Lesson 4 - Two Fold Effect Flashcards
What is the accounting equation?
A = L + OE
What is the basic idea of the two-fold effect?
The concept of the two-fold effect outlines that every transaction will impact the accounting equation in a minimum of two ways.
According to the two-fold effect, what must remain true after a transaction has been recorded?
The accounting equation must still balance, i.e. A=L=OE.
T/f - A single transaction can impact two items in the same element.
True - examples of this include cash purchase of inventory and cash received to settle an account receivable.
When there are two impacts under the same element, what additional piece of information must we write then recording in the Accounting Equation?
We must include the overall impact.
T/f - When the owner takes a “Drawing” - this would mean the drawings would increase, whilst causing Owners Equity overall to decrease.
True - the Owners Equity decreases, as Drawings have increased.
T/f - A capital contribution would increae the value of owners equity.
True.
Which two elements would be impacted following a monthly loan repayment?
Assets (bank) decrease
Liabilities (loan) decrease
Which two elements would be impacted if a busines purchased $1000 of inventory on credit?
Assets (inventory) increase $1000
Liabilities (accounts payable) increase $1000
What would happen when a business made a cash payment to settle an Accounts Payable of $1000?
Assets (bank) decrease $1000
Liabilities (AP) decrease $1000
Which elements would be impacted when the owner makes a drawing of $1000 cash?
Assets (bank) decrease $1000
Owners Equity (drawings [have increased]) decrease $1000
