terms to know

Question 1

drawings

Answer 1

When a sole trader takes value (as money or goods) from his/her business this is called drawings.

Question 2

how to calculate capital at year end

Answer 2

capital at start of year + profit of the year (or - loss of year) - drawings= capital at end of year

Question 3

depreciation

Answer 3

2 types of depreciation – Straight Line (on cost) and Reducing Balance
- straight line: Either a set percentage of the cost of the asset Or (cost – residual value)/useful economic life of the asset.
- Reducing balance depreciation: Is calculated as
A set percentage on the Net Book Value of the asset

Question 4

returns in and returns out

Answer 4

Purchase Returns = Returns Out: This is where you buy something but send it back to the supplier.
This is a credit (a minus) and is part of cost of sales.

Sales Returns = Returns In: This is where you have sold something but the customer sends it back. This is a debit and is treated as an expense of the business and would appear in administrative costs or in selling and distribution costs.

Question 5

Carriage Out and Carriage In:

Answer 5

• Carriage In is an expense paid by the business to get goods transported from a supplier. It is treated as a cost in Cost of Goods Sold.
• Carriage Out is where a business pays to send goods to a customer. This is treated as either an administrative expense or a selling & distribution expense.
  So they are both expenses – they just go in different places!

Question 6

cost of sales (costs of goods sold)

Answer 6

You need to work this out to subtract a number from Revenue to get Gross Profit. Bringing in carriage In and returns Out we get:

Revenue XXX
Less Cost of Sales:
Opening Inventory XXX
Plus Purchases XXX
Minus Returns Out (XXX)
Plus Carriage In XXX
Minus Closing Inventory (XXX)
XXX
Gross Profit XXX

Question 7

net assets

Answer 7

Total Assets – Total Liabilities.
Because of the accounting equation remember that Capital = Total Assets – Total Liabilities, therefore Net Assets can mean Capital or Total Assets – Total Liabilities.
This means that if Net Assets change over the year, there must be an equal change to Capital and to Total Assets – Total Liabilities.

Question 8

Ratios:

Answer 8

> Gross Profit margin = (gross profit/revenue) X100
Return on Equity (ROE) = (profit after tax/equity) X 100
Gearing = (long term loans/long term loans + equity) X 100
Collection days = (Trade receivables/revenue) X 365
Payables days = (Trade payables/cost of sales) X 365
Current ratio = current assets/current liabilities
Quick ratio = (current assets - inventory)/current liabilities
Net profit percentage = (profit after tax/revenue) X 100