Year 10 S2 B&F Revision

5 Key Elements of Accounting

Assets, Liabilities, Equity, Income, Expenses

Assets

Items or cash owned by or owed to the business, e.g. buildings, cash, motor vehicles.

Liabilities

Business debts on unpaid-for transactions, e.g. loans, accounts payable, unpaid wages.

Equity Equation

Eq = C + P - D

The Accounting Equation

A = L + Eq

Equity

Refers to the owner’s contribution/investments in the business. Also the leftover value in assets after liabilities are subtracted.

Capital

Cash or items invested in a business.

Profit

Income - Expenses for a period.

Drawings

Assets an owner withdraws from the business for personal use.

Income

Increases in equity other than contributions from holders of equity claims, e.g. sales of goods or services, discounts or interest received.

Expenses

Decreases in equity, other than those relating to distributions to holders of equity claims, e.g. wages, rent, insurance, electricity, advertising.

Define Income Statement

An accounting report that shows income and expenses for a period.

Purpose of the Income Statement

Determine profit/loss and measure financial efficiency.

Define Balance Sheet

A financial statement setting out assets, liabilities and equity on any one day.

Purpose of the Balance Sheet

Conveys a company’s financial position and health at a specific date.

What is the relationship between Net Assets and Equity?

Net Assets = Equity, always.

Structure of the Income Statement

Sales, Cost of Sales, Gross Profit, Other Income, Other Expenses, Profit/Loss

List 3 types of expenses on the income statement.

Selling & Distribution, General & Admin, Financial

Recall the double-entry principle.

Every business transaction has a debit and credit.

Recall the double-entry rule.

“Debit the receiver, credit the giver.” An increase in assets should be a debit.

What are the columns on each side of a ledger account?

Date, details, amount.