2: The Accounting Equation

Question 1

What is the accounting equation? And what is it also called as?

Answer 1

Assets

Liabilities
+ opening capital
+ capital injections
+ profit
- drawings

Also called the Statement of Financial Position equation

Question 2

Define non-current assets and current assets?

Answer 2

Non-current assets: acquired for ongoing, long-term use in business
- can be purchased outright or leased by business (right of use)
- ie. Land and buildings, vehicles, plant and machinery.

Current assets: acquired for resale or expected to be realised within the normal course of trading
- inventory, receivables, cash

Question 3

What are non-current and current liabilities?

Answer 3

Non-current liabilities: long-term liabilities payable more than 12 months after the SOFP date
- ie. Loan

Current liabilities: payable within 12 months of the SOFP date
- ie. Trade payables, overdraft

Question 4

The name for owners putting money in and out of the business

Answer 4

In: capital injections
Out: drawings

Reported as capital in SOFP

Question 5

What is the calculation for capital for sole traders

Answer 5

Opening capital
+ capital injections
+ net profit
- drawings

End balance

Question 6

What is gross profit and what is net profit?

Answer 6

Gross profit: the profit that has arisen from sales less costs of the core activities of the business

Net profit: the profit left after other expenses of the business have been taken into account

Question 7

What are expenses?

Answer 7

The running costs of the business