2. The Accounting Equation

Question 1

What is the dual effect of transactions and what relevance does it have to the double-entry system?

Answer 1

-The dual effect/double entry principle relies on the fact that in every commercial transaction, there are two effects. This dual effect forms the basis of accounting
-The double-entry system, subsequently is an example of this rule

Question 2

-What is the accounting equation?
-What is an alternative equation?

Answer 2

• Net assets = Proprietor’s funds
• Assets - Liabilities = Capital + Profits (-Losses) - Drawings
  (if liabilities were greater than assets then we would get net liabilities)

Question 3

What is capital?

Answer 3

The amount the owner has introduced to the business

Question 4

What are drawings?

Answer 4

Amounts withdrawn from business by owner for his own use. Deducted because amounts no longer owed by business to owner