Step 2

Study Guide Chapter 1.4 & cHAPTER 2

 Sharon Field - Q89038205 | ACCT110811 - Introductory to Financial

 Personal Reflections

Even as I read though these sections, I struggle to search the part of my brain where the previous accounting knowledge is safely packed away. These concepts are familiar yet strange. It’s clear at some point I just memorized ‘some stuff’ then without fully comprehending its meaning, promptly forgot. Much like a caterpillar munching its way through life, I will transform with this learning, into something meaningful and beautiful. I can apply these concepts to the running of my household, my business, my personal little business. I have some income, some capital investments, assets to maintain and liabilities, regular expenses, extraordinary expenses and on occasion some revenue. All the while, juggling between cold hard cash decisions and keeping people happy, especially myself. There are many reasons I want to make some significant transformable changes, the main ones are to make my mother proud, to be a good role model and mostly for the self-appreciation feeling one can only achieve by succeeding in spite of the odds stacked against you. I want to know, I want to apply and I want to engage.

Key concept number one: 

An increase in an asset is a debit 

Assets + expenses = equity + liabilities + revenue 

An increase on the left hand side is a debit, an increase on the right hand side is a credit

My minute mantra making the most of memorization.

Key concept number two: The heart of business is adding value to others and equity is the trust that the business will create value.

I had always assumed the only reason to be in business is to make lots of money or at least profit maximization. But there’s more to it than that, it’s the willingness to sacrifice to create something that someone else considers more valuable than money. What is the secret to this value creation?

Key concept number three: The General ledger contains all the businesses transaction records.

So what are these transactions to be recorded? How do we decide what needs to be recorded and when? What information do mangers want to capture and why? The Chart of Accounts can tell us which accounts are most prominent. Maybe this could help highlight the more significant activities of the firm. I think we need to understand the economic substance of business activities and then record relevant information as a reminder. This must be a huge job in large corporations. I wonder how it is possible to track everything. All I can think of is, thanks to technology, it sure makes it easier. Everything is linked, somehow, like a book telling a story, I imagine that’s what the general ledger is like. A window into the original ideas for being in business and possibly a glimpse into the future of where it’s going.

Key concept number four: Subsidiary ledgers are for those accounts the firm wants to record further details.

It makes sense that individual accounts would be kept for ease of use in the day to day running of the business. The general ledger would be quite bulky, if books were still used, with names, addresses and contact details of everyone the firm was dealing with, even with digitization, information would be difficult to navigate. I don’t like how casual ‘getting ripped off’ sounds. What kinds of assurances can accounting put in place? Does keeping separate records provide a cross reference of sorts, to help accountability? I guess Coffee Supreme has enjoyed success enough to indulge in nice dinners, skiing holidays and the company of cats and geese. I absolutely agree, that some of the best stories are told over coffee. How do businesses decide on limits and terms of credit? How long is too long and how much is too much?

Light bulb moment – The subsidiary ledgers are control accounts! Time and observation developing trust relationships, taking educated risks and managing those decisions by setting limits and terms. Making comparisons with ledgers to individual accounts maintained by separate people. How often should they be checked? Daily, monthly, when the account is transacted? Perhaps a hierarchy, owner, manager, employee, where access to records are restricted? It might all be a matter of trust, but also a matter of opportunity, regardless of the assumed ‘perks of the trade’ or ‘fringe benefits’. There are subtle protections put in place which help build the trust, reduce error and fraud and make business possible. Johnny Depp always makes me think of pirates. I guess even pirates needed accounting but probably not a lot of trust. So the journals tell the business’s story in chapters, once we know how to read them.

Key concept number 5: GST – Goods and services tax is 10% in Australia, paid, collected and payment or refund. The tax on production contributions collected by the government and paid by the consumer.

This is a complicated concept that may take me some time to understand. In my research I found there are GST free items, such as fruits and vegetables. I need to be aware of GST inclusive and exclusive items. I understand it is a liability from the firms’ perspective. This is a concept I will need to take care with as values will be affected and I’m sure the government will be monitoring closely too. How do we know if an item has GST included? Do we make assumptions or is it clearly shown somewhere? How can we check that it is recorded and not paid twice? I can understand that keeping it separate helps tracking but I predict this is one concept I find confusing.

Key concept number 6: Specialised journals, the separation of chapters in the firms’ story, the sorting alike business activities transactions almost into stories of their own.

I am somewhat familiar with sales, purchases, cash receipts and cash payment journal from my days as a tax consultant. I suppose the look has somewhat changed over the years. Digital dockets, automated electronic receipts, bank transfer numbers instead of cheques, the click of a button, the touch of the screen and it’s all safely stored in a cloud. I wonder how it all works today. I am excited to find out. But I still find GST more confusing.

Key concept number 7: The general journal records transactions that don’t match the specialised journals such a bad debts and credit returns.

Bad debts, these things happen and must be recorded. Goods sold or bought can be faulty. Nothing is perfect and yet the world still turns and business goes on. If these things do happen, this journal will tell the story.

Key concept number 8: Cash is the blood of the business. When the blood runs out, the business dies. Huge concept, this is the only way a business will end.

Key concept number 9: The bank reconciliation. The ominous task of keeping an eye on your cash.

I really liked the Xero video. I don’t have much experience with accounting software but it made it look so easy. It was easy to see the matching principle in effect and so much detail to understand the intricacies of business activity. I find it kind of exciting. I’m looking forward to learning more about software and other information technology advancements.

Key concept number 10: Current and non-current assets and depreciation.

It’s my understanding that non-current assets can be thought of as operating assets, which will deteriorate over time. The deterioration, is the depreciated value recorded as its usefulness is used up over time. I’m not sure how to value an asset and how that is recorded. The original cost less the depreciated value? But the asset is still useful for an undetermined amount of time, the true value not realised until the asset is completely useless and sold or thrown away. So how are assets true value reflected accurately? I understand the tax office sets some rules, which really only provide guidelines. Does accounting have to be perfectly accurate to be useful? I noticed that there was no clear explanation of current assets. I did some research to confirm cash is an example. Goodwill is also a confusing point of contention. Why is it considered a non-current asset? What is it really and how can goodwill be turned into cash?

Conclusion

I am developing pictures to go with the story but some are still out of focus. I can understand the logic of separating information and having checks and balances in place for security. It will be an interesting journey to discover new things and revive old ideas. I really like the logic of accounting and the reassurance behind the mathematics.