Topic 3 - Recording Information (Part 1) Flashcards
What’s the basic accounting equation?
Assets = Liabilities + Owner’s Equity
What’s the extended accounting equation?
Assets = Liabilities + Owner’s Equity + Income - Expenses
What’s the accounting equation that incorporates all of our accounting elements?
Assets + Drawings + Expenses = Liabilities + Capital + Income. This equation must stay balanced.
How do we maintain balance in the extended accounting equation?
By always enter two (or more) parts to an accounting entry.
What does double-entry accounting show?
shows that when a transaction is recorded, it has 2 effects.
On which side is a ‘debit’ (Dr) entry recorded?
It is recorded on the left hand side
On which side is a ‘credit’ (Cr) entry reorded?
It is recorded on the right hand side
What are the 2 methods in accounting that may be used?
- Cash accounting
- Accrual accounting
What is cash accounting?
a very basic approach that records income and expenses at the time the cash is received or paid
What is the main problem with cash accounting?
it’s not counted until the cash is collected. This means that distortions can happen with both prepayments and accruals, and about incomes and expenses, with flow-on effects impacting assets and liabilities as well.
What is accrual accounting?
records incomes and expenses when the underlying transaction occurs, regardless of whether cash has changed hands or not.
What does the term ‘accrual’ mean?
means the event has happened but the money comes later.
Define Accounts Recievable?
providing services to a customer on credit, record the income, along with an asset
Define Accounts Payable?
Incurring a business expense that is not paid immediately, record the expense, along with a liability
Define Prepayment?
when you pay for something in advance. This could sometimes be recorded as a liability or as an asset.
What is transaction analysis?
is the process of identifying the specific effects of transactions and events on the accounting equation.
What is an account?
is an individual accounting record of increases and decreases in a specific asset, liability or equity item.
Define dividend?
is a distribution by a company to its shareholders in an amount proportional to each investor’s percentage ownership.
What is the operating cycle?
is the length of time it takes for a business to acquire goods, sell them to customers and collect the cash from the sales.
