Chapter 2 - The Accounting Equation Theory Key Terms Flashcards
Explain the purpose of preparing a Balance Sheet
details assets, liabilities and oe at a particular time, allows the check of current financial position
Explain the relationship between the accounting equation and the Balance SHeet
reflection of the accounting equation as it shows, A on the left and Equities on the right
State the three pieces of info that must be present in the title of every accounting report
Who it has been prepared for
What kind of report it is
When it was prepared
Explain why the Balance Sheet is titled ‘as at’ a particular date
It is only ever accurate on the day it is prepared, as businesses complete a number of transactions every day, including the day it is prepared. This means that any transaction will adjust the values in the balance sheet, making it no longer accurate
Explain how the balance sheet upholds relevance
Will only contain info that is relevant to the particular entity and the period of time. The listing of each A and L seperately is capable to making a difference to decision making
Explain how the balance sheet upholds Faithful Rep
Each of hte amounts in a balance sheet will be verifiable by a source doc –> therefore provides faithful rep that is accurat and free from material error or bias
explain the valuation of (NCA) reffering to a QC
According to relevenace - info should be useful for decision making. historical cost is not an accurate representation of its worth, –> more beneficial for decision making to use fair value
Explain how the entity assumption is applied in the Balance Sheet
The use of a capital and drawings account in the Balance sheet makes use of the entity assumtion to ensure that the records of assets, liabilities and business activities of the entity are kept seperate. all contributions and withdrawals are recorded in these accounts
