Chapter One Questions

Why do we have double-entry accounting? Why do we put in everything twice? Why not just once?

Double entry accounting is a system in which transactions are recorded in terms of debits and credits. A debit in one account will be offset by credit in another account. Therefore the sum of all debits must be exactly equal to the sum of all credits. Double-entry accounting makes it easier to accurately prepare financial statements directly from the books of account and makes it easier to detect errors. Because each transaction contains both a source and a destination, double-entry accounting provides valuable details that can be sorted and viewed in report form later.

For your firm, identify three Assets, three Liabilities and three items of Equity. Describe what each item means to you (you may find some footnotes in your firm’s financial statements may help you to make more sense of these items). Put on your blog your answer to this question and comment on the answers to this question of at least three other people. Include links to your blog and also to your comments in other people’s blogs.

Asset - Cash and cash equivalents

Cash and cash equivalents in the statement of financial position comprise of cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

Asset - Trade and other receivables

Trade receivables, which generally have 30 to 60 day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less an allowance for any uncollectable amounts. Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectable are written off when they are identified. An allowance for doubtful debts is raised when there is objective evidence that the Group will not be able to collect the debt.

Asset - Investments

When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributed transaction costs. The group determines the classification of its financial assets at initial recognition and, when allowed and appropriate, re-evaluate this designation at each financial year-end.

Liability – Trade payables

Trade payables are carried at amortised cost and represent liabilities for goods and services provided to the group prior to the end of the financial year that are unpaid and arise when the group becomes obliged to make future payments in respect of the purchase of these goods and services. In 2013, Navitas had $81,895 in current liabilities for trade and other payables.

Liability – Provisions

Provisions are recognised when the group has a present obligation as a result of a past event. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. In the 2013 financial statement, Navitas had provisions of $4355 in current liabilities.

Liability - Borrowings

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the balance date. In 2013, Navitas had a current borrowing liability of $2979.

Equity – Issued Capital

Ordinary shares – Ordinary shares have no par value and have the right to receive dividends as declared and, in the event of winding up the company, to participate in the process from the sale of all surplus assets in proportion to the number and amounts of paid shares held. In the 2013 financial year, Navitas had a total issued capital of $195,375.

Equity – Reserves and retained earnings

The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested. The financial year 2013 saw Navitas with $39,966 in retained earnings.