Tutorial 2 (finc acc) Flashcards
What are the four main financial statements?
Income Statement, Balance Sheet, Statement of Changes in Equity, Cash Flow Statement
How does the Balance Sheet relate to the Income Statement?
The Balance Sheet uses the “profit for the year” figure from the Income Statement.
How does the Balance Sheet relate to the Statement of Changes in Equity?
The Balance Sheet uses equity figures (Contributed Capital and Retained Earnings) from the Statement of Changes in Equity.
How does the Balance Sheet relate to the Cash Flow Statement?
The Balance Sheet uses the “cash” balance from the Cash Flow Statement.
What are business transactions?
Business transactions are occurrences that affect assets, liabilities, and equity items in an entity.
What are personal transactions?
Personal transactions are occurrences of the owners, partners, or shareholders unrelated to the entity’s operations.
What is the duality principle in accounting?
Every transaction affects two sections of the accounting equation, ensuring balance.
What is double-entry accounting?
It’s the system where every transaction affects two accounts to maintain the balance of the accounting equation.
What is an example of double-entry accounting when a company raises capital?
Increase in assets (cash) and increase in equity (Contributed Capital)
What is a single entry error?
When only one part of the accounting equation is adjusted, violating the duality principle.
What is a transposition error?
When two digits are switched, e.g., recording $5,430 instead of $5,340.
What is accrual accounting?
Recording transactions as they occur, regardless of whether cash has been paid or received.
What is cash accounting?
Recording transactions only when cash changes hands, regardless of when the transaction actually happened.
What are the four entries of accrual accounting?
Accrued Income, Revenue Received in Advance, Accrued Expense, Prepaid Expense.
How can a company have negative cash but large profit?
Due to the difference between cash accounting (cash flow) and accrual accounting (profit), a company can have a negative cash balance and still show a profit.
