Module 3 - Business Transactions & Balance Sheet

Question 1

What must business transactions have an affect on in order to affect the business’ financial position and the accounting equation?

Answer 1

Assets, liabilities or equity

Question 2

Accounting equation

Answer 2

[A = L + OE]
Assets (A) - resources controlled by the business or investments made by the business
Liabilities (L) - money that a business gets from an outside party (e.g. creditors and bank loans); external source of funding.
Owner’s Equity (OE) - contribution made by the owners; internal source of funding

Question 3

What is the difference between cash and credit transactions?

Answer 3

Cash transaction involves cash whereas credit transaction doesn’t involve cash

Question 4

What is it called when the transaction of an asset is purchased on credit? How do we record this on the balance sheet?

Answer 4

Accounts payable

To balance the equation, accounts payable(L) increases as well as an increase in assets(A)

Question 5

What is the consolidated statement also known as?

Answer 5

Balance sheet

Question 6

Why is the balance sheet a snapshot of the business’ financial position?

Answer 6

The balance sheet will show how much assets they own, how much liabilities they owe and how much equity is remaining that can be claimed by the owners all at a particular point in time (end of the reporting period).

Question 7

What does GAAP stand for?

Answer 7

Generally Accepted Accounting Principals/Practices

Question 8

Difference between historical cost and fair value

Answer 8

Historical cost is the price that they paid for; a measure of value in which the price of an asset on the balance sheet is based on its original cost.
Fair value is the current market value which can be very different from the historical cost

Question 9

Characteristics of an asset

Answer 9

• Result of a past event (e.g. when you purchased an item from the store, that purchase is a past event. Signing a contract is also a past event)
• Must be controlled by the entity
• Present economic resource (has the potential to produce economic benefits)

Question 10

Characteristics of a liability

Answer 10

• Result of a past event (e.g. when the business borrows money from the bank, the business will need to sign a contract so signing the contract creates a past event)
• A present obligation (e.g. by signing the contract with the bank, that creates an obligation. The obligation of paying the money back plus interest)
• To transfer an economic resource (not all scenarios involve the payment of money to release the obligation, in some scenarios, it may be to deliver the goods or perform the services)