Chapter 2 Flashcards
The process of recording all the financial transactions a company enters during a year is called?
Double Entry Bookkeeping
What does Double Entry Book Keeping involve doing?
Debiting and Crediting
What is the “Accounting Equation”?
Assets - Liabilities = Equity
What is important about the “Accounting Equation”?
The two sides must always be equal
Why is “Double Entry Bookkeeping” called “Double Entry Bookkeeping”?
Every time an entry is made another entry has to be made to balance it up. Two entries i.e. double entry
What is the accounting equation for “The Statement of Financial Position”?
Assets = Equity +Liabilities
How does the accounting equation explain why the SFP used to be called “The Balance Sheet”?
Because the top half showing assets would always balance with the bottom half showing equity and liabilities.
What is the main purpose behind the Statement of Changes in Equity?
To draw attention to other changes in equity i.e. transactions between the company and the equity owners.
What are the main two transactions between a company and its shareholders?
- Capital invested from shareholders
- Dividends paid to shareholders
The rules of debit and credit are…
DEBIT CREDIT
Increase Asset Decrease Asset
Decrease Liability Increase Liability
Decrease Equity Increase Equity
Decrease Income Increase Income
Increase Expense Decrease Expense
How are debit and credit abbreviated?
Debit = Dr Credit = Cr
When a transaction happens what is it necessary to establish?
- The name of the affected items
- Whether the items are increasing or decreasing (so whether a debit or credit is required)
- The amounts involved
DEAD CLIC stands for?
Debit - Expense - Asset - Dividends
Credit - Liability - Income - Capital
