Week 2 - Lecture 2 Flashcards
what is the statement of financial position (balance sheet):
Reflects the accounting equation:
- assets = liabilities + equity
- assets - liabilities = equity
this equation shows the resources a business owns (assets), how much it owes **(liabilities), and the owner’s claim on the assets **(equity)
what are net assets?
represents the value of assets that belong to the owners after liabilities are deducted
what are permanent accounts?
these accounts (assets, liabilities, equity) are carried forward to the next accounting period
- example: if an asset is purchased, it stays on the balance sheet until sold or consumed
what is a temporary account?
revenue and expense accounts, which are reset to zero at the end of the period to calculate the profit or loss for that period
Purpose of the Balance Sheet
define liquidity
refers to the ability to meet short-term debts (within a year)
Purpose of a balance sheet
define solvency
refers to the ability to meet long-term debts (more than a year)
Purpose of the balance sheet
how can a balance sheet determine business value?
the value of assets minus liabilities (equity)
purpose of the balance sheet
how can sources of funding be determined from a balance sheet?
- Assets can be funded by debt (liabilities) or capital (owner contributions).
- The balance sheet helps **assess the capital structure **
Purpose of the Balance Sheet
how can efficiency of management be determined through a balance sheet?
The balance sheet helps assess how effectively **management uses debt **and equity to acquire assets and generate revenue
define current assets
- expected to be used or consumed within one year
- eg. cash and cash equivalents, accounts recievable (money owed by customers),** inventory** (products or goods intended for sale), prepayments (eg. prepaid insurance)
define non-current assets
Used in operations for more than one year
- eg. property, plant and equipment (PPE):** tangible assets** like land, buildings, machinery
- eg. Intangible assets: non-physical assets such as patents, copyrights, brand names
define current liabilities
**debts to be paid within one year **
- eg. bank overdraft (short-term borrowing)
- eg. accounts payable (amount owed to suppliers)
- eg. unearned revenue (cash recieved for goods or services to be delivered later)
- eg. provisions (eg. warranty provisions)
define non-current liabilities
debts due after one year
- eg. long-term loans (loans to be repaid over multiple years)
- eg. corporate bonds and debentures (borrowings from the public, issued by the company)
what are the 3 equity types?
-
capital/share capital: funds contributed by the owner(s), such as the purchase of shares by shareholders
2.** retained earnings:** profits that the company has generated but not distributed as dividends - reserves: funds set aside for specific future purposes, such as future purchases or legal fees
what is the double-entry system?
Ensures that each transaction impacts at least two accounts, maintaining the balance of the accounting equation.
explain an example of the double-entry system
If a company’s assets increase by $1 million, this could be balanced by:
- an increase in liabilities (eg. a loan)
- an** increase in equity** (eg. an owner’s contribution)
- or a decrease in another asset (eg. cash used to purchase assets)
