W3 Flashcards
Accouting cycle
- Analyse transactions
- jounalise transcations
- pose to ledger accounts
- prepare trial balance
- prepare financial statments
What’s a transaction?
- An external exchange of something of value between two or more entities
==> External: exchanging with a party outside the business
Evidence for a transaction
- Evidence comes in the forms of a source document
- E.g.:
- Purchase order
- EFT on bank statement
- Cash register tape
- Sales invoice
What transactions must be recorded?
Anny thing that has an effect on assets, liabilities and equity
Financial element - Asset
Present economic resource controlled by the entity as a resut of past events that has the potential to produce economic benefits
e.g.:
* Cash at bank
* Inventory
* Plant and equipment
* Buildings
* Accounts receivables
* Prepaid expenses
Financial element - Liabilities
A present obligtion of the entity to transfer an economic resource as a result of past events
E.g.
* Account payable
* Loan payable
* Interest payable
* Revenue received in advanced (Unearned revenue)
Financial element - Equity
An owner’s claims on the assets of the business or the net worth of the business
OR
The residual interest in the assets of the entity after deducting all its liabitlies
OE = A + L
How does equity change?
Increase: Capital, Income
Decrease: Expenses, Drawings or withdrawals, Dividends (distributions of profits (returns) to shareholders)
Financial element - Income
Revenue amounts received/receivable from selling goods or services
↑Assets + ↓Liabilies = ↑ Equity
e.g.
* Sales revenue
* Service revenue
* Interest income
Financial element - Expense
Costs that a business incurs to generate income
↓Assets + ↑Liabilties = ↓ Equity
E.g.:
* Wages expense
* Rent expense
What are Profit and Loss?
Profit: total income > total expenses
Loss: total expenses > total income
Accouting equation
An equation that measures that resources of a business and he claims to those resources
Assets = Liabities + Owners Equity
Assets = Liabities + Owners’s Capital + Income + Expenses+ Withdrawals
- Each transaction affects 2 or more accoutns
- The LHS must equal the RHS
What’s Double Entry Accounting?
Accouting records the ‘dual effect’ of a business transactions through forming each transactions in terms of debits and credits
Debits = Credits
Normal set up of accouting
Set up in ‘T’ structure with Debit (DR) on the LHS and Credit (CR) on the RHS
Normal balances
Assets:
* Increased debit - normal balance
* Decreased credit
Liabilities:
* Decrease debit
* Increased credit - normal balance
Capital
* Decreased debit
* Increased credit - normal balance
Income
* Decreased debit
* Increased credit - normal balance
Expenses:
* Increased debit - normal balance
* Decreased credit
Drawings:
* Increased debit - normal balance
* Decreased credit
