Chap 3 Accounting Equation Flashcards
What is the Accounting Equation?
Assets = Liabilities + Owner’s Equity
What are assets?
Assets are resources owned by a business that have monetary value
What are Liabilities?
Liabilities are debts that a business owed to external parties
What is Owner’s Equity?
Owner’s Equity represents the owner’s interest or claim upon a business’ net assets
Also known as Capital
OE = Capital - Drawings + Income - Expenses
What consist of income?
Income consists of revenue, other income and other gains
What is revenue
It is the amount a trading firm earns from selling goods and the amount a service business earns from providing services
What is’other income’?
Income not earned from normal sale of goods and services, such as interest income
What is ‘other gains’?
Other gains arise when the business sell its assets
What is an expense?
A business incurs expenses so as to generate income
The benefits from the expenses do not last into the future
Any reduction in value of assets becomes an expense
What is the difference between assets and expenses?
The difference lies on the benefits that can be enjoyed by the business.
Benefits from assets will last longer that those from expenses
What is the Expanded Accounting Equation?
Assets = Capital +( Income - Expenses) - Drawings + Liabilities
What are the effects of Transactions on the Accounting Equation?
At least two items in the accounting equation are affected (increase and/or decrease)
Both items may involve the same type of accounts
The accounting equation always balance after each transaction
