Week 2 Flashcards
what is the business entity concept?
the business is separate from the owner- they are two separate entities and transactions with the owner are recorded as if the business was transacting with an external body (apart from sole traders)
what is the double-entry system?
For all transactions, there has to be a SOURCE of the funds and a USE of the funds
what does the term real accounts mean?
The closing balance at the end of the year= opening balance at the start of the following year
what is the accounting equation?
Assets=owners equity+ liabilities
what are the real accounts?
Assets, liabilities and equity. All found in the statement of financial position
what are not real accounts (temporary or nominal accounts) ?
income and expenses
Why are income and expenses not real accounts?
they are closed off as profit or retained earnings at the end of the year
what happens if the business makes a profit/loss and what do you need to do to the statement of financial position?
Owners equity will increase/decrease and you need include this on the SoFP under the retained earning heading
what does accrued mean?
it means that the transaction of the material has taken place but you haven’t paid/been paid
what does pre-paid mean?
Prepaid means that you have paid/been paid for the material but the transaction of it hasn’t taken place yet
where does pre-paid expenses go on the SoFP?
Under current assets
where does accrued income go on the SOFP?
under current assets
what does debit mean?
It is the USE of funds in a transaction eg. inventory
what does credit mean?
It is the SOURCE of funds in a transaction eg. bank account
what are the abbreviations of debits and credits?
DR and CR
