Accounting equation Flashcards
What is the accounting cycle?
The flow of transaction data from the time the transaction arises until it is reflected in the financial statements and used for analysis, interpretation and decision making.
What is an asset?
A present economic resource which has the potential to produce economic benefits, controlled by the entity, as a result of past events
What are the forms of assets?
Current and non-current assets.
What are current assets?
Assets:
1. expected to realise or intended to be sold or consumed, in the entity’s normal operating cycle
2. held primarily for trading purposes
3. expected to be realised within one year after the reporting period
4. cash and cash equivalents
What are liabilities?
A present obligation of the entity to transfer an economic resource as a result of past events.
What are the forms of liabilities.
Current and non-current liabilities.
What is a current liability?
A liability:
1. expected to be settled within the entity’s normal operating cycle
2. held for purpose of trading
3. due to be settled within one year after the reporting period
4. the entity does not have an unconditional right to defer settlement of the liability beyond one year after the reporting period.
What is equity?
The residual interest in the assets of the entity after deducting all its liabilities.
How can equity be calculated?
Equity = capital - withdrawals + net profits - net losses.
What is capital?
The amount of cash or other assets brought into the enterprise by the owner and refers to the owner’s investment in the enterprise.
What are withdrawals?
The cash or other assets that the owner withdraws from the enterprise for private use.
What is net profit or loss?
The difference between income and expenses which relates to the entity’s financial performance.
What is income?
- Increases in assets or decreases in liabilities
- That result in increases in equity
- Other than those relating to contributions from holders of equity claims
What are expenses?
- Decreases in assets or increases in liabilities
- That result in decreases in equity
- Other than those relating to distributions to holders of equity claims.
What is a statement of profit or loss? (income statement)
A financial report summarising all income earned minus all expenses incurred during a specified period, resulting in a net profit or loss.
What is a statement of financial position?
Statement reporting on the financial position of an attorney’s practice at a specific time, based on the basic accounting equation.
