Theory - 8 Flashcards
What is accounting?
The art of recording, classifying and a summarizing translations in terms of money, and interpreting results
What is a transaction?
Refer to buying and selling goods or services and the receipt and payment of money
What can no business operate without?
An accounting or bookkeeping system
What does an accounting and bookkeeping system do?
Allows the business and mangers to see what is happening to the money coming into and going out of the business
What will happen to each account? (double entry system)
One is always debuted and one is always credited. The transaction balances out
When and who described the double entry system?
In 1494, Lucas Pacioli
What does the double entry system revolve around?
Revolves around the principle that states ‘for every debut, there is credit.’
What does debit refer to? Give the abbreviation
Debit refers to the left side of an account. Dr.
What does credit refer to?
Credit refers to the right side of an account. Abbreviated Cr.
What increases on the debit side?
Asset and expense accounts increase in the debit side
What increases on the credit side?
Liability, owner’s equity and income accounts increase on the credit side
What is owner’s equity?
The owners share or contribution to the business. The owner or entrepreneur not only brings skill to the business, also has to make a financial contribution to get the business started
What does owner’s equity consist of?
Consists of capital, drawings, and net income (profit)
What is owner’s equity made up by the difference between
Made up by the difference between incomes and expenses
What is capital?
Cash or goods used by an owner to generate income by investing into the business
What is own capital?
The owner contributes their own money to the business. They owner purchases shares and are known as shareholders
What is borrowed capital?
The business takes out a loan with a financial institution. The loan must be repaid over a certain time period with interest charges.
What is physical assets?
Owner can contribute in ways other than money. Owners will contribute vehicles, equipment, or buildings. It is given a monetary value in financial records
What is intellectual capital?
Specialized skills or abilities the owner may bring into the business. Skills will increase the value of the business through its performance. It is not recorded in financial records
What does capital increase?
Capital increases owner’s equity
What is drawings?
The owner is entitled to withdraw money or take assets like equipment or furniture or have their personal expenses covered by the business. Anything the owner takes from the business, whether it’s money, stick or equipment etc.
When does a business make a loss?
A business makes a loss when it spends more money than it earns
What is income?
An amount of money received, during a period of time in exchange for labor of services from a sale of goods
What two income accounts are used when a business sells its services or products?
When a business sells its services or products, the two income accounts are known as current income and sales.
What is expenses?
Money spent or cost returned in a business effort to generate revenue? representing the cost of doing business. Money that is spent the business in order to keep it running everyday
How often must expenses be paid?
Many expenses must be payed monthly, other can occur infrequently
What do businesses need to ensure when it comes to expenses?
Businesses need to ensure that they have both a high income and can manage their expenses well
Give examples of expenses
telephone, water abs electricity, rent expenses, wages and salaries
What do businesses need in order to run efficiently? (assets)
- A building/land
- Furniture (desk and chair)
- Equipment (printer and computers)
- Money
Do assets increase or decrease the monetary value of a business?
Assets increase the monetary value of a business
What two groups can assets be divided up into?
Fixed / non-current assets
Current assets
What are fixed assets?
Also known as non current assets. They create more money for the business
What is the life span of a fixed asset?
Have a life span of longer than 12 months
Why are fixed assets generally bought?
To assist in production or in the provision of the business’s service
What are the intentions of the buyer when they buy fixed assets?
They have the intention of no reselling the asset
How many types of fixed assets are there? Name them
There are four types. Land and building, investments, vehicles and equipment
What are land and building assets?
They are fixed assets. Money invested in buildings and land bought by the business. If the business were to sell, it would bring money into the business
What are investments assets?
investments are fixed assets. Money that the business has invested in long-term investment. Like to fixed deposits is ‘tied up’ for a certain time but still has value
What is vehicle assets?
vehicles are fixed assets. money invested in vehicles purchased, whether for cash on credit
What is the equipment asset?
equipment are fixed assets. Money invested in machinery and equipment. For example computers and manufacturing equipment. It can be turned into cash
What is a current asset?
The asset will be turned into cash within a 12 month period.
What are current assets for?
Current assets are for the provisions of the business’s goods and services.
How many types of current assets are there? Name them.
There are five types of current assets. Trading stock, debtors control, bank, petty cash and cash float
What is the trading stock asset?
trading stock is a current asset. money invested in goods that have been bought by the business for the purpose of reselling.
What is the debtors control asset?
Debtors control is a current asset. A summary of people who owe money to the business
What is the bank asset?
Bank is a current asset. The amount of money that the business has in its current bank account or cheque account. Used on a monthly basis
What is the petty cash asset?
Petty cash is a current asset. money the business keeps in a petty cash box which is used for business purchases that are too small to warrant the issuing of a cheque
What is the cash float asset?
It is a current asset. money that is kept in the business’s cash register.
What is liabilities?
A business’s debts or obligations that arise during the course of business operations.
What does it mean when a business owes money to another institution. (liability)
Most businesses that purchase their property will need to borrow money to finance these purchases.
How many categories can liabilities be discuss into? Name them
Tow categories. Long term liabilities (non current) and current liabilities
What are long term liabilities?
Also known as non current liabilities. Taken out for longer than 12 months abs lady back monthly.
How many types of long term liabilities are there? Name them
one type which is loans
What are loan liabilities?
The business borrows money from a financial institution and repays it over a certain amount of time.
What are current liabilities?
current liabilities are paid back within a 12 month period.
How many types of current liabilities are there? name them.
There are two types. Creditors control and SARS
What is the creditor control liability?
Also known as account payable. when a business buys goods or services on credit, it still owes the supplier money. The supplier is a creditor to the business. The business pays the creditor back over a few months
What is the SARS liability?
Also known as the South African Revenue Services. The receiver of the revenue (tax man) is owed money by the business in the form of VAT and income tax.
What is income?
Any money the business receives. For example rent income. Income increases the profit of a business and therefore also increases owners equity
