2: The accounting equation

Question 1

What is an asset?

Answer 1

a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow.

Question 2

What is a liability?

Answer 2

a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the business embodying economic benefits.

Question 3

What is capital

Answer 3

the residual interest in the assets of the entity after deducting all its liabilities. It is effectively what the business owes the owner. Also called equity in context of a company.

Question 4

What is a trade creditor

Answer 4

a person to whom a business owes money for trading debts. The amounts outstanding to these suppliers are called the trade payables (a current liability of a business).

Question 5

What is a trade debtor

Answer 5

A debtor is an amount outstanding from a customer. The amounts due are known as trade receivables
(a current asset of a business).

Question 6

What is the statement of financial position?

Answer 6

shows a business its financial position at a snapshot in time, highlighting its liabilities, capital and assets

Question 7

What is the statement of profit or loss?

Answer 7

a performance statement in which two key elements of financial statements – income and expenses – are matched to arrive at profit or loss.