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Comprehensive Guide to Australian Bookkeeping, Accounting, Taxation, and Finance Terminologies

Welcome to the comprehensive guide on Australian bookkeeping, accounting, taxation, and finance terminologies.


This article is written to be friendly for learners, providing clear definitions, examples, and calculations to help you understand these concepts better.


1. Bookkeeping Terminologies:


Ledger:


Definition: A ledger is a book or computer file used to record financial transactions.


Example: Recording all sales made by a company in the sales ledger.


Double-Entry System:


Definition: A system where every transaction affects at least two accounts, with one debit and one credit entry.


Example: Purchasing office supplies for $100 on credit. Debit Office Supplies $100, Credit Accounts Payable $100.


Trial Balance:


Definition: A statement that lists all ledger accounts and their balances at a particular date.


Example: A trial balance showing that total debits equal total credits, ensuring the accuracy of the ledger.


Journal:


Definition: A record where all transactions are initially recorded in chronological order.


Example: Recording a cash sale of $500 in the sales journal.

Accounts Receivable:


Definition: Money owed to a business by its customers for goods or services delivered.

Example: An invoice for $1,000 sent to a customer who will pay in 30 days.


Accounts Payable:


Definition: Money a business owes to its suppliers for goods or services received.


Example: A bill for $200 received from a supplier for office supplies.


Bookkeeping Cycle:


Definition: The process of recording, classifying, and summarizing financial transactions of a business.


Steps: Include identifying transactions, recording in journals, posting to ledgers, preparing trial balance, and generating financial statements.


Petty Cash:


Definition: A small amount of cash kept on hand for minor expenses.

Example: Using $10 from petty cash to buy office coffee supplies.


2. Accounting Terminologies:

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Accrual Basis Accounting:


Definition: Recording revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid.

Example: Recording a sale when the invoice is sent to the customer, not when the payment is received.


Depreciation:


Definition: Allocating the cost of a tangible asset over its useful life.


Calculation: Straight-line depreciation for an asset costing $10,000 with a useful life of 5 years is $2,000 per year.


Equity:


Definition: The owner's interest in the assets of the business after all liabilities are deducted.


Example: If a business has assets worth $50,000 and liabilities of $20,000, the equity is $30,000.


Balance Sheet:


Definition: A financial statement that reports a company's assets, liabilities, and equity at a specific point in time.


Example: A balance sheet showing total assets of $100,000, total liabilities of $60,000, and equity of $40,000.


Income Statement:


Definition: A financial statement that shows a company's revenues and expenses over a specific period, resulting in net profit or loss.


Example: An income statement showing $50,000 in sales and $30,000 in expenses, resulting in a net profit of $20,000.


Cash Flow Statement:


Definition: A financial statement that shows the inflows and outflows of cash over a period.


Example: A cash flow statement showing $10,000 in cash from operating activities, $5,000 used in investing activities, and $2,000 from financing activities.


General Ledger:


Definition: The main accounting record of a company, which uses double-entry bookkeeping.


Example: The general ledger contains all accounts such as cash, accounts receivable, accounts payable, and equity.


Amortization:


Definition: The process of gradually writing off the initial cost of an intangible asset over its useful life.


Example: Amortizing a patent worth $10,000 over 10 years at $1,000 per year.


3. Taxation Terminologies:


Goods and Services Tax (GST):


Definition: A 10% tax on most goods and services sold or consumed in Australia.


Example: A product sold for $110 includes $10 GST (i.e., $100 for the product + $10 GST).


Pay As You Go (PAYG) Withholding:


Definition: A system for withholding amounts from payments to employees and businesses, which are then remitted to the ATO.


Example: Withholding $200 from an employee's weekly wage of $1,000 and paying it to the ATO.


Fringe Benefits Tax (FBT):


Definition: A tax on benefits provided to employees in place of salary or wages.


Example: A company car provided to an employee for personal use.


Income Tax:


Definition: A tax on an individual or entity's net income.


Example: An individual earning $70,000 annually might pay $15,000 in income tax.


Capital Gains Tax (CGT):


Definition: A tax on the profit from the sale of assets or investments.


Example: Selling shares for $20,000 that were originally bought for $15,000 results in a $5,000 capital gain, which is subject to CGT.


Superannuation:


Definition: A system where money is placed into a fund to provide for an employee's retirement.


Example: An employer contributing 11% of an employee's salary into a superannuation fund.


Tax Deductions:


Definition: Expenses that can be deducted from gross income to reduce taxable income.


Example: Deducting $1,000 for work-related travel expenses.


Business Activity Statement (BAS):


Definition: A form submitted to the ATO by registered businesses to report their tax obligations.


Example: Reporting GST collected and paid, PAYG withholding, and other taxes on the

BAS.


Taxable Income:


Definition: The amount of income subject to income tax, after deductions and exemptions.


Example: If gross income is $80,000 and deductions are $20,000, taxable income is $60,000.


4. Finance Terminologies:


Capital Expenditure (CapEx):


Definition: Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.


Example: Spending $50,000 on new machinery for a factory.


Return on Investment (ROI):


Definition: A measure used to evaluate the efficiency of an investment.

Calculation: ROI = (Net Profit / Cost of Investment) * 100


Example: If the net profit from an investment is $5,000 and the cost of the investment is $20,000, ROI = (5,000 / 20,000) * 100 = 25%.


Liquidity:


Definition: The ability of a company to meet its short-term obligations using its most liquid assets.


Example: A company with $10,000 in cash and $5,000 in short-term receivables has a liquidity of $15,000.


Working Capital:


Definition: The difference between a company’s current assets and current liabilities.

Calculation: Working Capital = Current Assets - Current Liabilities


Example: If current assets are $30,000 and current liabilities are $10,000, working capital is $20,000.


Net Present Value (NPV):


Definition: The difference between the present value of cash inflows and outflows over a period of time.

Calculation: NPV = ∑ (Cash Inflow / (1 + r)^t) - Initial Investment


Example: An investment with an initial cost of $10,000 and future cash inflows of $3,000 annually for 5 years at a discount rate of 5% has an NPV of $2,925.


Internal Rate of Return (IRR):


Definition: The discount rate that makes the net present value of all cash flows from a particular project equal to zero.


Example: If an investment of $10,000 generates annual cash inflows of $3,000 for 5 years, the IRR might be around 14.87%.


Debt-to-Equity Ratio:


Definition: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.


Calculation: Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity


Example: If a company has $40,000 in liabilities and $20,000 in equity, the ratio is 2:1.


Earnings Before Interest and Taxes (EBIT):


Definition: A measure of a firm's profit that includes all expenses except interest and

income tax expenses.


Example: If a company has revenues of $100,000, cost of goods sold of $50,000, and operating expenses of $30,000, EBIT is $20,000.


Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA):


Definition: A measure of a company's overall financial performance.

Example: If EBIT is $20,000 and depreciation and amortization are $5,000, EBITDA is $25,000.


Leverage:


Definition: The use of various financial instruments or borrowed capital to increase the potential return of an investment.


Example: Borrowing $100,000 to invest in a project that returns $150,000 increases leverage.


5. Advanced Accounting Terminologies:


Deferred Tax:


Definition: A tax liability or asset that is postponed to future periods due to differences in accounting and tax treatments.


Example: Depreciating an asset faster for tax purposes than for accounting purposes creates a deferred tax liability.


Goodwill:


Definition: An intangible asset that arises when one company acquires another for more than the fair value of its net assets.


Example: Paying $1,000,000 for a company with net assets valued at $800,000 results in $200,000 goodwill.


Consolidation:


Definition: The process of combining the financial statements of a parent company with those of its subsidiaries.


Example: A parent company owning 100% of a subsidiary includes the subsidiary's assets, liabilities, income, and expenses in its consolidated financial statements.


Fair Value:


Definition: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.


Example: An asset valued at $100,000 in the market, but carried at a book value of $80,000, is adjusted to its fair value of $100,000.


Hedging:


Definition: A risk management strategy used to offset potential losses.


Example: An exporter hedging against foreign exchange risk by entering into a forward contract to sell foreign currency at a predetermined rate.


Impairment:


Definition: A permanent reduction in the value of an asset below its carrying amount.


Example: An asset with a book value of $50,000 but a market value of $30,000 is impaired by $20,000.


Variance Analysis:


Definition: The process of investigating the difference between budgeted and actual figures.


Example: Analyzing why actual sales were $10,000 lower than budgeted sales.


Activity-Based Costing (ABC):


Definition: A costing method that assigns overhead and indirect costs to specific activities.


Example: Allocating factory overhead costs to products based on the number of machine hours used in production.


6. Advanced Finance Terminologies:


Derivatives:


Definition: Financial securities whose value is derived from an underlying asset or group of assets.


Example: Options, futures, and swaps.


Arbitrage:


Definition: The simultaneous purchase and sale of an asset to profit from a difference in the price.


Example: Buying a stock on one exchange at a lower price and selling it on another exchange at a higher price.


Beta:


Definition: A measure of a stock's volatility in relation to the overall market.


Example: A stock with a beta of 1.5 is expected to be 50% more volatile than the market.


Credit Default Swap (CDS):


Definition: A financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor.


Example: An investor paying a premium to buy protection against the default of a corporate bond.


Leveraged Buyout (LBO):


Definition: The acquisition of a company using a significant amount of borrowed money.


Example: Buying a company for $100 million using $10 million of equity and $90 million of debt.


Portfolio Diversification:


Definition: The practice of spreading investments across various assets to reduce risk.


Example: Investing in a mix of stocks, bonds, real estate, and commodities.


Yield Curve:


Definition: A graph that plots the interest rates of bonds having equal credit quality but differing maturity dates.


Example: An upward-sloping yield curve indicates that longer-term interest rates are higher than short-term rates.


Valuation:


Definition: The process of determining the present value of an asset or a company.


Example: Using the discounted cash flow (DCF) method to value a company based on its expected future cash flows.


For a full guide on Banking and Finance Terminology visit or click here


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