Chapter 5 - The dual concept of accounting

Question 1

What is dual concept ?

Answer 1

This concept highlights the requirment that for every transaction there are entries/records in two accounts

Question 2

What is the equations needed for dual entry accounting ?

Answer 2

Assets = Equity + Liabilties

Question 3

What is the definition of Assets, Equity and Liabilites ?

Why is the distingush between these important.

Answer 3

Assets - Items which hold value e.g equipment or cash/stock

Equity - The value owed to the owner

LIabilites - Anything which is a payment that needs to be made

Question 4

How do you calculate equity ?

Answer 4

Equity = Opening Equity + Capital Injections + (Profit - Losses) - Drawings

Question 5

What are the Two inventory systems?

Answer 5

They relate to the calculation of cost of sales.

Periodic inventory system - This system means that cost of sales is calculated at the end of year or period. Known as year end adjustments. Closing inventory for the cos equations is calculated using one of the follwing
1) First in first out
2) Last in first out
3) Weighted average

This system makes accounting simplfied as all that is recorded is purchase/expense and cash/payable

Perpetual inventory system - This system records every cost of sale and inventory transaction throughout the year

what is noted is the increase in inventory and the cash/payable

Question 6

Why is the type of inventory systen important for equity calculation ?

Answer 6

As it determines the type of information that is noted at the specific time.
Periodic - Just expense and cash

Inventory feeds into Cost of sales which feeds into P/L calculations which feeds into Equity calcualtion