Week 2 and 3 - SOFP and preparing it Flashcards
What is a SOFP also known as?
Balance sheet
What is the accounting equation?
Assets = equity + liabilities
How would you describe an asset?
- An economic resource = a right to potential economic benefits
- Control (usually legal rights of ownership, but not always)
- The benefit arises from some past transaction or event
- The asset must be capable of measurement in monetary terms.
How would you describe a liability?
- The entity has an obligation
- The obligation is to transfer an economic resource.
- The obligation is a present obligation that exists as a result of past events.
How would you define equity?
The residual interest in the assets of the entity after deducting all its liabilities.
Equity = Assets - liabilities
How to calculate equity (end)?
Equity (end) = RE (beg) + Profit/loss - Drawings + Capital contributed
What are drawings?
A drawing account is a contra owner’s equity account used
to record the withdrawals of cash or other assets made by
an owner from the enterprise for its personal use during
the year. Drawings are a deduction from capital and will
reduce owner’s equity.
How would you classify assets between non current assets and current assets?
Current assets are assets held for the short term. They are expected to be sold within the next year and are cash or near cash, such as marketable short-term investments.
This can include:
inventory, trade receivables, cash.
What are non current assets (fixed assets)?
Assets that are held for long-term operations. They can be tangible or nontangible
This includes:
PPE, Buildings, Computers, Motor vehicles
How would you classify liabilities, current and non current?
Current liabilities
(Amounts due for settlement in the short term)
They are due to be settled within a year after the date of the statement of financial position.
Examples include:
Accounts payable, trade payables, and bank loans that are due within the next year.
How would you classify non current liabilities? What can it include?
(Amounts due for settlement in the long term)
They represent amounts due that don’t meet the definition of current liabilities
Can include:
Long term borrowings, trade payables, lease liabilities
What are the two fundamental accounting equations?
Assets + liabilities + Equity
Sum of debits = Sum of credits
What do debit and credit mean?
No deeper meaning other than Debit = left hand entry and credit = right hand entry
Why must each transaction affect two or more accounts?
To keep the basic accounting equation in balance (A=E+L)
What are the rules for the double entry accounting system?
▪ Each transaction must affect two or more accounts
to keep the basic accounting equation in balance
(A=E+L)
▪ Recording is done by debiting at least one account
and crediting another
