statement allows managers to compare actual performance against the budget. The statements are normally for internal consumption only. The purpose is to measure profit, but summarising the income for that period and deducting the expenses incurred in earning that income.
The balance sheet (statement of position) shows all the resources controlled by an entity and all the obligations due. The business entity principles asserts that transactions, assets and liabilities that relate to the entity are accounted separately, irrespective of whether the entity is recognised as a separate legal or taxable entity.
Wealth is a static measure and represents stock at a particular point in time. This stock can change over time. The difference between wealth at two time periods is the profit or loss for that time period.
ProfitPeriod1 = Wealth1 - Wealth0, ProfitPeriod2 = Wealth2 = Wealth1 etc.
The major influences on financial reporting for companies in Australia are; the AASB (Australian Accounting Standards Board) Framework, accounting standards (such as the International Accounting Standard Board), UIG (AASB subcommittee, Urgent Issues Group) interpretations, the Corporations (or other) Act, and stock exchange listing requirements. The aim of Not-for-Profit-Enterprises is use its resources in an efficient manner to best achieve the objectives of the organisation.