Accounting Fundamentals: Chapter 2 - The accounting equation

These flashcards cover key concepts related to the accounting equation, assets, liabilities, equity, and financial statements.

What is the accounting equation?

Assets = Capital/Equity + Liabilities

Define asset

An asset is something a business owns or controls that is expected to bring future economic benefits

Define current and non-current assets

Current assets: expected to be converted to cash or used up within one year

Non-current assets: long-term assets not expected to be converted to cash or used within one year

Provide two examples of current assets

Trade receivables, Inventory

Provide two examples of non-current assets

Property, vehicles

Define liability

A liability is something a business owes to another party, which must be settled in the future.

Define current liabilities and non-current liabilities

Current liabilities: payable in less than 12 months,

Non-current liabilities: payable in more than 12 months.

Provide two examples of current liabilities

Trade payables, Bank overdraft

Provide two examples of non-current liabilities

These are debts a business owes that are due in more than one year.

1. Long-term bank loan

2. Mortgage

What does capital represent in a business context?

Capital is the owner's investment in the business. It's what's left of the business's assets after all its debts (liabilities) have been paid.

Define trade payables

A trade payable is money a business owes to its suppliers for goods or services bought on credit, which needs to be paid back soon (within a year).

Define trade receivables

Trade receivables are amounts that customers owe a business for goods or services bought on credit, usually expected to be collected within a year.

Define the statement of financial position (SoFP)

A snapshot of all of a business's assets controlled and liabilities owed at a particular date.

Define the statement of profit or loss (SoPL)

It shows whether a business has had more income than expense during a reporting period.

List three types of expenses included in the statement of profit or loss.

Distribution costs, Administrative costs, Interest expenses.