Day 1 - chapter 2 Flashcards
What is the accounting equation?
assets = liabilities + capital/equity
What is the business entity concept?
owners is separate to business
we only prepare accounts from businesses point of view not the owner
the only cross over is if the owner invests more money into the business or withdrawers from the business
- recorded in capital of position of financial position
What is the capital equation?
opening capital
+/- net profit or (loss) for a year
+ capital injections
- drawings
= closing capital
What does the capital tell us?
how much the business owes to the owner
What is net assets?
assets - liabilities
What is the equation rearranged to have capital the subject?
assets - liabilities = capital
What is the long form of the accounting equation?
assets - liabilities = opening capital +profit + capital injections - drawings
if a sole trader makes a sale, what on the accounting equation will change?
assets increase
capital increases - profit feeds into capital
Long form of accounting equation
Opening capital + liabilities - drawings = assets profit
What is the duality concept?
a transaction had two effects ei. duel effects
What happens if a business sells inventory for more than it cost?
business made a profit
increases capital
What happens if a business sells inventory for less than it costs?
business made a loss
reduces capital
Cost of Sales
opening inventory + purchases - closing inventory
What is the gross profit on a sole trader profit and loss?
revenue - cos
What is net profit on a sole trader profit and loss?
gross profit - expenses
Profit and loss for a sole trader
revenue
- cos
= gross profit
+ other income
-expenses
= net profit
