Week 3 Flashcards
What is the purpose of a Statement of Financial Position?
To provide a snapshot of a business’s financial health at a specific point in time, showing assets, liabilities, and owner’s equity.
What is the accounting equation represented in a Statement of Financial Position?
Assets = Liabilities + Owners’ equity
What are assets?
What the business owns, classified into current and non-current assets.
What are current assets?
Assets expected to be converted into cash or consumed within one year, such as:
* Cash
* Accounts receivable
* Inventory
* Prepaid expenses
What are non-current assets?
Assets that provide benefits over more than one year, such as:
* Property
* Equipment
* Machinery
* Intangible assets (e.g., patents, trademarks)
* Long-term investments
What are liabilities?
Obligations the business owes to external parties, classified into current and non-current liabilities.
What are current liabilities?
Obligations due within one year, such as:
* Accounts payable
* Short-term loans
* Accrued expenses
What are non-current liabilities?
Obligations due after one year, such as:
* Long-term loans
* Mortgages
* Bonds payable
What is an accrual?
When expenses or revenues are recognized before cash is paid or received.
How is an accrual recorded in accounting?
The expense is recorded in the period it is incurred, creating a liability (accrued expenses) on the balance sheet.
Give an example of an accrual.
A business owes $1,000 in wages at the end of the month but pays them next month.
What is a prepayment?
When a business pays for goods or services before they are received or used.
How is a prepayment recorded in accounting?
Initially recognized as an asset and then expensed over time as it is used.
Give an example of a prepayment.
A business pays $1,200 for a 12-month insurance policy in advance.
Fill in the blank: Current assets are expected to be converted into cash or consumed within _______.
one year
Two types of liabilities?
Current liabilities and non-current (long-term) liabilities.
