Accounting

Question 1

Term

Answer 1

Definition

Question 2

Accounting Entity Assumption

Answer 2

The business is treated as separate from the owner and other entities. Personal transactions of the owner are not recorded in the business’s accounts.

Question 3

Accounting Equation

Answer 3

Shows the relationship between assets, liabilities, and owner’s equity. Three forms: Assets = Liabilities + Owner’s Equity; Owner’s Equity = Assets – Liabilities; Liabilities = Assets – Owner’s Equity.

Question 4

Assets

Answer 4

Resources owned by the business (e.g. cash, inventory).

Question 5

Liabilities

Answer 5

Debts or obligations owed to others (e.g. loans, accounts payable).

Question 6

Owner’s Equity

Answer 6

The owner’s investment in the business (e.g. capital, profit).

Question 7

Examples of Assets

Answer 7

Cash, inventory, accounts receivable, equipment.

Question 8

Examples of Liabilities

Answer 8

Bank overdraft, accounts payable, loans.

Question 9

Examples of Owner’s Equity

Answer 9

Capital contribution, retained earnings, drawings.

Question 10

Accounts Receivable

Answer 10

Money owed to the business by customers.

Question 11

Accounts Payable

Answer 11

Money the business owes to suppliers.

Question 12

Inventory

Answer 12

Goods held for resale.

Question 13

Bank Overdraft

Answer 13

A liability where more money is withdrawn from a bank account than is available.

Question 14

Capital

Answer 14

Money invested by the owner into the business.

Question 15

Internal Equity

Answer 15

Funds from within the business (e.g. retained profits).

Question 16

External Equity

Answer 16

Funds from external sources (e.g. capital contributions).

Question 17

Drawings

Answer 17

Withdrawal of cash or assets by the owner for personal use.

Question 18

Capital Contribution

Answer 18

When the owner invests personal funds/assets into the business.

Question 19

Liquidity

Answer 19

The ability of a business to pay its short-term debts.

Question 20

Working Capital

Answer 20

Current Assets – Current Liabilities; measures liquidity and short-term financial health.

Question 21

Working Capital Ratio

Answer 21

Current Assets ÷ Current Liabilities; assesses if the business can meet its short-term obligations.

Question 22

Balance Sheet

Answer 22

A financial report showing a business’s financial position at a specific time. Shows Assets = Liabilities + Owner’s Equity.

Question 23

Current Assets

Answer 23

Expected to be used or converted to cash within 12 months (e.g. cash, inventory).

Question 24

Non-Current Assets

Answer 24

Long-term assets not expected to be liquidated within a year (e.g. equipment, vehicles).

Question 25

Current Liabilities

Answer 25

Debts due within 12 months (e.g. accounts payable, short-term loans).

Question 26

Non-Current Liabilities

Answer 26

Debts due after 12 months (e.g. long-term loans, mortgages).

Question 27

Similarities: Liabilities & Owner’s Equity

Answer 27

Both are claims against the business’s assets.

Question 28

Differences: Liabilities vs Owner’s Equity

Answer 28

Liabilities are external claims (owed to others); Owner’s Equity is internal claim (owner’s interest).

Question 29

Completing a Balance Sheet

Answer 29

Use the accounting equation. List all assets, liabilities, and equity. Ensure total assets = total liabilities + owner’s equity.

Question 30

Working Out Working Capital

Answer 30

Formula: Current Assets – Current Liabilities.

Question 31

Positive Working Capital

Answer 31

Business can meet short-term debts.

Question 32

Negative Working Capital

Answer 32

Business may struggle with short-term debts.

Question 33

Working Capital Ratio Calculation

Answer 33

Formula: Current Assets ÷ Current Liabilities.

Question 34

Ratio Above 1:1

Answer 34

Indicates good liquidity; the business likely has more assets than liabilities.

Question 35

Ratio Below 1:1

Answer 35

Indicates poor liquidity; liabilities exceed assets, risk of not paying debts.