LA 2 Flashcards
Asset Definition
Present economic resource
Controlled by the entity
Resulting from a past event
Asset Recognition
Relevance
Faithful representation
Liabilities Definition
Current obligation
To transfer an economic resource
Resulting from a past event
Liabilities Recognition
Relevance
Faithful representation
Equity comprises:
Capital (invested by owner into entity)
Drawings (taken by owner for personal use)
Profits/(losses)
Equity =
Assets - Liabilities
Profit/(loss) =
Income - Expenses
Profit occurs when
Income is greater than expenses
Loss occurs when
Expenses are greater than income
Income Definition
Increases in assets or decrease in liabilities
that result in increases in equity, other than those related to contributions from holders of equity
Income Recognition
Relevance (should be probability of inflow of economic benefits)
Faithful representation (should be able to measure income with accuracy)
Realisation Concept
Income must be earned before it can be recognised
Expenses Definition
Decreases in assets or increases in liabilities
That result in decreases in equity, other than those related to distributions to holders of equity
Expenses Recognition
Relevance (should be probability of outflow of economic benefits)
Faithful representation (should be able to measure income with accuracy)
Expenses are:
Debits
What elements are included in the statement of financial position
Assets:
-Noncurrent/Current/Total assets
Equity
Liabilities:
-Noncurrent/Current liabilities
-Total equity and liabilities
The effect of liabilities and equity on the accounting equation
When they increase - Credit
When they decrease - Debit
The effect of assets on the accounting equation:
When assets increase - Debit
When assets decrease - Credit
What is a Debtor? What element is it?
A debtor owes money to the business
Asset
What is a creditor? What element is it?
A creditor lends money or provides goods/services on credit
Liability
Bank
If the business has deposited money in the bank
- Asset
If the business has taken money from the bank
- Liability
Positive/Favorable Bank Balance
When a business has money deposited in the bank. - Asset
Negative/Overdrawn Balance
When the business withdraws more money than is available in its account, leading to a bank overdraft
- Liability
