KNOWLEDGE CENTRE

TERMS & DEFINITIONS

To Assist You In Understanding
The Information On This Website
Here Are Some Accounting And Taxation
Terms And Definitions.

It's Easier To Understand A Subject
When You Know The Meaning Of Its Terms

The following is a list of definitions and basic terms of accounting and taxation. 
Presented in a non-technical manner, they are designed for the non-accountant and
to aid the business person or individual in gaining a better understanding.
Accounting, finance and tax should not be made difficult to understand, and only
understood by the few who are able to charge exorbitant fees for their services.
It should be easily understood by the ordinary person.
For example, the basic definition of economics is “the management of the household”
but can anyone easily understand economic terms?
The same with accounting, finance and tax.
Tax is made difficult by the ever changing legislation and definitions within it.
Lack of understanding of the basic terminology contributes to business failures. 
This is not designed to be a full or complete list of definitions, but some very basic terms
that will be added to over time.
If you require further information consult us or your accountant.

Asset:
Property owned by a person or company, it can be a trust or other structure. In business it is assumed that the Asset earns or had the potential to earn income by way of revenue or an increase in value.
     Current Asset: Assets that can be turned into cash within twelve months or are already cash, eg: Debtors, Inventory.
     Non Current Assets: Assets that ordinarily willnot be turned inti cash within twelve months. Examples of these are Plant & Equipment, Buildings Motor Vehicles.

Accrual Accounting:
‘Accrue’
means to make provision for.
Accounting whereby income that is yet to be received by from debtors, and expenses which are yet to be paid, by creditors are included (made provision for) in the calculations of profit for the period.

Accrued Expenses:
Expenses which are added into the profit as for what ever reason (the bill has not been received etc). The expense has been incurred and relates to the period the profit is required.

Assessable Income:
The gross amount of income priority its deduction. This is use in some Centrelink calculations and for tax offsets. (see definition)

Asset:
Property owned by a person or company, or it can be a trust or other structure. In business it is assumed that the Asset earns or has the potential to earn income by way of revenue or increase in its value.

Current Asset:
Assets that can be turned into cash within twelve months or are already cash. eg. Debtors inventory.       

Non-Current Assets:
Assets that ordinarily will not be turned into cash within twelve months. Examples are Plant and Equipment, Buildings, Motor Vehicles.

Balance Sheet:
A list of business Assets and Liabilities including any profit not taken out of the business and monies put in (equity or capital).

Bookeeping – Double Entry:
Double entry bookkeeping was invented in Italy in the 15th Century. Double-Entry means that there are two sides (one for each transaction). A ‘Debit’ side that relates to payments for things, such as expenses and assets and a ‘Credit’ side which relates to revenue and liabilities. The two sides need to balance which then delivers a balance sheet.

Cash Accounting:
This is accounting where the profit is based on cash or against accrual accounting, debtors, Creditor amounts and is not included as income. Businesses defined as Small Business Entities (SBE see definition below) can use either cash or accruals methods of determining profit.

Current Asset Ratio/Working Capital
An accounting statistic that is current assets divided by current liabilities, it signifies how able the business is of paying it’s immediate debts. This together with working capital – which is current assets minus current liabilities are solvency indicators, eg, if the current liabilities are greater than the current assets the business may be in some difficulty.

Current Liabilities:
A liability is something owed by the business. Current Liabilities are commitments that need to be paid in the next twelve months, eg, creditors, tax.

Non – Current Liabilities:
Are liabilities that do not have to be paid within twelve months, eg, loans.
Hire Purchase Agreements in the balance sheet are usually split into Current and Non – Current Liabilities.

CFO:
Chief Financial Officer

Depreciation:
Depreciation is a method of spreading the cost of an asset over a period of time (usually) based on the projected lifetime of the item. eg, a car per the ATO guidelines has a life of eight years, thus it is depreciated over eight years. The rationale behind this is that the asset earns income over its life and therefore there needs to be proper matching in income and expenses over its life in order to determine its real profit. This is an arbitrary for accounting to ensure there is no full tax deduction for the asset, rather a meaningful accounting measure.

Diminished Value Depreciation:
This where the assets are depreciated as a % of the original cost and then at the same % each year, for the remaining balance of the cost. as a result, there is higher depreciation in the earlier years. 

Prime Cost Depreciation:
Where the rate of depreciation is on the original cost throughout the life of the asset so depreciation is the same each year. eg, 10% of the original cost each year. eg, buildings are usually depreciated on the Prime cost method.

Pooled Depreciation – Low Value Pool:
The tax office in order to simplify things including a method of where all the assets purchased by a business in the year (excluding buildings) are added together and depreciated at a common rate. Thus making the record and taxation keeping simpler.

Instance Asset Write Off:
A tax incentive whereby assets purchases (excluding Buildings) can be depreciated 100% in one year. Thus moving further away from the principal of depreciating assets over their lifetime.
Currently businesses deemed to be SBE can write off $150k until December 2020.

FBT:
Fringe Benefit Tax.
A range of taxes introduced b the Hawke Labour Government in the 1980’s to collect taxes on so called ‘benefits’ paid to employees in lieu of cash that therefore escaped the tax net. eg, lunches, cars and others.
These taxes can be complicated and costly to account for.

KPI’s
Key Performance Indicators.
Ways of measuring your business by statistics in addition to Profit and Loss Statements and Balance Sheets.
There are many KPI’s and they can be tailored to your business.

Pooled Depreciation – Low Value Pool:
In order to simplify things the ATO has included a method where all assets purchased by a business in a year (excluding buildings) are added together and depreciated at a common rate. This makes recording and taxation keeping simpler.

SBE – Small Business Entity:
This is a business that has an income less than $10m per annum. as such has some small business entity concessions namely:
– Reduced company tax rates.
– Discounts on tax paid called Small Business Tax Offset.
– Simplified depreciation (such as pooled appreciation listed above) simpler rules for accounting for stock.
– The option of accounting profits based on Cash or Accruals.
– And some on Payg and GST.

Tax Offset:
Formerly called a tax rebate, this is a reduction in the tax paid by a certain in the amount, eg, there is a small offset which is an 8% reduction in the amount of tax paid.

Trusts:
A trust is essentially a promise. It is a promise to hold assetts in “Trust” – on behalf of another or others who will benefit when those assets are passed over to them after a nominated period. Those who benefit are called beneficiareies. The assets cen be a business. Trusts eminated from the days of the Crusades where ‘knights’ would give their assets to be held in trust yntil they returned.
The beneficiaries, trustees and powers of the Trust are set out in a Trust Deed.
A Trust is managed by a Trustee who takes full legal responsibility for the trust.
The Trustee can be an individual or a company a (Corporate Trustee) which is usually recommended in the case if a business exists.
The income of the Trust has to be distributed to the beneficiaries each year other higher tax rates apply.
This gives the advantage of maximising tax benefits.
Also a Trust can give asset protection as ‘nobody’ really owns the assets. There are many types of Trusts, the principal ones are for businesses:-

Discretionary Trust:
Also called a Family Trust – where the income and assets are distributed at the discretion of the Trustee.

Unit Trust:  
Where beneficiaries have fixed unit (share) in the Trust and receive income and assets according to these allocations.

Hybrid Trusts:
A combination of Discretionary and Unit Trusts. 

There are many complicated tax laws and rules surrounding trusts and a review of needs should be undertaken before implementation, but they can provide effective protection, succession planning and tx protection.

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ROBERTSON ACCOUNTING

Level 27 – 101 Collins Street
Melbourne Victoria 3000
p: 03 9653 9522
P.O. Box 354 Niddrie Victoria 3042
e: alex@robertsonaccounting.com.au
w: www.robertsonaccounting.com.au