Unit 3.4 Chp 1-4

34 UNIT 3 FINANCIAL ACCOUNTING FOR A TRADING BUSINESS
Where have we been?
• Assets are present economic resources controlled by the entity as a result of past events.
• Liabilities are present obligations of the entity to transfer an economic resource as a result of past events.
• Owner’s equity is the residual interest in the assets of the entity after the deduction of its liabilities.
• The Accounting equation is ‘Assets = Liabilities + Owner’s equity’, and it must always balance.
• The Balance Sheet is an Accounting report that details the business’s assets, liabilities and owner’s
equity at a particular point in time and is a reflection of the firm’s Accounting equation.
• Assets are classified as current if they are reasonably expected to be converted to cash, sold or
consumed within the next 12 months. Assets that are not held for resale and are reasonably expected to
be used for more than the next 12 months are classified as non-current.
• Liabilities are classified as current if it is reasonably expected they will be settled within 12 months.
Liabilities that are not required to be settled within 12 months are classified as non-current.
• Double-entry accounting means each and every transaction will have at least two effects on the
Accounting equation, and after these effects have been recorded the Accounting equation must balance.
Exercises
Please note: asterisks indicate that an answer for that question is available in the selected answers section at the end of
this book.
Exercise 2.1
Classifying items
Classify each of the following items as assets or liabilities, and as current or non-current:
• Accounts Payable • Bank overdraft
• Cash on hand • Capital
• Accounts Receivable • Equipment
• Mortgage (for both this year and the remainder) • Premises
• Inventory • Vehicles
• Wages owing to employees • Rent paid in advance
• GST payable.
W
B
page 18
Exercise 2.2
Balance Sheet
W B page 19
Mark Florence is the owner of Ponte Jewellers and has provided the following list of the firm’s assets and
liabilities as at 31 May 2025:
Inventory $62 000
Accounts Payable 3400
Loan – NAB (repayable 2025) 30000
Shop fittings 12000
Bank 5900
Accounts Receivable 8600
Office equipment 4100
Required
a Explain what is meant by the term ‘equities’.
b Calculate Capital as at 31 May 2025.
* c Prepare a classified Balance Sheet for Ponte Jewellers as at 31 May 2025.
d Referring to your answer to part ‘c’, explain your classification of Accounts Payable.
e Explain how including ‘Bank’ in the Balance Sheet upholds Relevance.
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