Chapter 2 - The Accounting Equation Flashcards
What is the accounting equation/ SFP equation?
Total Assets = Total Liability + Equity
What types of assets are there?
Current assets and non-current assets.
What is a current asset?
Assets acquired for resale or assets acquired for less than 12 months
What are examples of current assets?
- Inventory
- Trade Receivables
- Bank/ Cash
What is a non-current asset?
Assets acquired for long term use in the business (more than 12 months)
What are examples of non-current assets?
- Land/ buildings
- Vehicles
What types of liabilities are there?
Current liabilities and non-current liabilities
What is a current liability?
Liabilities that are payable within 12 months of the SFP date
What are examples of current liabilities?
- Trade payables
- Overdraft
What is a non-current liability?
Long term liabilities payable more than 12 months after the SFP date
What are examples of non-current liabilities?
Loan
What is the business entity concept?
This concept states that financial accounts should only show the activities of the business and NOT the personal activities of its owners
What examples are there of ‘flows of money’ between the owner and the business?
- Capital - invested into the business by the owner
- Drawings - Cash withdrawn from the business by the owner TO LIVE ON
What is capital?
How much the business owes the owner
How do you calculate capital for the year end - for a sole trader?
(+) Capital Injections
(-) Drawings
(+) Profit/ (-) Loss
What are capital injections?
Amounts invested in the business by the owner during the accounting period
What is an example of drawings, for a company?
Dividends
What is the duality concept?
This concept states that every transaction has a dual effect
What is gross profit?
Sales - Cost of Sales
What is net profit?
Gross profit - Other expenses
What are the types of sales?
Cash sales and credit sales
What are the types of other income?
Rent received and investment income
How do you calculate Cost of Sales?
(+) Opening inventory
(+) Purchases
(-) Closing inventory
What types of purchases are there?
Cash purchases and credit purchases
What are expenses?
Running costs of the business.
