Chapter 2 - The Accounting Equation

Question 1

What is the accounting equation/ SFP equation?

Answer 1

Total Assets = Total Liability + Equity

Question 2

What types of assets are there?

Answer 2

Current assets and non-current assets.

Question 3

What is a current asset?

Answer 3

Assets acquired for resale or assets acquired for less than 12 months

Question 4

What are examples of current assets?

Answer 4

• Inventory
• Trade Receivables
• Bank/ Cash

Question 5

What is a non-current asset?

Answer 5

Assets acquired for long term use in the business (more than 12 months)

Question 6

What are examples of non-current assets?

Answer 6

• Land/ buildings

- Vehicles

Question 7

What types of liabilities are there?

Answer 7

Current liabilities and non-current liabilities

Question 8

What is a current liability?

Answer 8

Liabilities that are payable within 12 months of the SFP date

Question 9

What are examples of current liabilities?

Answer 9

• Trade payables

- Overdraft

Question 10

What is a non-current liability?

Answer 10

Long term liabilities payable more than 12 months after the SFP date

Question 11

What are examples of non-current liabilities?

Answer 11

Loan

Question 12

What is the business entity concept?

Answer 12

This concept states that financial accounts should only show the activities of the business and NOT the personal activities of its owners

Question 13

What examples are there of ‘flows of money’ between the owner and the business?

Answer 13

• Capital - invested into the business by the owner

- Drawings - Cash withdrawn from the business by the owner TO LIVE ON

Question 14

What is capital?

Answer 14

How much the business owes the owner

Question 15

How do you calculate capital for the year end - for a sole trader?

Answer 15

(+) Capital Injections

(-) Drawings

(+) Profit/ (-) Loss

Question 16

What are capital injections?

Answer 16

Amounts invested in the business by the owner during the accounting period

Question 17

What is an example of drawings, for a company?

Answer 17

Dividends

Question 18

What is the duality concept?

Answer 18

This concept states that every transaction has a dual effect

Question 19

What is gross profit?

Answer 19

Sales - Cost of Sales

Question 20

What is net profit?

Answer 20

Gross profit - Other expenses

Question 21

What are the types of sales?

Answer 21

Cash sales and credit sales

Question 22

What are the types of other income?

Answer 22

Rent received and investment income

Question 23

How do you calculate Cost of Sales?

Answer 23

(+) Opening inventory

(+) Purchases

(-) Closing inventory

Question 24

What types of purchases are there?

Answer 24

Cash purchases and credit purchases

Question 25

What are expenses?

Answer 25

Running costs of the business.