week 2 THE FINANCIAL ACCOUNTING SYSTEM

ASSETS = LIABILITY + EQUITY

assets

• what the business owns and they have future economic benefits

• tangible - inventory; buildings; land and property

• intangible - copyrights ; patent ; trademark

• financial assets - account receivables; cash

liabilities

• what the business owns

• obligations that the business must settle in the future

• short-term _accounts payables; bank overdrafts

• long-term_bank loans

Equity

• owner’s claims to the business

• capital

• retained earnings

net asset value/ book value

assets minus liabilities = equity

income(revenue)

any increase in equity that does not come from the owners contributions

expenses

any decrease in equity without the owners’ contributions

the five accounting elements

• assets

• liabilities

• equity

• income

• expenses

double entry

• for every debit entry there must be a corresponding credit entry

current assets

assets expected to be converted to cash within one operating cycle

non current assets

assets that are expected to provide economic benefits for more than one year

current liabilities

obligations that must be settled within one operating cycle

non current liabilities

obligations that can be settled beyond one operating cycle

prepaid assets

this is an assets that the company has already paid form in advance before receiving the goods or services e.g prepaid rent

transaction

a business decision which affects the financial position of the company and result in a decrease or increase in one of the accounts

assets and expenses

• increase on the debit side

• decrease on the credit side

liabilities ; income and equity

• increase on the credit side

• decrease on the debit side

expense matching

expenses are recognized when they incurred even if the payment is made at a later stage

underlying assumptions

underlying assumptions refers to the foundational principles that guide how financial statements are prepared and reported

going concern

a belief that a company will continue to operate foreseeable future without having to liquidate its operations