Basic principles of accounting Flashcards
What are the three main basic principles of accounting?
Dual effect, Separate entity and The accounting equation.
What does the dual effect state?
This states that every transaction has two financial effects. For example buying an asset with cash means you have an increase in assets but a decrease in cash.
What does the separate entity state?
This states that the owner of the business is, for accounting purposes, a completely separate entity from the business itself.
What is the accounting equation in its simplest form?
Assets = Liabilities.
What is the accounting equation if capital was involved?
Assets - Liabilities = Capital or Assets = Liabilities + Capital.
What is the accounting equation if profit/loss and drawings was involved?
Profit: Assets - Liabilities = Capital + Profit - Drawings, Loss: Assets - Liabilities = Capital - Loss - Drawings.
What are the two key financial statements?
Statement of financial position and Statement of profit or loss.
Which financial statement uses the accounting equation?
Statement of financial position.
What is the purpose of a Statement of financial position?
This presents a snap shot of the financial position of the business at a specific moment in time. It summarises the assets and liabilities of a business.
What is the purpose of a Statement of profit or loss?
This summarises the effects of trading (the income and expenses), and shows the financial performance of the business for a given time period, usually the last twelve months.
