14: Equities

Question 1

Define equity.

Answer 1

Equity is the claim by the owner/shareholders on the net assets of the business.

Question 2

How do you calculate net assets?

Answer 2

Net Assets = Total Assets - Total Liabilities

Question 3

State and explain the accounting theory behind the accounting of capital and drawings.

Answer 3

Accounting Entity Theory states that the activities of a business are separate from the actions of the owner (or shareholders), and all transactions are recorded from the point of view of the business.

Question 4

How do you calculate owner’s equity?

Answer 4

Owner’s Equity = Capital + Profit - Drawings

Question 5

What are the double entries for recording capital and drawings?

Answer 5

Capital:
Dr (+) Assets
Cr (-) Capital

Drawings:
Dr (+) Drawings
Cr (-) Assets

Question 6

What are the double entries for closing income summary and drawings?

Answer 6

Income Summary (profit):
Dr (-) Income Summary
Cr (+) Capital
(Reverse for loss)

Drawings:
Dr (-) Capital
Cr (+) Drawings

Question 7

When does owner’s equity increase?

Answer 7

When the owner contributes additional assets to the business, and when the business makes a profit for the period.

Question 8

When does owner’s equity decrease?

Answer 8

When the owner withdraws business assets for personal use, and when the business incurs a loss for the period.

Question 9

In which financial statement and under which category does capital belong?

Answer 9

In the statement of financial position under the Owner’s Equity section.

Question 10

How do you calculate share capital, dividends declared, and retained earnings?

Answer 10

Share Capital = no. of shares x price of each share

Dividends = no. of shares x price of dividends declared

Retained Earnings = Profit - Dividends

Question 11

How do you calculate shareholder’s equity?

Answer 11

Shareholder’s Equity = Share Capital - Retained Earnings

Question 12

What are the double entries for recording share capital and dividends?

Answer 12

Share Capital:
Dr (+) CAB
Cr (+) Share Capital

Dividends (issued):
Dr (+) Dividends
Cr (+) Dividends Payable

Dividends (paid):
Dr (-) Dividends Payable
Cr (-) CAB

Dividends (immediate payment):
Dr (+) Dividends
Cr (-) CAB

Question 13

What are the double entries for closing income summary and dividends?

Answer 13

Income Summary (profit):
Dr (-) Income Summary
Cr (+) Retained Earnings
(Reverse for loss)

Dividends:
Dr (-) Retained Earnings
Cr (-) Dividends

Question 14

When does shareholder’s equity increase?

Answer 14

When the private limited company issues shares, and when the business makes a loss for the period.

Question 15

When does shareholder’s equity decrease?

Answer 15

When the private limited company declares dividends, and when the business makes a loss for the period.

Question 16

In which financial statement and under which category do share capital, retained earnings, and dividends payable belong?

Answer 16

The statement of financial position.
Share capital and retained earnings belong under the Shareholder’s Equity section.
Dividends payable belongs under the Current Liabilities section.

Question 17

What are the differences between the financial statements of a sole proprietorship and a private limited company?

Answer 17

The equity section of a sole proprietorship consists of only capital while the equity section of a private limited company consists of share capital and retained earnings/accumulated losses.