Chapter 2 - The Accounting Equation Flashcards
What are some common assets used by trading business’s?
Bank - cash kept in the business’s bank account
Debtors - the amount owed to the business by customers who were sold goods on credit
Stock - goods purchased and help for resale to customers
Fixtures and Fittings - items used in the business premises, such as shelving or window coverings
Vehicles - cars, trucks and vans for business purposes
Premises - the building(s) from which the business activity is conducted
What are some common liabilities that are used by trading business’s?
Bank overdraft - an amount owed to the banks when a business spends more than is currently in its bank account
Creditors - the amount owed by the business for goods it has bought on credit
Loan - an amount that is borrowed from a bank or other financial institution and must be repaid at some time in the future
Mortgage - a specific type of loan that is secured against property
What is equities?
It’s the claims on the assets of the business, consisting of both liabilities and owner’s equity
What is the accounting equation?
The rule that states that assets must always equal liabilities plus owners equity
A=L+OE
(ALOE)
What is a balance sheet?
An report that details the business’s assets, liabilities and owner’s equity at a particular point in time
What must a balance sheet include?
- who the document is for
- what the document is
- when it was prepared
EG) Morgan’s Merchandise - Balance sheet on June 30th 2015
What is the item listed under owner’s equity?
The word CAPITAL followed by the name of the owner
What is Classification?
The grouping of items under common characteristics.
Eg. Assets are categorised under assets in a balance sheet.
-There can be further classifications of current and non-current.
What are current Assets?
Current assets refer to resources that are controlled by the entity as a result of past events, from which a future economic benefit is expected to flow to the entity WITHIN the next 12 months.
This can be things such as cash in the bank for the company or the amounts owed by debtors.
What are non-current Assets?
Non-current assets refer to resources controlled by an entity as a result of past events, from which future economic benefit is expected to flow to the entity FOR MORE THAN in the next 12 months.
This includes things likes business premises, vehicles or shopping fixtures and fittings.
If an asset is expected to be sold, used or turned into cash within a year, what should it be classified as?
A current asset as it provides future economic benefit within 12 months.
If a business’s premise is classified, what should it be classified as?
A non-current asset as it provides future economic benefit for more than 12 months. Land is an ideal long term non-current asset.
What are current liabilities?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits WITHIN the next 12 months.
Liabilities that are obliged to be met within 12 months.
Eg. creditor loans, bank overdraft
What are non-current liabilities?
A present obligation of the entity arising from past events, the settlement of which is expected to result in the outflow of resources embodying economic benefits IN MORE THAN 12 months.
Liabilities that are obliged to be met in more than 12 months.
Eg. Loans (long term), mortgages
Classifying Loans!
If parts of a loan are due in the next 12 months but other parts are due after 12 months what do you classify it as on your balance sheet?
BOTH!!!
Repayments due within 12 months are held under current liabilities whereas the remaining is classified under non-current liabilities.
Check the date when the loan has to be repaid; this is the key to whether it is current or non-current
