2- Double-entry bookkeeping - introduction

Question 1

Sole trader

Answer 1

Organisations that are owned & operated by one person.

Question 2

Partnership

Answer 2

These are organisations owned by 2 or more persons working in common with a view to making a profit.

Question 3

Company

Answer 3

These are organisations recognised in law as ‘persons’ in their own right. A company may own assets & incur liabilities in its own name. The accounting of these organisations must meet certain minimum obligations imposed by legislation.

Question 4

Management accounts

Answer 4

Usually prepared on a monthly basis to present timely financial & statistical info to business managers. This info helps managers to run the business more effectively, making day-to-day & short-term decisions.

Question 5

Financial accounts

Answer 5

These are prepared annually, mainly for the benefit of people outside the management, such as the owners of the business, HMRC, banks, customers, suppliers & the government.

Question 6

What are the 2 main financial statements?

Answer 6

1. The statement of profit or loss
2. The statement of financial position

Question 7

The statement of profit or loss

Answer 7

This is a summary of the businesses transactions (income & expenses) for a given period.

Question 8

The statement of financial position

Answer 8

This is a statement of the assets & liabilities of the business at a given date. This date is the end of the period covered by the statement of profit or loss.

Question 9

Sales revenue

Answer 9

Income generated from the trading activities of the business.

Question 10

Cost of sales

Answer 10

The cost of buying or producing the goods for resale.

Question 11

Gross profit

Answer 11

The profit remaining, after the cost of sales have been deducted from sales revenue.

Question 12

Sundry income

Answer 12

Other types of income that aren’t generated by the primary trading activities of the business.

Question 13

Expenses

Answer 13

The day-to-day running costs of the business.

Question 14

Net profit or loss

Answer 14

The profit or loss remaining after expenses have been deducted from gross profit & sundry income.

Question 15

Asset

Answer 15

Something owned or controlled by a business, available for use in the business.

Question 16

Non-current asset

Answer 16

An asset acquired for long-term use in the business & not resold as part of the trading activities, e.g. The purchase of a delivery van.

Question 17

Current asset

Answer 17

A short-term asset of the business which is to be used in the business in the near future i.e. Cash or something that will soon be converted into cash.

Question 18

Receivable

Answer 18

Is an example of a current asset. A receivable is someone who owes the business money i.e. A credit customer.

Question 19

Non-current liability

Answer 19

An amount owed by the business & due to be repaid after more than 12 months.

Question 20

Liability

Answer 20

Is an amount owed by the business, i.e. An obligation to pay money at some future date.

Question 21

Payable

Answer 21

Is an example of a liability. A payable is someone the business owes money to i.e. A credit supplier.

Question 22

Capital

Answer 22

The amount which the owner has invested in the business. This is owed back to the owner & could be regarded as a special liability of the business.

Question 23

Drawings

Answer 23

Amounts withdrawn by the business owner for their own personal use: drawings may be of cash or items of inventory.

Question 24

Capital expenditure

Answer 24

The purchase of, or improvement of, non-current assets.

Question 25

Revenue expenditure

Answer 25

The day-to-day running costs of the business.

Question 26

Capital income

Answer 26

Income from the sale of capital assets of the business.

Question 27

Revenue income

Answer 27

Income generated from the sales of goods or services.

Question 28

What are the 3 basic principles based upon double-entry bookkeeping?

Answer 28

• The dual effect principle
• The separate entity principle
• The accounting equation

Question 29

The dual effect principle

Answer 29

This states that every transaction has 2 financial effects.

E.g. If you spend £2,000 to buy a car & pay for it by bank transfer, you will have £2,000 less money in the bank, but you will have acquired an asset worth £2,000.

Question 30

The separate entity principle

Answer 30

This states that the owner of the business is a completely separate entity from the business itself. Therefore the money that the owner pays into the business as initial capital has to be accounted for as an amount that the business owes back to the owner. In the same way, any money the owner withdraws from the business, known as ‘drawings’, is treated as a reduction of the initial capital that is owed back to the owner. We always look at this from the POV of the business.

Question 31

The accounting equation

Answer 31

At its simplest:

Assets = Liabilities

If we treat the owner’s capital as a special liability then it is:

Assets = Liabilities + Capital

Or we could rearrange to:

Assets - Liabilities = Capital

Profit will increase the capital & drawings will reduce it:

Assets - Liabilities = Capital + Profit - Drawings