ACT 111 Chapter 2 - Accounting Principles and Financial Statements

Vocabulary flashcards covering fundamental accounting definitions, financial statements, the double-entry system, and key financial ratios from ACT 111 Chapter 2.

The Accounting Equation

The algebraic relationship in the fundamental accounting model, expressed as $\text{Assets} = \text{Liability} + \text{Equity}$, also referred to as the balance sheet equation.

Capital (Equity)

The value of the investment in the business by the owner(s) that belongs to the owner, often described as the owner's interest and calculated as $\text{Equity} = \text{Owner Capital} - \text{Owner withdrawal} + \text{Revenues} - \text{Expenses}$.

Drawings

Amounts or assets taken out of the business by the owner for personal use, recorded in a separate general ledger account by debiting drawings and crediting the bank account.

Liabilities

The debts owed by the business, including payables to suppliers of goods and services, accounts payable, notes payable, wages payable, bank overdrafts, and bank loans.

Non-Current Assets

Long-term resources of a business that include land and buildings, furniture and fittings, plant and equipment (including computers), and motor vehicles.

Current Assets

Short-term assets of a business that include inventory, receivables, prepayments, and cash at bank or cash in hand.

Double Entry System

An accounting system wherein each transaction affects at least two accounts and is recorded with at least one debit and one credit, requiring that debits equal credits.

Trial Balance

A report prepared by listing each account title and amount from the ledger to verify that total debit balances equal total credit balances, though equality does not guarantee no errors were made.

Income Statement

A fundamental financial statement that shows revenues and expenses for a specific period to determine operating income or net income (loss).

Statement of Owner's Equity

A fundamental financial statement that reports the changes in the owner's equity over a given period, accounting for capital, owner investments, net income, and owner withdrawals.

Balance Sheet

A fundamental financial statement that provides a listing of all asset, liability, and equity account balances as of a specific date.

Statement of Cash Flows

A fundamental financial statement that indicates where a company obtained its cash and how it spent its cash during a period.

Return on Assets (ROA)

A profitability metric (also known as return on investment, or ROI) defined as net income divided by total average assets: $\text{Return on assets} = \frac{\text{Net Income}}{\text{Average Total assets}} \times 100$.

Debt Ratio

A leverage metric calculated as $\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}$, where a higher ratio reflects greater debt risk and a higher probability of being unable to pay debts.

Payables

Debts owed by a business to suppliers for goods and services received, classified as current liabilities.