Double Entry Bookkeeping Flashcards
What is the dual effect principal
It states that every transaction has two financial effects
What is the separate entity principal?
The owner of the business is, for accounting purposes, a completely separate entity from the business itself.
Any money that the owner pays into the business as capital must be accounted for as money that the business owes back to the owner.
What is the accounting equation
Assets = Liabilities
Assets = Liabilities + Capital
Assets - Liabilities = Capital + Profit - Drawings
Define business
An organisation that regularly enters into different transactions
List and define the 3 types of business
Sole trader: organisations that are owned and operated by one person
Partnership: organisations owned by two or more people working in common with a view to making a profit
Company: organised recognised in law as “persons” in their own right. A company may own assets and liabilities in its own name and its accounts must meet certain obligations imposed by legislation.
What is the difference between management and financial accounts?
Management accounts: usually prepared on a monthly basis to present timely financial and statistical information to business managers. Helps managers make day-to-day and short term decisions.
Financial accounts: prepared annually, mainly for the benefit of people outside the management, such as owners, HRMC, banks, customers, suppliers and the government.
List the two principal financial statements
Statement of profit and loss
Statement of financial position
What is the statement of profit or loss
A summary of the businesses transactions (income and expense) for a given period.
What is the statement of financial position
A statement of the assets and liabilities of the business at a given date.
This date is the end of the period covered by the statement of profit or loss
Define sales revenue
Income generated from the trading activities of the business
Define cost of sales
The cost of buying or producing goods for resale
Define gross profit
Profit remaining after the costs of sales have been removed from the sales revenue
Define sundry income
Other types of income that aren’t generated by the primary trading activities of the business
Define expenses
The day to day running costs of the business
Define net profit or loss
The profit or loss remaining after expenses have been deducted
Define asset
Something owned or controlled by a business, available for use in the business
Define non-current asset
An asset which is to be used for the long term in the business and not resold as part of trading activities.
Eg: company car
Define current asset
A short term asset of the business which can be used in the near future.
Eg: cash
Define revievable
Somebody who owes the business money (eg: a credit customer)
An example of a current asset
Define non-current liability
An amount owed by the business and due to be paid in the longer term (after 12 months)
Define liability
An amount owed by the business - an obligation to pay money at a later date
Define payable
Somebody that the business owes money to (eg: a credit supplier)
An example of a liability
Define capital
The amount that the owner has invested in the business.
This is owed back to the owner and is therefore a special liability of the business
Define drawings
Amounts withdrawn from the business by the owner for personal use.
Drawings may be cash or inventory
Define capital expenditure
The purchase of, or improvement of non-current assets
Define revenue expenditure
The day to day running costs of the business
Define capital income
Income from the sale of capital assets of the business
Revenue income
Income generated from the sale of goods and services
