Double Entry Bookkeeping

Question 1

What is the dual effect principal

Answer 1

It states that every transaction has two financial effects

Question 2

What is the separate entity principal?

Answer 2

The owner of the business is, for accounting purposes, a completely separate entity from the business itself.

Any money that the owner pays into the business as capital must be accounted for as money that the business owes back to the owner.

Question 3

What is the accounting equation

Answer 3

Assets = Liabilities

Assets = Liabilities + Capital

Assets - Liabilities = Capital + Profit - Drawings

Question 4

Define business

Answer 4

An organisation that regularly enters into different transactions

Question 5

List and define the 3 types of business

Answer 5

Sole trader: organisations that are owned and operated by one person

Partnership: organisations owned by two or more people working in common with a view to making a profit

Company: organised recognised in law as “persons” in their own right. A company may own assets and liabilities in its own name and its accounts must meet certain obligations imposed by legislation.

Question 6

What is the difference between management and financial accounts?

Answer 6

Management accounts: usually prepared on a monthly basis to present timely financial and statistical information to business managers. Helps managers make day-to-day and short term decisions.

Financial accounts: prepared annually, mainly for the benefit of people outside the management, such as owners, HRMC, banks, customers, suppliers and the government.

Question 7

List the two principal financial statements

Answer 7

Statement of profit and loss

Statement of financial position

Question 8

What is the statement of profit or loss

Answer 8

A summary of the businesses transactions (income and expense) for a given period.

Question 9

What is the statement of financial position

Answer 9

A statement of the assets and liabilities of the business at a given date.

This date is the end of the period covered by the statement of profit or loss

Question 10

Define sales revenue

Answer 10

Income generated from the trading activities of the business

Question 11

Define cost of sales

Answer 11

The cost of buying or producing goods for resale

Question 12

Define gross profit

Answer 12

Profit remaining after the costs of sales have been removed from the sales revenue

Question 13

Define sundry income

Answer 13

Other types of income that aren’t generated by the primary trading activities of the business

Question 14

Define expenses

Answer 14

The day to day running costs of the business

Question 15

Define net profit or loss

Answer 15

The profit or loss remaining after expenses have been deducted

Question 16

Define asset

Answer 16

Something owned or controlled by a business, available for use in the business

Question 17

Define non-current asset

Answer 17

An asset which is to be used for the long term in the business and not resold as part of trading activities.

Eg: company car

Question 18

Define current asset

Answer 18

A short term asset of the business which can be used in the near future.

Eg: cash

Question 19

Define revievable

Answer 19

Somebody who owes the business money (eg: a credit customer)

An example of a current asset

Question 20

Define non-current liability

Answer 20

An amount owed by the business and due to be paid in the longer term (after 12 months)

Question 21

Define liability

Answer 21

An amount owed by the business - an obligation to pay money at a later date

Question 22

Define payable

Answer 22

Somebody that the business owes money to (eg: a credit supplier)

An example of a liability

Question 23

Define capital

Answer 23

The amount that the owner has invested in the business.

This is owed back to the owner and is therefore a special liability of the business

Question 24

Define drawings

Answer 24

Amounts withdrawn from the business by the owner for personal use.

Drawings may be cash or inventory

Question 25

Define capital expenditure

Answer 25

The purchase of, or improvement of non-current assets

Question 26

Define revenue expenditure

Answer 26

The day to day running costs of the business

Question 27

Define capital income

Answer 27

Income from the sale of capital assets of the business

Question 28

Revenue income

Answer 28

Income generated from the sale of goods and services