LUBS1225 Lecture 2: Introducing the Financial Statements & Financial Position

Vocabulary practice flashcards covering account classifications, financial statements, the accounting equation, and accounting conventions from LUBS1225 Lecture 2.

Asset

A resource controlled by a business that is expected to produce future economic benefits for the enterprise.

Current Assets

Short-term assets that are held for sale or consumption during the normal operating cycle, expected to be sold within a year, held principally for trading, or held as cash and cash equivalents.

Non-Current Assets

Long-term resources used in an organisation over several years in order to generate wealth (such as property, plant, and equipment).

Tangible Assets

Physical assets that can be touched and seen, commonly used in business operations to produce goods or provide services (e.g., machinery, buildings, land, vehicles).

Intangible Assets

Non-physical assets holding economic value (such as patents, trademarks, goodwill, and brands) that are included on the balance sheet only when acquired through an arm's-length transaction with a measurable value.

Money Measurement Concept

The accounting rule dictating that an economic resource is recognized as an asset on the statement of financial position only if its monetary value can be measured with reasonable certainty.

Cash and Cash Equivalents

Liquid financial resources consisting of physical cash and short-term, highly liquid investments that are readily convertible into cash within 90 days (e.g., commercial paper, short-term government bonds).

Liabilities

Debts or obligations owed by a business to third parties or creditors, representing legal claims against the business's assets.

Current Liabilities

Debts or financial obligations due to be settled within one year (e.g., bank overdrafts, trade payables, accruals, and short-term loans).

Non-Current Liabilities

Debts and borrowings of a business that are due for repayment after more than one year (e.g., long-term bank loans).

Trade Receivables

Amounts owed to a business by customers who have bought goods or services on credit and have not yet paid.

Trade Payables

Amounts owed by a business to suppliers for goods or services purchased on credit that have not yet been paid for.

Equity

The residual interest and claim of the owners or shareholders in the assets of a business after deducting all of its liabilities ($\text{Assets} - \text{Liabilities}$).

Capital

The specific term used to represent the owner's equity or interest in an unincorporated business, such as a sole trader, rather than share capital.

Drawings

Money or assets withdrawn from the business by a sole trader or partner for personal use.

Revenue (Sales / Turnover)

The gross inflow of economic benefits or income earned by a business from its everyday activities, primarily the sale of goods or provision of services.

Expenses

Costs incurred in the process of running a business and enabling commercial operations in order to generate revenue.

Matching Convention

The accounting principle stating that when determining profit or loss for an accounting period, expenses must be matched directly against the revenues that they helped to generate.

Statement of Financial Position (SOFP / Balance Sheet)

A primary financial statement showing a business's assets, liabilities, and equity at a specific point in time (the end of the accounting period).

Statement of Profit or Loss (SOPL / Income Statement)

A financial statement displaying revenues earned and expenses incurred to determine the net profit or loss generated over a specific accounting period.

Statement of Cash Flows

A financial statement highlighting the major cash inflows and outflows (movements of cash) across operating, investing, and financing activities during a period.

Accounting Equation

The fundamental formula underlying double-entry bookkeeping and the statement of financial position: $\text{Assets} = \text{Liabilities} + \text{Equity}$ (or rearranged as $\text{Assets} - \text{Liabilities} = \text{Equity}$).

Cost of Sales (Cost of Goods Sold)

The direct cost of acquiring or producing the goods sold during an accounting period, calculated as $\text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}$.

Gross Profit

The basic trading profit calculated as the excess of sales revenue over the direct cost of sales ($\text{Sales Revenue} - \text{Cost of Sales}$).

Operating Profit (Profit Before Interest and Tax)

The earnings derived from ordinary operations, calculated by subtracting operating expenses (e.g., administrative and distribution expenses) from gross profit before deducting finance costs and tax.

Net Profit

The residual profit of a business after all operating expenses, finance costs (interest), and corporation taxes have been deducted.

Trial Balance (TB)

A bookkeeping schedule that lists all the debit and credit balances extracted from the general ledger accounts to check that total debits equal total credits.

T Account

A visual layout of an individual account in the general ledger resembling the letter 'T', where debit entries (Dr) are recorded on the left and credit entries (Cr) on the right.