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
An asset account decreases and a corresponding claims account decreases.
Use of Assets
One claims account increases and another claims account decreases.
Exchange of Claims
CURRENT ASSETS
Cash
Cash Equivalents
Notes Receivable
Accounts Receivable
Inventories
Prepaid Expenses
Any medium of exchange that a bank will accept for deposit at face value. (coins, currency, checks, money orders, bank deposits and drafts)
Cash
Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash Equivalents
Written pledge that the customer will pay the business a fixed amount of money on a certain date
Notes Receivable
Claims against customer arising from sale of services or goods on credit
Accounts Receivable
Assets which are (a) held for sale in the ordinary course of business; (b) in the process of production for such sales; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Inventories
Expenses paid for by the business in advance. (insurance and rent)
Prepaid Expenses
NON-CURRENT ASSETS
Property, Plant and Equipment
Intangible Assets
Identifiable nonmonetary assets without physical substance held for use. (goodwill, patents, copyrights, licenses, franchises, trademark)
Intangible Assets
Tangible assets that are held by an enterprise for use for more than one period.
Property, Plant and Equipment
CURRENT LIABILITIES
Accounts Payable
Notes Payable
Accrued Liabilities
Unearned Revenues
The business entity is the maker of the note; that is, the business entity is the party who promises to pay the other party a specified amount of money on a specified future date.
Notes Payable
When the business entity receives payment before providing its customers with goods or services, the amounts received are recorded in the unearned revenue account. When the goods or services are provided to the customer, the unearned revenue is reduced and income is recognized
Unearned Revenues
Amounts owed to others for unpaid expenses. (salaries payable, utilities payable, interest payable and taxes payable)
Accrued Liabilities
By accepting the goods or services, the buyer agrees to pay for them in the near future.
Accounts Payable
Bond is a contract between the issuer and the lender specifying the terms of repayment and the interest to be charged. Business organization often obtain substantial sums of money from lenders to finance the acquisition of equipment and other needed assets.
Bonds Payable
NON-CURRENT LIABILITIES
Mortgage Payable
Bonds Payable
Long-term debt of the business entity for which it has pledged certain assets as security to the creditor.
Mortgage Payable
OWNER’S EQUITY
Capital
Withdrawals
Income Summary
. Original and additional investments of the owner of the business entity. It is increased by the amount of profit earned during the year or is decreased by a loss. Cash or other asset that the owner may withdraw from the business ultimately reduce it. This account title bears the name of the owner.
Capital
Owner’s cash or other assets withdrawal.
Withdrawals
Temporary account used at the end of the accounting period to close income and expenses. This account shows the profit or loss for the period before closing to the capital account.
Income Summary
Revenues earned by performing services for a customer or client.
Service Fee/Income
The cost incurred to purchase or to produce the products sold to customers during the period; also called cost of goods sold.
Cost of Sales
Revenues earned as result of sale of merchandise or goods.
Sales
EXPENSES
*Cost of Sales
*Salaries or Wages Expenses
*Telecommunication, Electricity, Fuel and Water Expenses
*Rent Expense
*Supplies Expense
*Insurance Expense
*Depreciation Expense
*Uncollectible Account Expense
*Interest Expense
Includes all payments as a result of an employer-employee relationship such as salaries or wages, 13th month pay, cost of living allowances and other related benefits.
Salaries or Wages Expenses
Expenses related to use of telecommunications facilities, consumption of electricity, fuel and water.
Telecommunication, Electricity, Fuel and Water Expenses
Expense for space, equipment or other asset rental.
Rent Expense
Expense of using supplies in the conduct of daily business.
Supplies Expense
Portion of premiums paid on insurance coverage which has expired.
Insurance Expense
The portion of the cost of a tangible asset allocated or charged as expense during an accounting period.
Depreciation Expense
The amount of receivables estimated to be doubtful of collection and charged as expense during an accounting period.
Uncollectible Account Expense
An expense related to use of borrowed funds.
Interest Expense
there is only one owner’s equity account because there is only one owner.
sole proprietorship
an owner’s equity account exists for each partner.
partnership
owners’ equity or stockholders’ equity consists of share capital, retained earnings and reserves representing appropriations of retained earnings among others.
corporation
