CHAPTER 2 - ACCOUNTING EQUATION

Question 1

What is capital?

Answer 1

Money put into the business by the owner

Profits are added to the capital

Money taken out by the owner (Drawings) are deducted from capital

Treated as a loan (liability) from the owner on the Balance Sheet

Question 2

Define fixed and current assets

Answer 2

Assets

• items owned by company
• used to operate business
• listed in order of permanence

Fixed Assets

• used to generate profit
• kept for more than one year
• used as security
• premises, machinery

Current Assets

• Used / spent within next accounting year
• Part of working capital
• stock, debtors, bank, cash

Question 3

Define Long Terms and Current Liabilites

Answer 3

Money owed by the company to third parties

Part of working capital

Long term - repaid after next accounting year (bank loans, mortgages)

Current - repaid in next year (creditors, overdraft, VAT)

Question 4

What happens to the debtors account when the debtor pays?

Answer 4

The debtor account decreases and the cash account increases

The overal asset value remains the same

Question 5

Name the 3 accounting equations?

Answer 5

Assets (Current & Fixed) - Liabilities =

Capital (or Net Assets)

Current Assets - Current Liabilities =

Working Capital (or Net Current Assets)

Assets + Expenses = Capital + Liabilities + Income

Question 6

What are Capital items and on what report would they be found?

Answer 6

Assets, Liabilities and Capital found on the Balance Sheet

Question 7

What are revenue items and on what report are they found?

Answer 7

income generated and expenses incurred in the day to day running of the business

found on the profit and loss report

Question 8

Explain the use of, rules and order of the Balance Sheet

Answer 8

Use

Shows financial position at a given point in time

Records assets and liabilities (what’s owned and owed)

Proves accounting equation (a - l = c)

Rules

State company name and date (The Balance Sheet as at…)

Liabilities always in brackets to denote minus

Net Assets should always equal Captial

Values in right hand column except Current Assets (middle column) and Current Liabilities (left hand column)

Total each section up including a total of fixed and net curent assets

Order

Fixed Assets - in order of permanence

Current Assets (Middle Column)

Less Current Liabilities (LHC)

Net Current Assets

(then add up fixed and net current assets - no heading)

Less Long Term Liabilities

Net Assets

Financed by (Capital goes under here)