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UNIVERSITY OF SOUTH AUSTRALIA

DIVISION OF BUSINESS
SCHOOL OF COMMERCE
ACCT 2011 (012270) - Small Bus!"ss A##$u!%!&
L"#%u'" Ou%l!"
("") 1 - A##$u!%!& a!* Small Bus!"ss - A! O+"'+",
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1. Introduction to the subject, aims, emphases, materials and assessment
requirements.
Points to note:
Amount and source of reading
Updating of information (particularl ta!"
Preparation, participation and attendance at tutorials
#h no e!am.
$usiness Plan % $rief Introduction & 'or(ard planning
). #hat is small business*
).1 +ften difficult to accuratel define the fine line bet(een big and small
business. ,urrentl used Australian definitions from -o.ernment
sources:
).1.1 /ualitati.e 0efinitions
A small business is one in (hich one or t(o persons are required
to ma1e all the critical management decisions (ithout the aid of
internal specialists and (ith o(ners onl ha.ing specific
1no(ledge in onl one or t(o functional areas of management
#iltshire 2eport (1341"
5he characteristics of a small business are:
It is independentl o(ned.
It is closel controlled b o(ner%managers (ho ha.e
responsibilit for the principal decisions.
Its o(ner%mangers contribute most, if not all, of the capital.
Its operations are locall based, although its mar1ets might
not be.
0ept. of Industr, 5echnolog 6 ,ommerce (133)"
).1.) /uantitati.e 0efinitions
A small business is one that has less than )7 emploees.
Australian $ureau of 8tatistics ()771"
A business (ith aggregated turno.er of 9)m per ear or less
qualifies for small business status in relation to income ta!.
A5+ ()71)"
).) 8mall 6 :edium ;nterprise (8:;" % the ;uropean Union approach to
getting o.er the definition problem.
5he definition of 8:; Incorporates:
:icro enterprises: <17 emploees
8mall enterprises: =3 and <177 emploees
:edium enterprises: =33 and <>77 emploees
?. ,haracteristics of small business that ma1es it different from big business.
@. +bjecti.es of 8mall $usiness
@.1 'inancial
@.) /ualitati.eA self actualising
>. #hat is accounting and its purpose*
>.1 Accounting is the process of identifing, measuring and communicating
economic information to permit informed judgements and decisions b
the users of the information.
American Accounting Association % AAA
>.) -eneral purpose financial reports shall pro.ide information useful to
users for ma1ing and e.aluating decisions about the allocation of scarce
resources. 8A, 1
B. #h 8mall $usiness and Accounting*
B.1 'rom the small business perspecti.e:
B.1.1 Pi.otal profession for business ad.isor ser.ices and assistance
for the meeting of regulator obligations
B.1.) A source of information for decision ma1ing 6 accountabilit
B.) 'rom the accounting perspecti.e:
B.).1 A source of professional (or1
B.).) Presents a challenge to the discipline in terms of appropriate
practices (eg in financial reporting".
4. 8mall business and accounting . small business and accountants.
C. #hat does research tell us about small business and its need for accounting
and its interactions (ith it*
C.1 ,auses of small business failure
C.) 8tate of record 1eeping in small business
C.? #hat small businesses use accountants for
C.@ #hat small businesses belie.es that accountants can do for them
)
3. Accounting profit .. 5a! DprofitD (ta!able income".
3.1 Accounting profit
5he residual after e!penses incurred for a period are subtracted from
the income earned for that same period. 5he processes of earning and
incurrence are adjudged (ithin the frame(or1 of accrual accounting as
built up through the -AAP (hich in.ol.es the application of traditional
con.ention, 8A,s and accounting standards.
3.) 5a!able income (or ta! DprofitD"
Eet Income (profit" upon (hich ta! is to be paid measured b a socio%
politico%legal frame(or1 (I5AA". 5hough most of its calculati.e base of
(hat is considered assessable income and deductions (e!penses" ma
seem similar to that of accounting profit calculation at first glance,
ta!able income, and (hat ma1es it up, differs from profit in a number of
important (as.
3.? :ain causes of differences bet(een the t(o profit measures
5he main differences bet(een accounting profit and profit for ta!
purposes are caused b the follo(ing (the points belo( are not
e!hausti.e, rather, the are meant to be illustrati.e":
D--"'"!#"s ! s$m" !#$m" '"#$&!%$!
Example 1: In accounting, gains made on the sale of non%
current assets are calculated b comparing the carring amount
of the asset as at the date of sale (ith the sale price (stable
monetar unit assumption". Example 2: In the case of a ,apital
-ain, for ta! purposes one calculation method allo(ed for
calculation (for assets purchased before )1 8eptember 1333" is
to discount the original .alue (or cost base" for inflation before
an income gain is recognised. 5he method allo(ed since is to
include half of the nominal gain as part of Assessable Income in
the ear of disposal.
D--"'"!#"s ! *".'"#a%$!
In the case of accounting, depreciation is an attempt to
recognise the loss of economic benefits of an asset o.er the
period of its useful life. 5he ta! .ersion of depreciation is based
upon the concept of recognising the e!istence of accounting
depreciation, but it is not treated as a reflection of that
depreciation, but as an allo(ance for it ha.ing happened. 5his is
reflected b the follo(ing:
Published depreciation rates: 5he Australian 5a! +ffice
publishes depreciation rates (both straight line and reducing
balance methods allo(ed" (hich are used to establish the
amount of deduction allo(ed across entities for the same tpes
of assets. 5his contrasts (ith the accounting .ie(, (here both
the method and amount are set subjecti.el as an attempt to
conte!tualise the loss of benefits for that particular asset in that
particular entit.
Special rates of depreciation: 5o implement their
socialAeconomicApolitical agendas, go.ernments of the da use
allo(ed rates for deductions to implement polic (eg offering
accelerated depreciation on Dhigh techD equipment". 0uring the
ta! ears ended ?7 Fune 1333 and )777, assets purchased for
?
income production (plant" could be full depreciated in one ear
if the (ere e!pected to ha.e a useful life of less than ? ear or
cost less than 9?77. In the )71)%1? ear, all items of plant
costing less than 9B,>77 can be (ritten off b small businesses
immediatel. Items costing 9B,>77 or abo.e, are depreciated at
1>G in the first ear, then added to the o.erall pool of business
depreciable assets and depreciated at ?7G pa each ear
thereafter. An e!ception is made for motor .ehicles of 9B,>77 or
abo.e, (here an initial 9>,777 plus 1>G of the remainder of the
purchase price is allo(ed as a deduction is allo(ed in the first
ear, before the ?7G pa rule applies in subsequent ears.
D--"'"!#"s ! $%/"' "0."!s" '"#$&!%$!
8ome items are considered e!penses in accounting but not
deductions under the ta! la(. 'or e!ample, non%deductable
donations, entertainment, income ta! e!pense itself and
pro.isions for doubtful debts, holida pa 6 long ser.ice lea.e.
8ome items are not considered e!penses for accounting
purposes but are gi.en special deduction status for income ta!
purposes. 'or e!ample, some capital e!penditures on building
and structural impro.ements (assets in accounting", research
and de.elopment e!penditure 6 e!penditure on Australian films
(increased rates of up to 1>7G deduction" and carried for(ard
losses from pre.ious ears.
@
L"#%u'" Illus%'a%$! 1
A##$u!%!& .'$-% +1 Ta0a2l" !#$m"
-otno :aits, is a sole trader (ho sells carpet care products. Hou are pro.ided (ith the
follo(ing information in relation to the financial ear ended ?7 Fune, )71?:
8ales for the ear 9C7,777.
Purchases of stoc1 during the ear 91C,777.
5here (as no stoc1 on hand at either the start or end of the ear.
+perating e!penses (all ta! deductable" 91B,777
:otor Iehicle purchased for the business on 1A4A1) for 91C,777. ;!pected useful
life @ ears (ith a 9),777 residual e!pected (straight line".
+n 1A4A11, -otno purchased land for the business for 9)77,777 to build a future
(arehouse. Je changed his mind and sold it on ?7ABA1? for 9)@7,777.
-otno bought 9)77 (orth of tic1ets for himself and a client to go to the local
snchronised s(imming finals to enhance business good(ill. 5he .alued client had
once mentioned that he admired the s(immersK abilit to breathe and smile (hilst
(earing nosepegs. 5ic1ets to an e.ent such as this is not considered an
entertainment e!pense for ta! purposes.
2equired:
a. ,alculate -otno :aitsK business accounting profit for the ear ended ?7 Fune
)71?.
b. Assuming that there are no other financial issues rele.ant to the preparation of
his ta! return, calculate -otnoKs ta!able income for the same ear.
a1 A##$u!%!& 3'$-%4 21 Ta0a2l" I!#$m"4
Assessable Income:
8ales 9C7,777 Income from sales 9C7,777
less ,+8 1C,777 ,apital gain ()" )7,777
-ross Profit B),777 177,777
add net gain on disposal @7,777 Less allowable
deductions:
17),777 8toc1 used 1C,777
less expenses: +perating e!penses 1B,777
+perating e!penses 1B,)77 0epreciation
deduction(?"
B,3>7
0epKn on :I (1" @,777 @7,3>7
)7,)77 5a!able Income 9>3,7>7
Eet Profit 9C1,C77
(1" (91C,777%9),777"A@
()" (9)@7,777%9)77,777"A)
(?" 9>,777 L M(91C,777 % 9>,777" ! 1>GN
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