Chapter 14 : Equity Flashcards
Define the term equity
Equity refers to the claim by the owner on the net assets of the business
Define the term capital
Capital refers to the contribution of resources into the business by the owner for business use
Define the term drawings
Drawings refer to the withdrawal of assets from the business by the owner for personal use
Explain the accounting theory behind why businesses should record capital contribution and drawings by the owner.
According to the accounting entity theory, business and owner are treated as two separate entities, and all transactions are recorded from the point of view of the business, only transactions that affect the business are recorded.
Thus, the amount contributed by the owner to the business and the amount withdrawn by the owner from the business for personal use should be recorded as capital and drawings respectively.
State what causes the change in owner’s equity
- Additional contribution by owner
- Drawings by the owner
- Profit or loss made during the year
Suggest two ways for the owner to increase the owner’s equity of the business
- owner contributes funds or other resources into the business
- business makes profits from selling goods and providing services
- business earns other income such as commission income and discount received
Define the term share capital
Share capital is the amount of funds raised by issuing shares to shareholders
Define the term dividends
Dividends refer to the portion of retained earnings that is distributed to shareholders
Define the term retained earnings
Retained earnings refer to the accumulation of profits and losses that has not been distributed to shareholders yet since operation
State what causes the change in shareholder’s equity
- Issuance of shares
- Declaration of dividends
- Profit or loss for the period
