Accounting equation and double entry system Flashcards
ELEMENTS OF FINANCIAL STATEMENTS
*Position
-Asset
-Liability
-Equity
*Performance
-Income
-Expenses
-Losses
Valuable resources owned by the entity.
Resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
Asset
Assets should be classified only into two:
current assets and non-current assets.
An entity shall classify assets as current when:
- it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
*it holds the asset primarily for the purpose of trading;
*it expects to realize the asset within twelve months after the reporting period; or
*the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
All other assets should be classified as non-current assets.
-Obligations of the entity to outside parties who have furnished resources.
-Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
Liabilities
An entity shall classify a liability as current when:
- it expects to settle the liability in its normal operating cycle;
- it holds the liability primarily for the purpose of trading;
-the liability is due to be settled within twelve months after the reporting period; or
-the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
All other liabilities should be classified as non-current liabilities.
-Residual interest in the assets of the enterprise after deducting all its liabilities.
-May pertain to any of the following depending on the form of business organization:
*In a sole proprietorship, there is only one owner’s ______account because there is only one owner.
In a partnership, an owner’s ______ account exists for each partner.
-In a corporation, owners’ ____ or stockholders’ ____consists of share capital, retained earnings and reserves representing appropriations of retained earnings among others.
Equity
The definition of _____ encompasses both revenue and gains.
Income
Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increase in equity, other than those relating to contributions from equity participants.
Income
arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names (sales, fees, interest, etc..)
Revenue
_____ represent other items that meet the definition of income and may, or may not arise in the course of the ordinary activities of an enterprise.
Gains
Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
It also encompasses losses.
Expenses
____ represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of an enterprise.
Losses
The basic summary device of accounting is ______.
THE ACCOUNT
_____is a detailed record of the increases, decreases and balance of each element that appears in an entity’s financial statements.
Account
A _____account is maintained for each element that appears in the balance sheet (asset, liabilities and equity) and in the income statement (income and expenses).
separate
The simplest form of the account is known as the _____ because of its similarity to the letter __.
“T” account
Left side
Debit side
Right side
Credit side
THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
Presents the resources controlled by the enterprise, the present obligations of the enterprise and the residual interest in the assets.
It states that assets must always equal liabilities and owner’s equity.
THE ACCOUNTING EQUATION
-Dual effects of a business transaction is recorded.
-A debit side entry must have a corresponding credit side entry.
-Each transaction affects at least two accounts.
-The total debits for a transaction must always equal the total credits.
-An accounts is debited when an amount is entered on the left side of the account and credited when an amount is entered on the right side.
THE DOUBLE-ENTRY SYSTEM
TYPES AND EFFECTS OF TRANSACTIONS
Source of Assets
Exchange of Assets
Use of Assets
Exchange of Claims
*________ of any account refers to the side of the account – debit or credit – where increases are recorded.
*Asset, owner’s withdrawal, and expense accounts normally have debit balances.
* Liability, owner’s equity, and income accounts normally have credit balances.
NORMAL BALANCE OF AN ACCOUNT
An asset account increases and a corresponding claims account increases.
Source of Assets
One asset account increases and other asset account decreases.
Exchange of Assets
