The accounting equation Flashcards
What is the accounting equation
Assets = Equity + liabilities
In the accounting equation what comes under equity
Capital + (income - expenses) - drawings)
What is an asset
Resources the business owns
Controlled by an entity as a result of past events from which future economic benefits are expected
What 4 conditions must be met for something to be considered an asset
- Probably future benefit
- Benefit must arise from a past transaction
- business must have the right to control the resource
- Capable of measurement in monetary terms
What is a current asset
Assets the entity expects to turn into cash within the year
Example of a current asset
Cash, trade receivables, inventory
What is a trade receivable
The amount of money a customer owes a business. Service has been delivered but not yet paid
What are non-current assets
All assets which are not current. Can be tangible or intangible (seen or unseen)
Example of a tangible and an intangible non-current asset
Delivery van, Copyrights
What is equity
belongs to the owners
What the entity owes to its owners
Also known as capital
Source of finance
What is a claim
when entity concept is considered any funds invested by the owner are claims
What is a profit
difference between income and expenses. Difference between price and the expenses to provide them
What are liabilities
What a business owes, a source of finance, settled by giving up resources
A present obligation to transfer an economic resource as a result of past events
What is a current liability
Liabilities due to be settled within 12 months
Example of a current liability
trade payables, short -term loans
What is a trade payable
What the business owes on credit
What are non-current liability
Usually payable in a period that extends one year
Example of a non-current liability
long-term loans
What is income
Increase in economic benefit
What the business earns from the sale of goods and services
What are expenses
decrease in economic benefits
What it costs the business to earn the income
What is accrual principles
Transactions should be recognised when they occur
Income is different to cash received
Expenses are different to cash paid
What is matching principle
Expenses should be matched against the revenue they generate
