Chapter 2 (Balance sheets) Flashcards
2.1: Balance sheets
Define a balance sheet
A balance sheet is a report prepared by a business showing its financial position at the end of a reporting period.
2.1: Balance sheets
Identify the accounting equation
Assets=Liabilities + Owners equity
Or alternatively
Owners equity=Assets-Liabilities
2.1: Balance sheets
Briefly outline the layout of a T-Form balance sheet
The T-Form presentation of a balance sheet lists the accounting equation (Assets=Liabilities+Owners equity) horizontally across the page.
It contains the Assets on the left of the balance sheet. Whilst recording equities (liabilities and owners equity) on the right of the balance sheet.
2.1: Balance sheets
Briefly outline the layout of a balance sheet under the “Narrative format.”
1: The narrative format can show the accounting equation (Assets=Liabilities+Owners equity) vertically down the page. Displaying Assets as equal to equities.
2: The narrative format can also show the accounting equation (Owners equity=Assets-Liabilities) vertically down the page to highlight the Owners equity (or net worth) of a business. Displaying Owners equity equal to the net assets of a business (Assets-Liabilities).
2.1: Balance sheets
Define the term “Working capital.”
The term “working capital,” refers to liquid funds usable in the day-to-day activities of a business.
It’s expressed as a value and displays the liquidity of a business’s current assets.
The working capital of a business is determined by deducting its current liabilities from its current assets.
2.2: Classifying loans
Define an “interest only,” loan and describe how it’s included in a balance sheet.
An interest-only loan requires a business to make regular payments of interest over the life of the loan. However, the principal (the amount actually burrowed) doesn’t need to be paid until the end of the loan’s life.
Meaning the principal amount doesn’t need to be paid until the date the loan expires.
An interest-only loan is classified as a non-current liability until a specific date is reached where the principal amount must be paid within 12 months. Once this date is reached the loan is then classified as a current-liability.
2.2: Classifying loans
Define an “installment loan,” and describe how it’s classified in a balance sheet.
An installment loan requires a business to make regular and scheduled repayments of principal throughout the loan’s life. Which is paid on top of interest payments also transferred as well.
An installment loan is classified as both a current and a non-current liability within a balance sheet.
The amount owed within the next 12 months of the current reporting period is classified as a current liability. With the remaining principal being classified as a non-current liability.
2.4: How transactions impact the balance sheet
Outline how revenues and expenses impact a balance sheet.
A revenue increases the owner’s equity and an expense decreases the owner’s equity.
Therefore, if a sale is made, the difference between the sale and any incurred costs is added to the figure of owner’s equity.
2.4: How transactions impact the balance sheet
Define a GST liability
A GST liability results when a business has collected more GST than they’ve paid. When this occurs, an obligation towards the ATO is created. Therefore, the GST clearing acocunt is classified as a current liability under a balance sheet. (Accounts payable is why)
2.4: How transactions impact the balance sheet
Define a GST refund
A GST refund results when a business has paid more GST than they’ve collected. In this occurrence, the business is owed a refund from the ATO. Therefore, the GST clearing account is classified as a current asset under a balance sheet. (Accounts receivable is why)
