Accounting Basics: Key Terms and the Accounting Equation

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Card 1. What is the basic accounting equation?
AnswerAssets = Liabilities + Owner's Equity.
Card 2. What are assets?
AnswerResources a business owns or controls that bring future benefit, such as cash, inventory and equipment.
Card 3. What are liabilities?
AnswerWhat a business owes to others, such as loans and accounts payable.
Card 4. What is double-entry bookkeeping?
AnswerEvery transaction is recorded in at least two accounts, with total debits equal to total credits.
Card 5. On which side are debits and credits recorded?
AnswerDebits on the left, credits on the right.
Card 6. Which accounts normally have a debit balance?
AnswerAssets and expenses (and owner's drawings).
Card 7. Which accounts normally have a credit balance?
AnswerLiabilities, owner's equity and revenue.
Card 8. How do you compute net income?
AnswerRevenue minus expenses.
Card 9. What does the balance sheet show?
AnswerA company's assets, liabilities and equity at a specific date.
Card 10. What does the income statement show?
AnswerRevenue, expenses and net income or loss over a period.

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Card 11. What is a trial balance?
AnswerA list of all ledger account balances, used to check that total debits equal total credits.
Card 12. What is depreciation?
AnswerSpreading the cost of a long-term asset, like equipment, over its useful life.
Card 13. What is the difference between accounts receivable and accounts payable?
AnswerReceivable: money customers owe the business. Payable: money the business owes suppliers.
Card 14. What is accrual-basis accounting?
AnswerRecording revenue when earned and expenses when incurred, not when cash changes hands.
Card 15. How do you compute working capital?
AnswerCurrent assets minus current liabilities.
Card 16. How do you compute the current ratio?
AnswerCurrent assets divided by current liabilities. Example: ₱200,000 ÷ ₱100,000 = 2.0.