Test 1 Flashcards
Basis Framework of Accounting
Assets and Expenses on the left
Liabilities, Equity and Income on the right
Increase on the left is a debit
Increase on the right is a credit
Assets
what the business owns
valuable, measurable things
Liabilities
what the business owes
obligation to pay creditors
Income
what the business generates from
activities
value generating activities
Expenses
what the business needs to
pay, to generate income
Value sacrificing activities
Equity
Obligation to owners
Statement of Profit or Loss
(Income Statement) –
Financial performance over the year
Statement of Changes in Equity
(Capital Account) – Changes in ownership investment
Statement of Financial Position
(Balance Sheet) – Position at a moment in time (generally the end of the
financial year)
Statement of Cash Flows
(source and use of cash)
Entity concept
recording transactions from the perspective of the business
Distribution
A distribution is a company’s payment of cash, stock, or physical product to its shareholders
Double entry system
Every transaction has two parts to it, the source of the funds and the
use of the funds.
Accounting Equation
(A = O + L)
Profit at the start of a new year
Equals zero
Acrrual basis of accounting
ensuring that Income and Expenses (all
transactions) are recorded in the year in
which they occur and NOT when cash is
received or paid.
Cost price
what it costs to bring the item to the
location and condition where it is ready for the
purpose for which intended.
Carrying Amount
cost price less accumulated
depreciation
Depreciable amount
cost price less what the
item can be sold for (scrap value or residual
amount) at the end of its useful life – i.e. cost less
scrap value, only this figure to be depreciated
Useful life
‘period over which an asset is
expected to be available for use by an entity’ or
‘the number of production or similar units
expected to be obtained from the asset by an
entity’.
Depreciation
Depreciation is ‘the systematic allocation of the
depreciable amount (cost*) of an asset over its
useful (economic) life’
it is an expense
Bad debt journal entry
Dr Bad Debts Exp; Cr Accounts Receivable: Debtor’s
name (if avail
Inventory
Assets to sell
Is rent prepaid an asset or expense
Difference between asset and expense. Rent prepaid is asset because you haven’t had the use of the rent
Accounts receivable
outstanding payment to be received
Accounts payable
outstanding payment to be payed
Journal entry for depreciation
When equipment depreciates journal entry is accumulated depreciation
Journal entry for supplies being used up
When supplies are used up they are entered as supplies expense
Allowance for bad debts is written journal entry
allowance for doubtful debts and as bad debts expense
Capital account equation
Capital contribution + profit - drawings
Sole Proprietorship
sole trader
* No formal procedures to establish
* No separate legal entity (persona)
* No separate taxation (owner draws and
is taxed on profits)
Partnership
combining resources
(expertise and financial) of a group of
individuals
* No formal procedures to establish
* Legal relationship (generally max 20
individuals)
* Not separate legal entity – all partners
jointly & severally responsible for debts
incurred
* Not taxed separately – partners pay tax
Company
an incorporated entity
* Separate legal entity – owns assets,
respondible for debts
* Separate tax entity
* Owners are shareholders – do not own
assets – benefit dividends; do not owe
liabilities – limited liability
private company
shareholders restricted
public company
often listed on stock
exchange
a company must supply annual financial statements to…
shareholders
who appoints the directors of a company
shareholders
non current asset
A non-current asset is a long-term investment that a business owns and expects to generate income from, but that is not easily converted to cash within a year
current asset
A current asset is a resource that a business can use, sell, or convert to cash within a year. Current assets are also known as short-term assets or liquid assets because they are easier to convert to cash than long-term assets.
examples of non current asset
Examples of non-current assets include:
Fixed assets: Property, plant, and equipment
Long-term investments: Bonds and shares
Intangible assets: Copyrights and patents
Natural resources: Assets with no fixed expiry
examples of current asset
Examples of current assets include:
cash, accounts receivable, inventory, marketable securities, prepaid expenses, and supplies
when recording a sale of inventory, what is the entry on P/L statement
sales (asset) increases by quantity sold
income increases by quantity sold
cost of sales of cost of inventory bought, affects assets and expenses
entry when you receive cash for credit purchase
cash from rec +the purchase amount
Acc receivable -the purchase amount
what are expenses paid in advance in A = OL
asset
Capital account formula
Capital contribution + gross profit - drawings
Gross profit formula
Sales - cost of sales
Selling inventory journal entry
Debit Bank
Credit Sales
Debit Cost of Sales
Credit Inventory
Ownership interest
Ownership interest is a legal term that refers to a person or entity’s stake in a property, business, or other asset.
