Accountancy has been performed since the earliest period of civilisation. Archaeological records dates back to ancient Mesopotamia, and is closely related to developments in writing, counting and money. There is also evidence for early forms of bookkeeping in ancient Iran, and early auditing systems by the ancient Egyptians and Babylonians.By the time of the Emperor Augustus, the Roman government had access to detailed financial information.
In 1984 the Australian Government established the Australian Accounting Standards Board to improve the quality and consistency of accounting reports and to cater for businesses trading both locally and internationally.
Accounting information is used by management for planning and control purposes and to comply with government requirements. Common accounting terms include:
The Australian Financial Year
The financial year in Australia begins on 1 July and finishes on 30 June in the following year. Individual tax returns are due for submission by 31 October and most business tax returns by 15 May.
Types of industries
- Primary – includes mining, farming, fishing and forestry
- Secondary – also referred as the Manufacturing Industry, e.g. motor vehicles, engineering, shipbuilding
- Tertiary – also referred to as the Service Industry e.g. accounting, banking, architecture, wholesale and retail traders
- Quaternary -Involve the use of high technology industries and mainly includes Research and Development type Companies.
All of the companies are linked in one way or another. For example:
- The raw material cotton is extracted by primary industries
- The cotton may then be turned into an item of clothing in the secondary industry.
- Tertiary industries may advertise the goods in magazines and newspapers.
- The quaternary industry may involve the product being advertised or researched to check that the item of clothing meets the standards that it claims too.
Types of Business Ownership
- Sole Trader – managed and owned by a single person. The owner is entitled to all profits but bears all losses
- Partnership – managed and owned by two or more persons. Profits are shared between partners, as are losses. If one partner resigns, the partnership must be dissolved.
- Corporation – a company is a separate legal entity. Shareholders have limited liability for the debts of the company, and may sell or pass on their interest in the company to a third party
- Trust – a trust is separate legal entity. Whether or not a trust is liable to pay tax depends on what type of trust it is, the wording of its trust deed and whether any of the income the trust earns is distributed to its beneficiaries.
The Goods and Services Tax
The Goods and Services Tax (GST) is a broad-based consumption tax of 10% that is charged on the supply of goods and services in Australia and on goods imported into Australia. Once a business achieves sales of $75,000 per year, it is legally required to register for GST. It is then obliged to charge 10% tax on all sales, and to show this figure in a Tax Invoice. When goods and services are acquired for use in earning income, the amount of GST paid can be used as a rebate against the tax collected. Thus, if GST collected exceeds GST paid, the difference is remitted to the Australian Taxation Office (ATO) with the completed Business Activity Statement (BAS). If GST paid exceeds GST collected, a refund may be issued by the ATO.
- Income Statement or Profit and Loss Report details the financial performance of a business by offsetting expenses against income to arrive at a net profit or loss for that year ending the 30 June.
- Balance Sheet – is a statement of financial position at a specific point in time, e.g. at 30 June, listing the assets, liabilities and owner’s equity of a business.
- Asset – a thing of value belonging to the business that will provide a future benefit, e.g. premises, motor vehicle, machinery, furniture, office equipment, stock, cash at bank, accounts receivable.
- Liability – amounts owed by the business which will need to be paid in the future, e.g. funds borrowed or loans, goods bought on credit for which payment has yet to be made.
- Current Liability – is a short-term debt which is normally repaid within the year. It may include items bought on credit (accounts payable), bank overdrafts, credit card balances.
- Non-Current Liability – include debts which are not expected to be repaid within one year, e.g. leases, mortgages, long-term loans.
- Owner’s Equity – also known as capital, being the value of the owner’s interest in the business, i.e. the amount invested in the business by the owner plus retained profit, less drawings.
It is possible to be a business owner without completely understanding the above terms, your accountant will be able to explain the implications of the financial position on the business.