chapter 7

Question 1

profit

Answer 1

the amount by which the income (or revenue) exceeds the expenses of the business

Question 2

loss

Answer 2

the amount by which expenses exceed the income (or revenue) of the business

Question 3

unlimited liability

Answer 3

the owner of a business is personally responsible for all the debts and losses of the business

Question 4

advantages of sole traders

Answer 4

being in full control of their own business
running a business that is linked to one of their hobbies or interests
hoping that it will provide them with a large income

Question 5

why is it vital for a sole trader to make profit

Answer 5

the profit belongs to the sole trader
sole traders have unlimited liability

Question 6

disadvantages of being a sole trader

Answer 6

a limit on how much finance can be introduced to the new business
having to work very long hours
being expected to have a wide range of skills and knowledge to run every aspect of the business
not having another owner to discuss ideas with when they are considering several possible alternatives

Question 7

statement of profit or loss

Answer 7

account prepared periodically to find the profit or loss made by a business.

Question 8

gross profit

Answer 8

the profit calculated by deducting the cost of sales from the net sales in the statement of profit or loss.

Question 9

revenue

Answer 9

the sales of goods or services made by a business.

Question 10

cost of sales

Answer 10

the net cost of the goods sold to customers.

Question 11

net sales

Answer 11

the difference between the original sales made and the amount of refunds that were given.

Question 12

profit or loss for the year

Answer 12

the profit or loss calculated by adding other income to the gross profit and deducting the business expenses.

Question 13

what does the statement of profit or loss show

Answer 13

gross profit
profit or loss for the year
expenses

Question 14

inventory

Answer 14

the unsold goods of a business involved in buying and selling at a particular point in time

Question 15

carriage inwards

Answer 15

the additional delivery cost paid by a business in excess of the purchase price of the goods purchased for resale

Question 16

carriage outwards

Answer 16

the additional cost charged by the seller to deliver goods sold

Question 17

cost of sales

Answer 17

opening inventory + purchases - closing inventory = cost of sales

Question 18

who receive credit items

Answer 18

it is often only given to customers who have proved to be reliable and the business may have carried out checks before deciding to offer credit terms.

Question 19

disadvantage of credit

Answer 19

the business needs money to pay for purchases and day to day expenses. cash (or settlements) discounts can be used to encourage businesses pay faster, it involves the customer having the option of paying a smaller amount if payment is made before a specified date

Question 20

why is discount allowed recorded as an expenses

Answer 20

the discount is dependent on payment and not on the sales
theoretically, when a discount is offered, there is no guarantee that the customer will take advantage of it

Question 21

how is discount received recorded

Answer 21

it is kept separate from purchases figures. it is added to the gross profit figure

Question 22

other income

Answer 22

income earned by the business from sources other than its main sources. added to the gross profit

Question 23

how are drawings recorded

Answer 23

the double entry to record this would be
debit: drawings
credit: purchases

Question 24

wages

Answer 24

wages are added to the work related to cost of sales