VCE Accounting flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting equation

Assets = Liabilities + Owner's Equity. Every transaction keeps this equality true, so changes on one side must be matched by equal changes on the other side or opposite changes on the same side.

Double-entry principle

Every transaction is recorded with at least one debit and one credit of equal total value. Debits increase assets and expenses; credits increase liabilities, equity and revenue.

GST Paid account

A current asset/clearing account debited when a business pays GST on purchases. It is offset against GST Collected, and the net amount is remitted to or refunded by the tax authority.

GST Collected account

A current liability credited when a business charges GST on sales. At reporting, it is offset against GST Paid; any excess is payable to the tax authority.

Tax invoice

A source document issued by a supplier for a credit sale. It shows the goods or services, amounts, GST and total, and supports recording the transaction in the buyer's and seller's records.

Memo source document

An internal document used to record transactions that lack an external source document, such as goods taken by the owner for personal use, correcting entries, or internal transfers of stock.

Perpetual inventory method

An inventory system that updates the Inventory account after every purchase and sale. Each sale records revenue and also cost of goods sold and a reduction in inventory.

Cost of goods sold

The cost to the business of inventory sold during a period. Under perpetual recording it is debited at the time of each sale and closed to the income statement.

Prepaid expense

A current asset representing a benefit already paid for but not yet consumed, such as prepaid rent. At balance date the consumed portion is transferred to an expense.

Accrued expense

A current liability for a benefit already consumed but not yet paid, such as wages owing. An adjusting entry debits the expense and credits the accrued expense liability.

Straight-line depreciation

Depreciation = (cost − residual value) ÷ useful life. It allocates an equal amount of the asset's depreciable cost to each year of its useful life.

Reducing-balance depreciation

Depreciation = carrying amount × rate. The expense is higher in early years and lower later because the carrying amount falls each period.

Accumulated depreciation

A contra-asset account that accumulates all depreciation charged on a non-current asset. It is deducted from asset cost to give carrying amount; the asset account itself is not reduced.

Working capital

Current assets minus current liabilities. A positive figure indicates the business can meet short-term obligations from short-term resources; a negative figure signals liquidity pressure.

Current ratio

Current assets ÷ current liabilities. It measures the number of dollars of current assets available for each dollar of current liabilities; a ratio below 1 indicates potential liquidity difficulty.

Debt ratio

Total liabilities ÷ total assets, often expressed as a percentage. It shows the proportion of assets financed by external parties; a higher ratio indicates greater financial risk.

Owner's equity

The owner's claim on the business, calculated as assets minus liabilities. It increases with capital contributions and profit and decreases with drawings and loss.

Trial balance

A list of all ledger account balances at a point in time, with debits and credits in separate columns. Equal totals provide evidence of arithmetic accuracy but do not prove the ledger is error-free.

FIFO inventory method

First-in, first-out: the earliest inventory costs are assigned to cost of goods sold, and the latest costs remain in closing inventory. It approximates the physical flow of perishable goods.

Purchase returns entry

Returning goods to a supplier debits Accounts Payable and credits Inventory for the cost of returned goods, with GST Paid or GST Collected adjusted as required.

Sales returns entry

A customer return debits Sales Returns and credits Accounts Receivable for the selling price, and debits Inventory and credits Cost of Goods Sold for the cost of returned goods.

Bad debts write-off

An entry that debits Bad Debts expense and credits Accounts Receivable when a debt is confirmed uncollectable. It removes the receivable and recognises the loss.

Allowance for doubtful debts

A contra-asset account estimating receivables unlikely to be collected. The entry debits Doubtful Debts expense and credits the allowance; net receivables equal accounts receivable minus the allowance.

Carrying amount

The cost of a non-current asset minus its accumulated depreciation. It is the value at which the asset is reported in the balance sheet.

Gain or loss on disposal

Gain = proceeds − carrying amount; loss = carrying amount − proceeds. The gain or loss is reported in the income statement when the asset is sold or scrapped.

Accrual basis

Revenue is recognised when earned and expenses when incurred, regardless of when cash changes hands. Adjusting entries at balance date convert cash records to accrual figures.

Cash basis

Revenue and expenses are recognised only when cash is received or paid. It is simpler but does not match income and expenses to the period in which they are earned or incurred.

Gross profit margin

Gross profit ÷ sales, expressed as a percentage. It measures the proportion of each sales dollar remaining after cost of goods sold to cover operating expenses and profit.

Net profit margin

Net profit ÷ sales, expressed as a percentage. It measures how much of each sales dollar becomes profit after all expenses are deducted.

Return on owner's equity

Net profit ÷ average owner's equity, expressed as a percentage. It measures how effectively the owner's invested capital is being used to generate profit.

Inventory turnover

Cost of goods sold ÷ average inventory. It indicates how many times inventory is sold and replaced in a period; a higher rate generally indicates faster stock movement.

Cash budget

A forecast of expected cash receipts and cash payments for a period. It excludes non-cash items such as depreciation and shows the expected opening and closing cash balance.