What is the accounting equation? (rearange it in all the ways)
give examples for each
- A=L+OE A-L=OE A-OE = L
- Assetts: Cash, accounts receivable, supplies, prepaid expenses, - Equipement, building, land vehicle
- Liabilites: Accounts payable, Short term - loans - mortgage payables
Owners equity - owners capital
Definiton of Assets
Things the business OWN that has value
Definition of Liabilities
Things you OWE / have to pay off
Definition of owners equity
The amount of money you actually have after paying off liabilities and turning all the assets into cash
Definition of capital
Cash or other assets the owner puts into the business to help it
Definition of Net worth
Synonym for owner’s equity. The total value after liabilities are subtracted from assets.
Definition of Liquidity
How easily an asset can be turned into cash
Definition of Account receivable
Accounts that owe the business money (they owe me money)
Definition of Account payable
Accounts that i owe money to (I owe them money)
Definiton of Creditor
A person or business a person owes money to
Definiton of Debtor
A person or business that ows money to the company
Whats claims against the assets?
Liabilities claimed by who?
Owners equity by who?
- Who has legal rights on the companies assets
-Liabilities: claims by creditors - people the business owes money to
-Owners Equity: claimed by the owner - whats left for them after debts are paid
How to calculate caims against the assets?
Creditor’s Claim (Liabilities)=Assets−Owner’s Equity
Owner’s Claim (Equity)=Assets−Liabilities
What are Uncollectable debt
What would happenen on a balance sheet?
When customers dont pay what they owe the company
That amount is no longer counted as an asset.
It reduces total assets and equity.
what is a Partially collected debt
What would happenen on a balance sheet?
If only part of what a customer owed to a company is payed
Subtract what’s unpaid from Accounts Receivable.
Only the collected amount is considered secure.
Who gets paid first when you gotta pay ? who gets whats left?
Liabilites/creditores. Owner gets whatever is left
Business Entity Concept meaning
The business is treated a separate from its owner(s) (personal and business finances are kept separately)
The cost principle concept: meaning
Assets are recorded at the original purchase cost and not the current market value (recorded at the price you paid. Not what its worth now)
The continuing concern concept meaning
Assuming the business will continue operating and not shut down soon (dont treat the business like its closing unless there is a clear reason.
What are business transactions?
how many accounts are involved/effected?
Any financial event that changes the company’s assets, liabilities, or owner’s equity and can be measured in money.
Always involves 2 accounts
what are Source documents (2 examples)
The original record that proves a business transaction happened (recipts, cheque)
The Objectivity Principle meaning (example)
Financial information must be based on facts and evidence, not personal opinion (like a receipt).
what is a Current ratio
A measure of a business’s ability to pay its short-term debts using its short-term assets.
how to calculate current ratios and show your work
Current Ratio= Current assets
——————–
Current liabilities
List them both, add then, divide current assets and current liabilities
