Basic Accounting Equation

Question 1

ASSETS, define.

Answer 1

Assets are resources controlled by the entity as a result of past transactions and events and from which the future economic benefits are expected to flow to the entity.

Question 2

CHARACTERISTICS OF ASSETS, enumerate.

Answer 2

1. Controlled by the entity - control is the ability to obtain the economic benefits and to restrict the access of others.
2. Result of past transactions or events - the event must be past before an asset can be used.
3. Provides future economic benefits - evidenced by the prospective receipt of cash.
4. Cost can be reliably measured.

Question 3

CLASSIFICATIONS OF ASSETS, enumerate.

Answer 3

1. Current Assets

2. Non-Current Assets

Question 4

CURRENT ASSETS, define.

Answer 4

These are assets that are:

1. expected to be realized, sold, or consumed within the normal operating cycle.
2. expected to be realized within twelve months after the reporting period.
3. held primarily for the purpose of trading.
4. cash or cash equivalents unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

Question 5

LIABILITIES, define.

Answer 5

Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 6

CHARACTERISTICS OF LIABILITIES, enumerate.

Answer 6

1. Present obligation.
2. Result of past transactions or events.
3. Requires an outflow of resources embodying economic benefits.

Question 7

CLASSIFICATIONS OF LIABILITIES, enumerate.

Answer 7

1. Current Liabilities.

2. Non-Current Liabilities.

Question 8

CURRENT LIABILITIES, define.

Answer 8

These are liabilities that are:

1. expected to be settled within the normal operating cycle.
2. expected to be settled within twelve months after the end of the reporting period.
3. held primarily for the purpose of trading.
4. liabilities where the entity does not have unconditional right to defer settlement of the liability for at least twelve months after reporting period.

Question 9

EQUITY, define.

Answer 9

Equity is the residual interest of the entity after deducting all its liabilities.

Question 10

CAPITAL, define.

Answer 10

Capital is an account used to record original and additional investments of the owner.

Question 11

WITHDRAWALS or DRAWINGS, define.

Answer 11

Withdrawals or drawings is an account used to track money withdrawn from a business by the owner.

Question 12

INCOME & EXPENSE SUMMARY, define.

Answer 12

Income & Expense Summary is a temporary account in the income statement used to summarize all revenue and expense accounts to determine profit or loss.

Question 13

INCOME, define.

Answer 13

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Question 14

REVENUE, define.

Answer 14

Revenue is income in the course of the ordinary activities of an enterprise.

Question 15

GAINS, define.

Answer 15

Gains is income from non-primary activities of the enterprise.

Question 16

EXPENSES, define.

Answer 16

Expense is 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.

Question 17

LOSSES, define.

Answer 17

Losses represent decreases in assets or increases in liabilities arising from activities or events outside the ordinary course of business operations.