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FINANCIAL'ACCOUNTING'' '

Chapter(1:(Introduction(' '

ASSUMPTIONS** ' Economic'entity'à'The'financial'activities'of'the'business'remain'separate'from'the'financial' activities'of'the'business'owner,'helps'to'assess'the'performance'of'the'business' ' Time'period'à'Information'is'communicated'in'time'periods'e.g.'financial'year,'quarters'etc.' ' Monetary'unit'à'Accountants'communicate'through'dollar'values'' ' Going'concern'à'Business'will'continue'to'operate'into'the'foreseeable'future'(endless'life)' ' '

QUALITATIVE*CHARACTERISTICS*OF*ACCOUNTING*INFORMATION* ' − They'provide'the'framework'for'the'preparation'and'presentation'of'financial'statements''' ' Understandability' − Refers'to'the'ability'of'accounting'information'to'be'comprehensible'to'those'who'have'a' reasonable'understanding'of'business'' ' Materiality' − The'threshold'at'which'an'item'begins'to'affect'decision'making'' − Information'is'material'if'it’s'likely'to'influence'a'decision'' ' Relevance' − Refers'to'the'capacity'of'accounting'information'to'make'a'difference'in'decisions'' − Possesses'either'feedback'value'or'predictive'value'' − Feedback'value:'ability'to'assess'past'performance'' − Predictive'value:'ability'to'form'expectations'of'future'performance'' − E.g.'in'preparing'financial'statements'for'a'business,'feedback'is'provided'on'the'success'of' the'business'for'that'period'of'time,'and'data'is'provided'so'that'forecasts'of'future' performance'can'be'made'for'the'following'time'period'' − Accounting'information'must'also'be'timely'in'order'to'be'relevant'' ' Reliability'

− Refers'to'the'extent'to'which'accounting'information'can'be'depended'upon'to'represent' what'it'intends'to'represent,'both'in'description'and'numbers' − Information'should'be'verifiable'(can'be'proven'to'be'accurate'i.e.'checking'source' documents)'and'neutral'(presented'in'an'unbiased'way'i.e.'not'portrayed'in'a'more'or'less' favourable'light)' Comparability' − Accounting'information'being'contrasted'against'the'financial'activities'of'other'businesses'' − Compares'both'businesses'over'the'same'year,'having'used'the'same'accounting'methods'' − Allows'businesses'to'assess'their'market'position'within'an'industry,'measure'their'success' against'a'competitor'and'set'future'goals' − Businesses'must'disclose'the'methods'they'use'in'the'‘notes'to'financial'statements’'as' there'isn’t'always'uniformity'in'the'accounting'methods'used'by'different'companies' ' Consistency' − Using'accounting'information'to'compare'the'financial'activities'of'the'same'entity'over' time'' − In'using'the'same'accounting'methods'consistently,'comparisons'between'years'can'reveal' trends'that'help'to'generate'expectations'about'future'performance' ' Conservatism' − Preference'is'to'understate'profits'rather'than'overstate'if'there'is'any'uncertainty' ' '

GENERALLY*ACCEPTED*ACCOUNTING*PRINCIPLES*(GAAP)* * − The'accounting'standards,'rules,'principles'and'procedures'that'comprise'authoritative' practice'for'financial'accounting' − Standards'are'developed'by'the'Australian'Accounting'Standards'Board'(AASB)' − AASB:'government'agency'that'ensures'financial'statements'are'presented'fairly'and' provide'a'true'and'fair'view'of'a'business' ' '

BUSINESS*FORMS* ' Sole'Proprietorship'(Sole'Trader)' − Business'owned'by'one'person' − Owner'maintains'complete'control'of'business'and'bears'all'risk' − Business'and'owner'are'separate'entities'(economic'entity'assumption)' − For'tax'purposes,'owner'and'business'are'not'separated'i.e.'income'from'the'business'is' reported'on'the'owner’s'personal'tax'return'' ' Partnership'

− Business'formed'when'two'or'more'proprietors'join'together'' − Can'be'established'through'either'written'or'oral'agreement' − Combines'skills'and'resources' − Spreads'risk'among'several'people' − Business'and'owners'are'separate'entities'(economic'entity'assumption)' − Like'sole'traders,'partner’s'share'of'income'from'the'business'is'reported'on'their'personal' tax'return'' ' Company/Corporation' − Separate'legal'entity'that’s'established'by'registering'the'company'with'ASIC' − Sells'shares'to'individuals'who'want'to'own'part'of'the'company'(raising'capital'through' issue'of'shares)' − Business'and'owners'are'separate'entities'(economic'entity'assumption)'

− Company'is'taxed'separately'on'the'income'generated* − Private'(proprietary)'companies:'indicated'by'the'‘Pty’'at'end'of'company'name* − Public'companies:'ownership'is'available'to'the'general'public,'shares'can'be'bought'and' sold'through'Australian'Securities'Exchange'(ASX)* ' '

Chapter(2:(Financial(Statements(' '

CASH*FLOW*STATEMENTS* ' − Statement'that'reports'a'business’s'sources'and'uses'of'cash'(inflows'and'outflows)' ' Operating'' − Purchasing'supplies,'payment'of'employees'and'sale'of'products'' ' Investing'' − The'buying'and'selling'of'assets'that'generate'revenue' ' Financing'' − Generating'and'repaying'cash'contributed'by'creditors'and'investors'' '

* INCOME*STATEMENTS** ' − Statement'that'reports'a'company’s'revenues'and'expenses'over'a'specified'period'of'time' − Reports'the'financial'success'or'failure'of'a'business'(net'profit/net'loss)'

− Single-step'income'statement:'determines'net'profit'in'one'step'by'subtracting'total' expenses'from'total'revenue'' − Multi-step'income'statement:'calculates'net'profit'by'grouping'certain'revenues'and' expenses'together,'and'calculating'several'subtotals'of'income' − Statement'of'comprehensive'income:'comparative'income'statements'' ! Revenue'' − An'increase'in'resources'resulting'from'the'sale'of'goods/provision'of'services' − Revenue'recognition'principle:'revenue'should'be'recorded'when'a'resource'has'been' earned,'not'just'when'cash'is'received'' − Gross'profit:'the'profit'generated'after'subtracting'COGS'(cost'of'inventory'sold)'from'net' sales'(represents'the'gross'dollar'mark-up'that'a'company'is'able'to'achieve'when'selling' its'inventory)' ' Expenses'' − A'decrease'in'resources'resulting'from'the'sale'of'goods'or'provision'of'services' − Matching'principle:'expenses'should'be'recorded'in'the'period'that'resources'are'used'to' generate'revenues' − Operating'expenses:'expenses'that'a'company'incurs'every'year'during'normal'operations' − Profits'before'tax'expense:'the'profit'a'company'generates'when'operating'expenses'are' subtracted'from'gross'profit' − Other'comprehensive'income:'includes'gains'and'losses'not'included'in'the'traditional' revenue'and'expense'items'e.g.'movement'in'foreign'operations'due'to'exchange'rate' fluctuation'' ' '

THE*STATEMENT*OF*CHANGES*IN*EQUITY** ' − Statement'that'reports'the'change'in'a'company’s'equity'and'retained'earnings'over'a' period'of'time'' − Retained'earnings'(updated)'='retained'earnings'(beginning'balance)'+'net'profit'–' drawings'(dividends)' − Once'the'statement'of'changes'in'equity'has'been'prepared,'the'figure'for'retained' earnings'can'be'included'in'the'balance'sheet'' ' '

BALANCE*SHEETS* ' − Statement'of'the'business’s'financial'position'at'a'specific'point'in'time' − Reports'a'business’s'assets,'liabilities'and'equity'(accounting'equation:'A'='L'+'E)'

− Consolidated'balance'sheet:'groups'together'all'the'companies'controlled'by'a'public' company'into'one'economic'entity'(necessary'as'operations'aren’t'all'carried'out'by'the' same'company)' ' Assets'' − Measureable'resource'of'a'business'that'will'provide'future'economic'benefit' − Cost'principle:'assets'should'be'recorded'at'the'original'cost'paid'to'acquire'them' − Current'Assets:'assets'that'are'expected'to'be'converted'to'cash'or'consumed'within'one' year'e.g.'cash,'short-term'investments,'receivables,'inventory'etc.'' − Non-current'Assets:'the'resources'that'are'used'in'a'company’s'operations'for'more'than' one'year'and'aren’t'intended'for'resale'e.g.'plant'and'equipment,'machinery'etc.' − Intangible'assets:'non-current'assets'that'have'no'physical'substance'e.g.'goodwill,' trademarks,'franchise'rights'etc.'' ' Liabilities'' − Obligation'of'a'business'that'will'require'the'sacrifice'of'economic'resources'in'the'future' − Current'liabilities:'an'obligation'that’s'expected'to'be'satisfied'within'one'year'e.g.' accounts'payable' − Non-current'liabilities:'an'obligation'that'isn’t'expected'to'be'satisfied'within'one'year'e.g.' mortgage'loans'' ' Equity'' − Equity'is'the'difference'between'a'company’s'assets'and'it’s'liabilities'' − Represents'the'share'of'assets'that'are'claimed'by'the'business’'owner(s)' − Generated'through:' o Issued'capital:'amount'of'equity'a'company'generates'through'the'sale'of'shares'to' investors'for'part'ownership'(contributed'equity)' o Retained'Earnings:'amount'of'equity'a'company'generates'by'being'profitable'and' retaining'the'profits'in'the'business'once'dividends'are'paid''' ' '

HORIZONTAL*AND*VERTICAL*ANALYSES* ' − Allows'for'comparisons'to'be'made'in'order'to'generate'more'useful'information'from'the' financial'statements'' ' Horizontal'Analysis'' '

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Vertical'Analysis'' '

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'

* INFORMATION*BEYOND*FINANCIAL*STATEMENTS* ' − Information'beyond'the'financial'statements'is'included'in'company’s'annual'report'that'is' distributed'to'all'shareholders' ' Notes'to'the'Financial'Statements'' − Additional'textual'and'numerical'information'' − Discloses'the'accounting'methods/policies'used'to'prepare'the'financial'statements' − Provides'explanations'of'account'balances'' ' Auditor’s'Report' − Independent'auditor’s'report:'a'report'prepared'by'a'registered'company'auditor'for'the' shareholder'that'states'whether'the'information'in'a'company’s'financial'statements'is' reliable/accurate'(not'about'performance)'and'in'compliance'with'the'AASB'standards'' ' Management’s'Discussion'and'Analysis'' − A'discussion'and'analysis'of'the'financial'activities'of'the'company'completed'by'the' manager'of'the'company'' − Comments'on'the'overall'position'of'the'business'and'their'success' − Useful'in'understanding'past'performance'and'generating'expectations'for'the'future' ' ' '

Chapter(3:(Recording(Accounting(Transactions' '

ACCOUNTING*INFORMATION*SYSTEM* ' − Accounting'information'system:'the'system'that'identifies,'records,'summarizes'and' communicates'the'various'transactions'of'a'company'' − Transaction:'anything'that'affects'a'company’s'assets,'liabilities'or'equity'at'the'time'of'the' event'' − Account:'accumulates'the'activity'of'a'specific'item'and'yields'the'item’s'balance'' − Chart'of'accounts:'the'list'of'accounts'that'a'company'uses'to'capture'its'business'activities'' '

'

ACCOUNTING*TRANSACTIONS*AND*THE*ACCOUNTING*EQUATION* ' − All'transactions'must'be'recorded'in'the'accounting'information'system'' − Dual'nature'of'accounting:'every'accounting'transaction'must'affect'at'least'two'accounts' − E.g.'when'a'transaction'increases'an'asset'account,'the'transaction'must'also'either' decrease'another'asset'account,'or'increase'a'liability'or'equity'account'in'order'to'stay'in' balance'(as'per'accounting'equation'A'='L'+'E)' * *

DUAL-ENTRY*SYSTEM* ' T-account'' − Name'of'the'account'is'listed'at'the'top'' − Left'column'in'debit'side' − Right'column'is'credit'side' ' Debit'and'credit'rules'' − Debits'='uses'of'resources' − Credits'='sources'of'resources'' − Increasing'an'account'balance:'record'transaction'on'the'same'side'as'the'normal'balance'' − Decreasing'an'account'balance:'record'transaction'on'the'opposite'side'as'the'normal' balance'' − Assets:'' o Debit'nature'' o Increasing'an'asset'à'debit' o Decreasing'an'asset'à'credit' − Expenses'and'Dividends:' o Debit'nature'' o Increasing'expenses'and'dividends'à'debit' o Decreasing'expenses'and'dividends'à'credit' − Liabilities'and'Equity:' o Credit'nature' o Increasing'liabilities'and'equity'à'credit' o Decreasing'liabilities'and'equity'à'debit'' − Revenue:' o Credit'nature' o Increasing'revenue'à'credit' o Decreasing'revenue'à'debit'' '

* *

RECORDING*TRANSACTIONS* ' − Journal'à'Ledger'à'Trial'Balance'à'Financial'Statements' ' The'Journal' − A'chronological'record'of'transactions'' − Where'transactions'are'first'recorded' − General'journal:'most'basic'of'all'the'journals' ' The'Ledger' − A'collection'of'accounts'and'their'balances'(various'T-accounts)' − General'ledger:'most'basic'of'all'the'ledgers' − Contains'both'the'activities'and'balances'of'all'the'business’'accounts' ' The'Trial'Balance'' − A'listing'of'accounts'and'their'balances'at'a'specific'point'in'time'' − Listing'order:'Assets,'Liabilities,'Equity,'Revenue,'Expenses'and'Dividends'' − The'account'balances'from'the'general'ledger'are'listed'in'the'appropriate'debit'or'credit' column'in'the'trial'balance'' − Proves'that'total'debits'equals'total'credits'(accounting'equation'must'be'in'balance)' − Helpful'in'making'necessary'adjustments'to'account'balances'at'the'end'of'an'accounting' period' − From'the'trial'balance,'financial'statements'can'be'prepared'' ' ' '

Chapter(4:(Accrual(Accounting(And(Adjusting(Entries' '

ACCRUAL*AND*CASH*BASES*OF*ACCOUNTING** ' − Cash'basis'of'accounting:'records'revenues'when'cash'is'received'and'records'expenses' when'cash'is'paid'e.g.'personal'bank'account' − Cash'flow'statements'report'cash-based'income' − Accrual'basis'of'accounting:'records'revenue'when'it’s'earned'and'records'expenses'when' they’re'incurred'(application'of'revenue'recognition'principle'and'matching'principle)' − Income'statements'report'accrual-based'profits'or'losses' − Accrual'basis'provides'a'better'representation'of'income'over'each'period'of'time'(accrual' basis'is'required'by'Generally'Accepted'Accounting'Principles'GAAP)' * *

ADJUSTING*JOURNAL*ENTRIES* ' − Adjusting'journal'entries:'entries'made'in'the'general'journal'to'record'revenues'that'have' been'earned'but'not'received'and'expenses'that'have'been'incurred'but'not'paid' − Occurs'at'the'end'of'each'accounting'period'after'the'trial'balance'is'prepared'(4th'step'in' accounting'cycle)' − After'adjusting'entries'are'journalized'and'posted,'an'adjusted'trial'balance'is'then' prepared,'from'which'financial'statements'are'generated'' − Every'adjusting'journal'entry'will'affect'at'least'one'revenue/expense'account,'and'one' asset/liability'account'' − Adjusting'journal'entries'arise'because'the'timing'of'revenue'and'expense'recognition' differs'from'the'exchange'of'cash,'therefore'cash'will'never'be'increased'or'decreased'in' an'adjusting'entry'' ' Deferred'Revenue'(CL)' − Receiving'cash'before'revenue'is'earned'' − Current'Liability'à'at'the'time'of'cash'receipt,'the'company'has'not'yet'provided'the' promised'service'and'cannot'record'a'revenue'in'its'accounting'system'(revenue'can’t'be' recorded'until'it’s'earned)' '

𝐷𝑅 𝐶𝑎𝑠ℎ' 𝐶𝑅 𝑈𝑛𝑒𝑎𝑟𝑛𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ' '

𝐷𝑅 𝑈𝑛𝑒𝑎𝑟𝑛𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒' 𝐶𝑅 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ' ' Accrued'Revenue'(CA)' − Earning'revenue'before'receiving'cash' − Current'Asset'à'a'receivable'account'is'increased,'as'the'payment'is'yet'to'be'received' even'though'the'revenue'has'already'been'earned'' '

𝐷𝑅 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒' 𝐶𝑅 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒' '

𝐷𝑅 𝐶𝑎𝑠ℎ' 𝐶𝑅 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 ' ' Deferred'Expense'(CA)' − Paying'cash'for'expenses'before'they’re'incurred'(prepaid)'e.g.'rent'

− Current'Asset'à'at'the'time'of'cash'payment'for'the'resource,'the'company'has'yet'to' use/consume'the'resource'it’s'acquiring'and'therefore'cannot'record'the'expense' (expense'can’t'be'recorded'until'it’s'incurred)' ' '

𝐷𝑅 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 ' 𝐶𝑅 𝐶𝑎𝑠ℎ ' '

𝐷𝑅 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝐸𝑥𝑝𝑒𝑛𝑠𝑒' 𝐶𝑅 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 ' ' Accrued'Expenses'(CL)' − Incurring'expenses'before'they’re'paid'for''

* 𝐷𝑅 𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝐸𝑥𝑝𝑒𝑛𝑠𝑒' 𝐶𝑅 𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 ' *

𝐷𝑅 𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒' 𝐶𝑅 𝐶𝑎𝑠ℎ ' * *

CLOSING*PROCESS* ' − The'process'of'transferring'all'revenue,'expense'and'dividend'account'balances'to'the' Retained'Earnings'account'' − Occurs'after'all'financial'statements'have'been'generated'' − This'process'is'necessary'as:' o Revenue,'expense'and'dividend'accounts'are'temporary:'they'only'accumulate' balances'for'the'current'period'(all'temporary'accounts'must'be'reset'to'zero'for' the'start'of'the'next'period)' o The'transfer'updates'the'Retained'Earnings'account'to'its'proper'end-of-period' balance'' − Closing'entries:'entries'made'in'the'journal'and'posted'to'the'ledger'that'eliminate'the' balances'in'all'temporary'accounts'and'transfer'those'balances'to'the'retained'earnings' account'' ' * * * * '

Chapter'5:'Cash'And'Internal'Controls' '

COMPONENTS*OF*INTERNAL*CONTROL** ' − Internal'control:'the'system'of'policies'and'procedures'used'in'a'company'to'promote' efficient'operations,'reliable'financial'reporting'and'compliance'with'laws'and'regulations'' − Protects'companies'against'the'fraudulent'behaviour'of'employees'' − Limitation'of'internal'control'à'limited'in'its'effectiveness'because'of'the'human'element' e.g.'errors/mistakes'made' ' Control'activities' − Control'activities:'the'policies'and'procedures'established'to'address'the'risks'that' threaten'the'achievement'of'organisational'objectives'' o Establishing'responsibility:'making'sure'the'employee'knows'they'will'be'held' accountable'for'completion'of'the'task,'that'way'management'will'know'who'to' consult'if'the'task'isn’t'completed'sufficiently'à'employees'are'motivated'to' perform'their'tasks'well'and'the'risk'or'theft'and'error'is'reduced'' o Maintaining'adequate'documentation:'accounting'information'is'only'useful'when' its'free'from'error'e.g.'sales'should'be'recorded'on'a'sequentially'numbered'sales' invoice'so'that'the'sale'will'neither'be'lost'nor'recorded'twice'' o Segregation'of'duties:'spreading'responsibility'among'multiple'employees'so'that' one'employee’s'work'can'serve'as'a'check'against'another’s'work'à'errors' performed'by'one'employee'can'be'caught'by'another'employee'' o Physical'security:'efforts'to'safeguard'company'assets'and'records'e.g.'secured' facilities,'video'cameras,'alarm'systems'and'computer'passwords'' o Independent'verification:'process'of'reviewing'and'reconciling'information'within' an'organisation'e.g.'a'bank'reconciliation'where'the'bank’s'balance'and'the' company’s'balance'are'reconciled,'internal'audits'' ' *

CASH*CONTROLS* ' Bank'reconciliation'' − Bank'reconciliation:'noting'the'differences'between'the'cash'balance'on'a'bank'statement' and'the'cash'balance'in'a'company’s'records'' − Confirms'the'accuracy'of'both'records'(twofold)' − Determines'the'appropriate'cash'balance'to'be'recorded'in'the'company’s'balance'sheet' − STEP'1:'Reconciling'the'bank'balance'to'the'actual'cash'balance' o Deposits'in'transit:'deposits'made'by'the'company'that'haven’t'cleared'the'bank' yet'(added'to'the'bank’s'cash'balance)'

o Outstanding'cheques:'cheques'distributed'by'the'company'but'haven’t'cleared'the' bank'yet'(deducted'from'the'bank’s'cash'balance)' − STEP'2:'Reconciling'the'company'books'to'the'actual'cash'balance' o Added'à'collection'of'receivable'and'interest'deposits'(credit'memoranda)' o Subtracted'à'banking'fees'charged,'returned'customer'cheques'for'insufficient' funds'(debit'memoranda)' o Adjusted'à'adjustments'must'be'made'if'errors'are'made'in'the'company’s'cash' records'e.g.'a'cheque'amount'is'incorrectly'recorded'(added/subtracted'depending' on'error)' − STEP'3:'Journal'Entries' o Journal'entries'must'be'recorded'to'adjust'the'company’s'book'balance'to'reflect' the'actual'cash'balance'' o The'journal'entries'are'based'off'the'debit/credit'memoranda'and'the'errors' recorded'in'the'reconciliation'of'the'company’s'book'balance' ' Collection'of'Receivable:'

𝐷𝑅 𝐶𝑎𝑠ℎ' 𝐶𝑅 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 ' ' Correction'of'Error:'

𝐷𝑅 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 ' 𝐶𝑅 𝐶𝑎𝑠ℎ ' ' Monthly'Service'Charge:'

𝐷𝑅 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝐶ℎ𝑎𝑟𝑔𝑒 𝐸𝑥𝑝𝑒𝑛𝑠𝑒' 𝐶𝑅 𝐶𝑎𝑠ℎ' ' Bounced'Cheque:'''

𝐷𝑅 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒' 𝐶𝑅 𝐶𝑎𝑠ℎ ' ' ' Petty'cash'funds' An'amount'of'cash'kept'on'hand'to'pay'for'minor'expenditures'e.g.'postage' ' − STEP'1:'Establishing'the'fund' o A'cheque'is'drawn'and'cashed'from'the'business'ba...