Accounting Equation and Financial Statements

A decrease in assets, often due to selling an asset for less than its original cost. This event reduces a company's net income and shareholder equity.

The systematic allocation of the cost of a tangible asset over its useful life. Depreciation is an expense that reduces both net income and shareholder equity.

Giving customers more time to pay for their purchases. This can increase sales but also increases the risk of bad debts.

Taking longer to pay suppliers for purchases made. This can save cash in the short-term but can damage relationships with suppliers.

A financial statement that summarizes an entity's assets, liabilities, and equity at a specific point in time. It provides a snapshot of a company's financial position.

The accounting equation is a fundamental principle in accounting that states that assets are equal to the sum of liabilities and equity.

Receiving payment from a customer reduces the amount owed to the business. This decreases liabilities and increases assets.

Purchasing goods on credit increases liabilities as the business now owes money to the supplier. It also increases assets as the business now has the goods.

The double-entry bookkeeping system is a fundamental accounting principle. Assets, liabilities, and equity have to be recorded with equal debits and credits. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

A debit is a record of an increase in assets, expenses, and dividends. It's also used to record a decrease in liabilities, income, and owner's equity.

Credit is a record of a decrease in assets, expenses, and dividends. It's also used to record an increase in liabilities, income, and owner's equity.

The accounting equation represents the fundamental principle of double-entry bookkeeping. It states that the total assets of a company are equal to the total liabilities plus equity. It is used to monitor the financial position of the business.

Trade payables are liabilities that arise from goods or services purchased on credit from other businesses.

The payment of an invoice to a supplier is a transaction that involves a decrease in the liability known as 'trade payables' and a decrease in the asset known as 'cash at bank'.

The double-entry bookkeeping system involves recording each transaction separately. The total amount of debits and credits must be equivalent. This ensures the fundamental accounting equation remains balanced.

To correctly record an invoice raised to a credit customer, debit accounts receivables because they are the assets you will receive payments from and credit sales. This is also a credit to sales because it is a revenue generation event.

The value of inventory returned to the supplier is removed from the closing inventory. The company has effectively reduced their inventory by the £1,800 cost.

An understatement of closing inventory in the current year leads to an overstatement of profit for the current year. This is because the cost of goods sold is underestimated, resulting in a higher profit. However, the next year's profit will be understated as the cost of goods sold is overestimated.

The closing inventory should only include items that are still held at the end of the period.  Items that were sold during the period should be excluded, regardless of whether they were sold for a profit or a loss.

A company must value their inventory at cost. Even if the company sold items for more than their original cost, the inventory value should remain at the original cost.

When inventory is counted on a date after the year-end but before the financial statements are finalized, the inventory figures are adjusted to reflect the value at the year-end. The cost figure reflects the value of the stock as of the year-end, not the date the inventory is counted.

When a company receives payment from a customer for a previously sold good or service, they should debit "Cash at Bank" and credit "Receivables" to reflect the decrease in the outstanding amount owed by the customer.

When a business makes a payment to a supplier for goods or services received, they should debit "Payables" and credit "Cash at Bank" to reflect the decrease in the outstanding amount owed to the supplier.

A non-current asset is an asset that is expected to be used for more than one year. Land is classified as a non-current asset because it is expected to provide benefits for many years.

The net amount in a VAT account represents the difference between the VAT collected from customers (output VAT) and the VAT paid to suppliers (input VAT). If output VAT is greater, there will be a credit balance in the account, indicating VAT due to the tax authority. If input VAT is greater, there will be a debit balance, indicating VAT owed by the tax authority.

When a company sells goods to customers on credit, they should record the sale by debiting "Receivables" and crediting "Revenue". This reflects the increase in the amount owed by customers and the increase in the company's revenue.

When a business records a sale where payment is received immediately, they should debit "Cash at Bank" and credit "Revenue". This reflects the increase in cash and the increase in the company's revenue.

A debit entry to the payables account means that the amount the company owes to the supplier is being reduced. It should be credited when a payment is made to the supplier.

When recording the receipt of payment from a customer who has taken advantage of an early settlement discount, the company should debit "Cash at bank" and credit "Receivables" to reflect the decrease in the amount owed by the customer. If the discount is taken, it should be credited to "Revenue", as a discount given to the customer is considered a reduction in earnings.

A temporary account used to hold transactions that cannot be immediately posted to their regular accounts. This helps to identify and rectify errors.

In accounting, the posting of debits and credits must always balance. This means that the total value of debits for a transaction must equal the total value of credits.

This is a common error in accounting software where the system may be programmed with the wrong rates or formulas, leading to inaccurate calculations in financial statements.

This type of error occurs when only one side of a journal entry is recorded in the accounting software, leaving the other side unbalanced. This will lead to an inaccurate representation of the transaction in the accounts.

Mistakes made when typing in data into the software. It could be wrong numbers, letters, or incorrectly selecting accounts.

This method calculates a company’s capital by adding up assets and subtracting liabilities. It ensures that the accounting equation is followed (Assets = Liabilities + Equity).

The trial balance is a document that lists all the account balances of a company at a specific point in time. The total of all debit balances must equal the total of all credit balances, illustrating the double-entry bookkeeping principle.

An audit involves examining a company’s financial records to ensure that they are accurate and reliable. This is typically done by an independent third party. The auditor analyzes the records, verifies transactions, and assesses the company’s internal controls.

FIFO (First In, First Out) assumes that the oldest inventory items are sold first. This method values ending inventory based on the cost of the most recent purchases.

Damaged goods are valued at their net realizable value (NRV). NRV is the estimated selling price less any costs of completion and selling expenses.

Inventory valuation in the context of financial accounting refers to determining the cost of the goods that are still on hand at the end of an accounting period.

The cost of goods sold (COGS) is the direct cost of producing the goods sold by a company. It includes the cost of raw materials, direct labor, and manufacturing overhead.

Inventory holding costs are the expenses incurred by a company for storing its inventory. These expenses include storage costs, insurance, and obsolescence.

The value of inventory is calculated by multiplying the number of units in inventory by the cost per unit. This cost per unit can depend on the inventory valuation method used.

Inventory turnover is a measure of how quickly a business is able to sell its inventory. It is calculated by dividing the cost of goods sold by average inventory.

Obsolete inventory is inventory that is no longer in demand or is no longer saleable. It can occur when products become outdated or when there is a shift in consumer preferences.