Understanding accounting terms is essential for business owners, managers, and anyone involved in the financial aspects of a business, especially in Australia where specific terms and principles may apply. Here’s a guide to some key accounting terms relevant in the Australian context:
1. GST (Goods and Services Tax)
This is a broad-based tax of 10% on most goods, services, and other items sold or consumed in Australia. Understanding GST is crucial for businesses as they need to include this tax in their prices and report it to the Australian Taxation Office (ATO).
2. BAS (Business Activity Statement)
Australian businesses use this form to report their GST obligations to the ATO. It may also include other taxes like PAYG (Pay As You Go) withholdings and instalments.
3. PAYG (Pay As You Go)
This system is used to collect income tax from employees’ wages and salaries. Businesses withhold a portion of their employees’ pay as tax and send it to the ATO.
4. Superannuation
In Australia, employers are required to contribute to their employees’ pension funds (superannuation). It’s a percentage of an employee’s ordinary time earnings.
5. Debit and Credit
Fundamental to accounting, debits and credits are used to record transactions. They must always balance in the double-entry bookkeeping system.
6. Balance Sheet
This financial statement shows the company’s assets, liabilities, and equity at a specific point in time, providing a snapshot of its financial condition.
7. Profit and Loss Statement (P&L)
Also known as an income statement, it shows the company’s revenues, expenses, and profit or loss over a specific period.
8. Cash Flow
This term refers to the movement of money into and out of the business. Positive cash flow indicates that a company’s liquid assets are increasing.
9. Accrual Accounting
In this method, revenues and expenses are recorded when they are earned or incurred, regardless of when the money is actually received or paid.
10. Depreciation
This is the gradual charging to expense of an asset’s cost over its expected useful life. It reflects the decrease in value of the asset over time.
11. Capital Gains Tax
A tax on the profit made from selling certain types of assets. It’s important for businesses and individuals when they sell property, shares, or other investments.
12. Audit
An official inspection of an organisation’s accounts, typically by an independent body, to ensure accuracy and compliance with laws and regulations.
13. Equity
In accounting, equity represents the value left in the business after deducting liabilities from assets. It’s also known as ‘owner’s equity’.
14. Liability
Any amount that the company owes to others—like loans, accounts payable, mortgages, and accrued expenses—is considered a liability.
15. Asset
Anything of value that is owned by the business. Assets can be tangible (like machinery or buildings) or intangible (like patents or trademarks).
Understanding these terms is essential for managing the financial aspects of a business in Australia. They are not only crucial for day-to-day bookkeeping but also for complying with Australian tax laws and regulations.
