CH2 - The Accounting Equation Flashcards
What is the accounting equation?
Also known as the statement of financial position (SFP) Assets = Accounting + Liabilities
What are non-current assets?
Assets acquired for on-going, long term use in the business e.g. Land and building, motor vehicles [>12m]
What are current assets?
Assets acquired for resale or expected to be sold during normal course of trading e.g. inventory
What are non-current liabilities?
Long-term liabilities payable more than 12 months after statement of position date e.g. Loan
What are current liabilities
Liabilities that are payable within 12 months of the statement of financial position date e.g. Trade payablesW
What is a trade payable?
Money owed to credit suppliers, overdraft
What is the business entity concept?
Statement of financial position should only show the activities of the business and not personal activities of the owners.
What are drawings?
Funds withdrawn from the business owner
What is capital for a sole trader?
How much the business owes back to owner
How do you calculate for year-end capital shown on the face of statement of financial position for a sole trader?
Opening capital + Net profit (deduct a loss) + Capital injections - Drawings for the year = Balance at the end of the year
How to work the change in net assets?
Further capital introduced + Profit - Drawings
What does the top half of the statement of financial position show?
Assets of the business
What does the bottom of the statement of financial position show?
Liabilities
What is the duality concept?
States that every transaction has a dual effect e.g. Increase trade payables because company owes a supplier And inventory because company now holds stock
How do businesses handle inventory of SFP
- Record inventory as a asset at how much it cost to buy
- If business sells more than cost then = Profit + Increase in capital
- If business sells inventory for less than cost = Reduced capital
