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

Equity equation

Equity = Capital + Profit – Drawings

Why does sales revenue increase equity?

Sales revenue increases profit, and profit belongs to the owner, so equity increases.

(Equity = Capital + Profit – Drawings)

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 one example of a non-current liability

Mortgage

Define capital

same as equity, the owner’s claim on the business’s assets after liabilities are deducted.

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)

Assets, liabilities, and equity at a specific date.

Define the statement of profit or loss (SoPL)

Income minus expenses over a period.

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

Distribution costs, Administrative costs, Interest expenses.

Define income

Income is money earned from normal business activities, such as sales or services.

What is the dual impact of a transaction?

Every transaction affects at least two parts of the accounting equation.

Example: Buying inventory on credit → Assets increase, Liabilities increase.

What are drawings and how do they affect the accounting equation?

Drawings are money taken out by the owner for personal use and reduce equity.