Chapter 3: Accounting Equation

Question 1

Define assets.

Answer 1

Resources owned or controlled by businesses and are expected to benefit the business in the future.
1. Current assets.
- Cash and other assets that can easily be converted into cash within one year.
Examples: Cash in hand, cash at bank, inventory, accounts receivable.

2. Non- current assets.
   - Tangible non-current assets; land, building, etc.
   - Non-tangible non-current assets; patent, copyrights, etc.
   - Investments; A sum of money placed in other companies or organizations to get returns.

Question 2

Define owner’s equity.

Answer 2

Owner’s claim on the assets of the business after deducting all its liabilities.

Question 3

Define liabilities

Answer 3

Debts owed by the business to other parties.
1. Non-current liabilities.
Payback period is more than one year.
Example: Long term loans

2. Current liabilities.
   Payback period is within one year.
   Example: accounts payable, short term loans, bank overdrafts

Question 4

What is the basic accounting equation?

Answer 4

Shows the relationship between assets, liabilities and owner’s equity

The foundation of double-entry accounting - a system where every transaction affects at least two accounts

Assets= Capital + Profit + Liabililties
Expanded; Assets= Capital + (Income - Expenses) + Liablilities
Assets + Expenses + Drawings = Capital + Income+ Liabilities

Question 5

Define income and expenses.

Answer 5

• Revenues
  Income generated from business operations.
  Represents an increase in the wealth of the owner.
  Increases owner’s equity.
• Expenses
  Costs incurred in order to run and generate revenue for the business.
  Decreases owner’s equity.

Question 6

What are the three types of financial statements?

Answer 6

• Accounting reports that shows the financial activities and performance of a business.
• Can cover any period of time, although most commonly prepared at the end of a month, a quarter, or a year.
• 3 main types:
  Statement of profit or loss; Shows revenues and expenses and the resulting net profit or net loss for a specified period of time.

Statement of financial position; Reports the assets, liabilities and owner’s equity at a specified date

Statement of cash flows