Accounting Equation And Components

Question 1

What is the accounting equation

Answer 1

Assets = capital + liabilities
Or
Assets - liabilities = capital

Question 2

What is an asset?

Answer 2

An asset is a tangible or intangible resource that is owned or controlled by an accounting entity, and which is expected to generate future economic benefits (e.g. plant & machinery, office equipment, inventories, trade receivables, cash).

Question 3

What is a liability?

Answer 3

A liability is a legal obligation to transfer assets or provide services to another entity which arises from some past transaction or event (e.g. loans, trade payables).

Question 4

What is capital?

Answer 4

Capital is the difference between an entity’s assets and liabilities.

Question 5

How can the profit (or loss) for any given accounting period can be measured?

Answer 5

a dynamic/transaction based approach that involves the matching of sales revenue with revenue expenditure. Thus profit = sales revenue - cost of goods sold;

or

a comparative static/capital maintenance based approach in which profit = capital at the end of the period – capital at the start of the period (- capital introduced + drawings).

Question 6

What is capital expenditure?

Answer 6

Is expenditure that results in the acquisition of assets or an improvement in their earning capacity
.

Question 7

What is revenue expenditure?

Answer 7

Is expenditure which is incurred for the purpose of the trade of the business or to maintain the existing capacity of existing assets.

Question 8

Summary of revenue expenditure?

Answer 8

• Operational costs required for the generation of sales.
• These costs are used up in the period
• Matched against the revenue to which they relate
• Matched against the period to which they relate
• Repair costs to keep an asset operational ( not improvement costs)

Question 9

What is capital expenditure?

Answer 9

• purchase of non-current assets that will generate revenue over a number of years.
• Initial costs associated with getting the non-current asset into working order
• Asset improvement costs (Not repair costs).
• These costs increase revenue generation or enhance cost savings in the future.

Question 10

What is historical cost accounting ?

Answer 10

Historical cost is the price that was paid for an asset when it was purchased.

Question 11

What is fair value accounting?

Answer 11

Fair value accounting refers to the practice of measuring your business’s liabilities and assets at their current market value. In other words, “fair value” is the amount that an asset could be sold for (or that a liability could be settled for) that’s fair to both buyer and seller.