TFA 1-5 summary.docx - Topic 1 Accounting Equation...

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Topic 1 Accounting Equation Accounting equation for sole traders: Assets = Liabilities + Equity Accounting equation for a company: Equity for a company includes: - Share capital - Retained earnings/loss - Reserves - Less Dividends Assets = Liabilities + Share capital + Reserves + Revenues – Expenses – Dividends paid Assets + Expenses + Dividends paid = Liabilities + Share Capital + Reserves + Revenues Topic 2 Companies Formation and Operations Four types of companies: *focusing on the first type 1. Limited Companies - Proprietary Companies - Public companies 2. Unlimited companies 3. No liability companies 4. Special companies - Investment - Banking - Life insurance Companies are separate accounting entities as well as separate legal persons or entities. Limited liability - shareholders only lose their share money. The debts belong to the company as it is a separate accounting and legal entity. How to create a limited company? - Lodge an application with ASIC. Own constitution and general rules. - When a company is incorporated ASIC issues a certificate of registration. Equity of a company is split into three major categories: - Share capital
- Retained earnings (profits/losses) (type of reserve) - Reserves: o Asset revaluation o Plant replacement Once a company records and identifies all asset, liability and equity accounts it prepares an unadjusted trial balance. Unadjusted trial balance ensuring all accounts are balanced and bank reconciliation. Also known as cash accounting. The accountant now converts it from a cash basis to an accrual basis. Then, prepares the financial statements: - Income statement - Statement of changes of equity - Balance sheet - Statement of cash flows Advantages: - Better at attracting investors due to limited liability - Long term investment - Doesn’t have to issue a dividend - Continue to trade indefinitely - Tax saving Disadvantages: - Conflict between shareholders and directors - Creation of legal documents: time consuming and costly - More comprehensive financial reports. - To create a reserve, the accounting entry is: - Debit retained earnings - Credit reserves - Interim dividend = a dividend declared and paid part-way through the year - A company has an additional expense of income tax: - Debit income tax expense - Credit current tax liability Topic 3 Reconstruction of accounts and error correction
- When highest totalling column is on the Debit side Step 1 - Close each account by totalling the highest column. (Dr $40,000) Step 2 – copy that amount and move it to the other column as a total (Cr $40,000) Step 3 – Calculate carry down value/closing balance (c/d) by adding an amount to the transactions already recorded Step 4 – Open next period by debiting carry down value. (the c/d value becomes the opening balance (b/d) for the next period) 40,000 – 4,000

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