CHAPTER 2 Flashcards
Asset, Liabilities & the Accounting Equation
Asset
Items belonging to a business and used in the running of the business
Asset (Conceptual Framework)
Present economic resources controlled by an entity as a result of past event.
An economic
resource is a right that has the potential to produce economic benefits.‘
Liabilities (Conceptual Framework)
A present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is a duty of responsibility that the entity has no practical ability to avoid.
The accounting equation (1)
Asset = Capital + Liabilities
Capital
An investment of money (funds) with the intention of earning a return
Accounting equation (2)
=(Capital introduced + Retained profits) + Liabilities
Net assets =
Total assets - Total liabilities
Net asset =
Capital
Drawings
Amount of money taken out of a business by its owner
Accounting equation (3)
= Capital introduced + (Earned profit - Drawing) + Liabilites
Asset expenditure
- Acquisition of non-current assets in the account
- Improvement in earning capacity (Capital expenditure)
- Not deducted from income when calculating profit
Expense charged to profit or loss
- Purpose of a trade of the business ; selling & distribution expenses, administration expenses and finance charges
- Maintain exisiting earning capacity of NCA
- Repair to NCA
Revenue
Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
Expenses
Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims
Double entry bookkeeping
Every transaction has two accounting entries
- every transaction recorded in at least two account
- value of debit EQUAL credit
