TOPIC 3 Flashcards
(15 cards)
What is the Basic Accounting Equation?
Assets = Liabilities + Owner’s Equity.
What is the Extended Accounting Equation?
Assets = Liabilities + Capital - Drawings + Income - Expenses.
What is Double Entry Accounting?
Double Entry Accounting ensures each transaction has two effects on the accounting equation, maintaining balance in financial records.
What is the purpose of Double Entry Accounting?
It allows you to keep track of the running balances of accounts and ensures the accounting equation remains balanced.
What are the rules of Debit and Credit?
Debit records on the left-hand side, Credit records on the right-hand side. Assets, Drawings, and Expenses increase on the debit side, while Liabilities, Income, and Capital increase on the credit side.
What is the effect of a $500 cash received from service?
Assets increase by $500, and Income increases by $500.
What happens when equipment worth $100 is purchased in cash?
Assets (Cash) decrease by $100, and Assets (Equipment) increase by $100.
What is the relationship between transactions and the financial statements?
Transactions impact financial statements like Income Statement (Expenses/Revenue), Balance Sheet (Assets/Liabilities/Equity), Statement of Changes in Equity (Revenue/Expenses), and Cash Flow Statement (Cash).
What is the difference between Cash Accounting and Accrual Accounting?
Cash Accounting records transactions only when cash is received or paid, while Accrual Accounting records income and expenses when earned/incurred, regardless of cash flow.
What is the issue with Cash Accounting?
Cash Accounting distorts financial performance as transactions are not recorded when they occur, violating relevance.
What is Accrual Accounting?
Accrual Accounting records income when earned and expenses when incurred, regardless of cash flow, allowing for accurate assessment of business performance.
What is an example of an accrual in Accrual Accounting?
Providing services on credit, resulting in an increase in Accounts Receivable and Income.
What is the role of Adjusting Entries in Accrual Accounting?
Adjusting Entries are made at the end of the period to ensure the equation balances and accurately reflects performance, such as prepaid assets and liabilities.
What does Prepaid Asset adjustment involve?
Adjusting for an expense that has been incurred but not yet paid.
What does Prepaid Services adjustment involve?
Adjusting for income that has been earned but not yet received.
