Introduction to accounting Flashcards
Statement of financial position
A list of all the assets controlled and all the liabilities owed by a business at a particular date.
A snapshot of the financial position of the business at a particular moment.
Equity
The amount invested in a business by the owners.
Statement of profit or loss
A statement displaying items of income and expense in a reporting period as components of profit or loss for the period.
The statement shows whether the business has had more income than expense or vice versa.
Capital expenditure
Expenditure that results in the acquisition of non-current assets or an improvement or enhancement of their earning capacity.
Capital expenditure is not charged as an expense in the statement of profit or loss.
Capital expenditure on non-current assets is presented in the statement of financial position.
Non-current asset
Those which will be kept in the entity for more than one year.
Revenue expenditure
Expenditure that is incurred either for trade purposes or to maintain the existing earning capacity of non-current assets.
Revenue expenditure is charged to the statement of profit or loss of a period, provided that it relates to the trading activity and sales of that particular period.
Capital income
Proceeds from the sale of non-current assets.
The profits or losses from the sale of non-current assets are included in the statement of profit or loss for the reporting period in which the sale takes place.
Revenue income
Income derived from the sale of trading assets, the provision of services, or interest and dividends received from business investments.
Asset
A resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity.
Examples of assets
- Land and buildings
- Motor vehicles
- Plant and machinery
- Fixtures and fittings
- Cash
- Inventory
- Receivables
Liability
A present obligation arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Examples of liabilities
- A bank loan
- An overdraft
- Payables
- Taxation
Business entity concept
A business is a separate entity from its owner.
Capital
/Equity in the context of a company; The residual interest in the assets of the entity after deducting all its liabilities.
Accounting equation
ASSETS = CAPITAL + LIABILITIES
Historical cost
Transactions are recorded at their cost when they were incurred.
Profit
The excess of income over expenses.
Loss
The excess of expenses over income.
Income
Increases in economic benefits over a period in the form of inflows or increases of assets, or decreases of liabilities, resulting in increases in equity/capital.
Can include both revenue and gains.
Expenses
Decreases in economic benefits over a period in the form of outflows or depletion of assets, or increases in liabilities, resulting in decreases in equity/capital.
Elements of financial statements
- Income
- Expenses
- Assets
- Liabilities
- Equity
Drawings
Money and goods taken out of a business by its owner.
Creditor
Party to whom a business owes money.
Trade payables
The amounts due to credit suppliers.
Debtor
Party who owes money to the business.
Trade receivables
The amounts owed by credit customers.
Elements of statement of financial position
- Liabilities
- Capital
- Assets
Net assets
Assets less liabilities.
Non-current assets
Assets acquired for continuing use within the business, with a view to earning income or making profits from their use, either directly or indirectly, over more than one reporting period.
Examples of non-current assets
- Property, plant, and equipment
- Intangible non-current assets
- Long-term investments
Current assets
An asset is current when it is expected to be realised in, or intended for sale consumption in, the entity’s normal operating cycle, or is held for being traded, or it is expected to be realised within twelve months of the date of the statement of financial position, or is cash or a cash equivalent.
Examples of current assets
- Items owned by the business with the intention of turning them into cash in a short time
- Cash owned by the business
Non-current liabilities
A debt which is not payable within one year.
Any liability which is not current must be non-current.
Examples of non-current liabilities
- Loans that are not repayable for more than one year
- Loan stock or debentures
Current liabilities
Debts of the business that must be paid within one year, or within the entity’s normal operating cycle, or that are held to be traded.
Examples of current liabilities
- Loans repayable within one year
- A bank overdraft, which is usually repayable on demand
- Trade payables
- Other payables
- Taxation payable
- Accruals
