The Accounting Equation Flashcards
What is the Accounting Equation?
Assets = Owner’s Equity + Liabilities
A = OE + L
Can be rearranged: A-L = OE
What is the accounting statement which shows a summary of the accounting equation?
The Statement of Financial Position (SoFP), also know as the Balance Sheet
If an owner puts their own money into the business, £1000, show the effect on the accounting equation?
Assets (bank) increases £1000. Owner’s equity (capital) increases £1000. Increase in A = Increase in OE
+£1000 = +£1000
Give 5 examples of current assets. (hint: current means that they are cash or can/will be converted to cash within a year).
Stock, Bank, Petty Cash, Float, Accounts Receivable.
Give 3 other names for Stock
Inventory, Merchandise, Goods.
Give 5 examples of non-current assets. (hint: the business will use these assets over more than a year)
Vehicles, Machinery, Equipment, Land & Buildings (could also be called premises), Furniture and fittings.
What are the two categories of funding a business?
Owner’s funds or Liabilities (borrowed funds for example a loan).
The business buys a delivery vehicle, £300 and pays with money drawn from the bank account. Show the effect on the balance sheet/ accounting equation?
Assets (vehicles) increase £300. Assets (bank) decreases £300.
+&- £300 = 0
If your customer buys goods for you does not pay immediately, where does their debt to you go in the balance sheet?
Accounts receivable (because you are still waiting to receive the money from your customer, who is also called a debtor as they are in debt to you).
Where are supplier’s balances shown in the balance sheet?
Accounts payable (because you still need to pay).
Another name for supplier?
Creditor
Another name for customer?
Debtor
The business buys a property for £1m and takes out a loan to pay for it. Show the effect on the accounting equation/ balance sheet.
Assets (Land & Buildings) increases £1m, Liabilities (loan) increase £1m.
+£1m = +£1m
The business pays off £1500 of the loan. Show the effect on the accounting equation / balance sheet.
Assets (bank) decrease £1500, Liabilities (loan) decreases £1500. Explanation: you took money out of your bank account therefore it decreased and you paid off part of the loan, therefore the loan also decreased.
-£1500 = -£1500
Is it possible for the Bank be an asset and a liability?
Yes, but not at the same time. If there is money in your account it is an asset. If you have taken out too much money and gone into overdraft then it is a liability as you owe the bank.
A customer pays £20 off the amount he owes. Show the effect on the accounting equation.
Asset (bank) increases £20. Asset (Accounts receivable) decreases £20.
+&- £20= 0
What accounts would you find in the Owner’s Equity section of the balance sheet if the enterprise is a Sole Trader?
Capital, Drawings, Net Profit.
What accounts would you find in the Owner’s Equity section of the balance sheet if the enterprise is a Company (public or private)?
Shares, Retained income.
What do shareholders receive in return for their investment?
Dividends
What do sole traders receive in return for their investment in their own business?
The net profit for the year belongs to them, the net profit is then part of Owner’s Equity.
What is a T-account?
A general ledger account. This shows all the debits and credits for a particular account.
In the General Ledger (or T account), on which side
do Assets increase?
Assets increase on the DEBIT side.
Extra information: Debit side is on the left of the T
In the General Ledger (or T account), on which side do Liabilities increase?
Liabilities increase on the CREDIT side.
Extra information: Credit side is on the right of the T
In the General Ledger (or T account), on which side does Owner’s Equity increase?
Owner’s Equity increases on the CREDIT side.
Extra information: Credit side is on the right of the T
