Accounting Equation
What is the basic accounting equation?
Assets = Liabilities + Equity
On which side of the ledger is a debit recorded?
The left side
Name the financial statement that summarizes a company's revenues and expenses.
The Income Statement.
What is a transaction in accounting?
An economic event that is recorded in the financial statements.
What is “accrual accounting”?
A method where revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
If a company has total assets of R80,000 and total liabilities of R30,000, what is its equity?
R50,000
hich type of account increases with a credit: an asset or a liability?
Liability.
Which financial statement shows a company’s financial position at a specific point in time?
The Balance Sheet or Statement of Financial Position
When a company makes a sale on credit, what two accounts are affected?
Accounts Receivable (debit) and Revenue (credit).
Define “amortization” in accounting.
The gradual write-off of an asset's value over time
How would an increase in liabilities without a corresponding increase in assets affect the accounting equation?
It would reduce the equity.
If a cash sale is made, which accounts are affected and how?
Cash (debit) increases and Revenue (credit) increases.
What does the Cash Flow Statement report?
The inflows and outflows of cash
How would you record a transaction where inventory is purchased on account?
Debit Inventory and credit Accounts Payable.
What is “depreciation”?
The systematic allocation of the cost of a tangible asset over its useful life.
If a transaction involves purchasing equipment by taking on a long-term liability, which parts of the accounting equation are affected?
Assets increase (equipment) and liabilities increase.
What is the effect of debiting an expense account?
It increases the expense, which ultimately reduces net income.
How does the Statement of Retained Earnings link the Income Statement and Balance
It shows how net income is used (or not used) to increase retained earnings on the balance sheet.
What transaction occurs when a company pays off a portion of its debt
Cash decreases (credit) and Liabilities decrease (debit).
What does “liquidity” refer to in accounting?
The ease with which assets can be converted into cash.
Explain why the accounting equation must always balance.
Because every financial transaction affects at least two accounts, ensuring that the relationship between assets, liabilities, and equity remains in balance
Explain the dual aspect concept in relation to debits and credits
Every transaction affects at least two accounts in equal and opposite ways, keeping the books in balance.
Describe the purpose of notes to financial statements.
They provide additional details and context for the numbers presented in the financial statements
Explain how adjusting entries are related to transactions.
Adjusting entries record revenues and expenses that have occurred but are not yet recorded, ensuring that financial statements are accurate.
Explain the term “fiscal period.
A specific time period for which financial statements are prepared.