Chapter 2: The Accounting Equation Flashcards
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
How is a bank overdraft recorded in a balance sheet?
It is not recorded until it is used, whereby it goes in the credit column of the bank ledger, and is recorded as a current liability
What does a balance sheet detail and what is its purpose?
Details assets, liabilities and owners equity at a particular point in time, allowing the owner to assess the firm’s current financial position
What does the title of a balance sheet state?
Who it has been prepared for, what kind of report it is and when it was prepared
What is a current asset?
A present economic resource controlled by an entity as a result of past events, that is reasonably expected to be converted to cash, sold or consumed within the next 12 months
What are some examples of current assets?
Bank, inventory, accounts receivable, prepaid expenses
What is a non-current asset?
A present economic resource controlled by an entity as a result of past events, that is not held for resale and is reasonably expected to be used for more than the next 12 months
What are some examples of non-current assets?
Vehicles, computers, equipment, premises, fixtures/fittings
What is a current liability?
A present obligation of an entity to transfer an economic resource as a result of past events, that is reasonably expected to be settled within 12 months
What are some examples of current liabiliites?
Accounts payable, loan repayments within 12 months, accrued expenses and GST owing
What is a non-current liability?
A present obligation of an entity to transfer an economic resource as a result of past events, that is not required to be settled within 12 months
What are some examples of non-current liabilities?
Loan repayments after 12 months and mortgages
What are the advantages of a classified balance sheet?
It is more relevant and understandable for an owner, because it makes decision making easier and allows working capital to be calculated
What is working capital?
The amount left over when the current liabilities are subtracted from the current assets
What is the working capital ratio?
Current Assets / Current Liabilities
What are the two rules of double-entry accounting?
Every transaction will affect at least two items in the accounting equation, and the accounting equation must always balance
Why must the accounting equation be redrawn after every transaction?
Two items of the equation are always changed due to double-entry accounting
What is an advantage of double-entry accounting?
It provides an extra checking mechanism before data is recorded
What happens to the accounting equation when the owner deposits $375,000 to start the business?
Assets increase by $375,000
Owner’s equity increases by $375,000
What happens to the accounting equation when the business buys an office desk for $2000 cash?
Assets increase by $2000
Assets decrease by $2000
What happens to the accounting equation when inventory is purchased for $10,000 on credit?
Assets increase by $10,000
Liabilities increase by $10,000
What happens to the accounting equation when the business pays $10,000 for advertising?
Assets decrease by $1000
Expenses increase by $1000
What happens to the accounting equation when $2000 is repaid to accounts payable?
Assets decrease by $2000
Liabilities decrease by $2000
