2 - The accounting equation Flashcards
What is an asset?
It is a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow.
Examples:
Cash
Inventory
Trade Receivables
Land, buildings
Cars
What is a liability?
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
Examples:
Bank loan
Overdraft
Trade payables
Accrual
What is capital?
It is the amount the business owes back to its owners. LTD companies call this capital equity
Capital + profits - drawings
What is the accounting equation?
Assets = Liabilities + Capital
Owns = Owes
Profits are added to owners capital and losses are deducted from owners capital
What is sole trader drawings?
They do not get paid a wage. They draw out or appropriate some of their capital as drawings
What are trade payables?
A trade creditor is a person whom a business owes money for trading debts. The amounts outstanding to these suppliers are called the trade payables. (Current liability)
What are trade receivables?
A debtor is an amount outstanding from a customer. The amounts due are known as trade receivables. (Current asset)
What does a proforma SFP look like?
First you state out assets Current and Non current
Then state out capital (capital b/f, capital introduced, profit for period and drawings) and then liabilities noncurrent and current
What will income from other sources include?
Profit on disposals of non current assets
Dividends or interest received from investments
Rental income from property owned but not otherwise used by the business
Discounts received from suppliers for early payment of their debt
What is distribution costs?
Expenses associated with selling and delivering goods to customers
What is administrative costs?
Expenses of providing management and administration for the business
What is finance costs?
These include interest expenses (on loans or overdraft)
