The Accounting Equation

Question 1

What is an asset? Examples

Answer 1

A resource controlled by the entity as a result of past events from which future economic benefits are expected to flow.

Inventory, cash, buildings, vehicles, prepayments, tax receivables, furniture, equipment

Question 2

What is a liability? Examples

Answer 2

A present obligation which is expected to result in an outflow of resources.

Accruals, loans, overdraft, mortgage, tax payable, payables, deferred income

Question 3

What is capital?

Answer 3

Also known as equity - residual interest in assets of entity after deducting all its liabilities. What the business owes the owner.

Question 4

Where do profit and loss go in capital?

Answer 4

profit added
losses deducted

Question 5

What are drawings?

Answer 5

Sole traders taking capital from their earnings for their own use

Question 6

What income and expenses does the SPL include?

Answer 6

Income from:

Profit on disposal of NCA
Dividends/interest received
Rental income form property not used by business

Expenses:
Distribution costs - selling and delivering to customers
Admin - management and admin
Finance costs - interest expenses

Question 7

Double entry for purchase of goods

Answer 7

Dr purchase expense, Cr cash/ trade payables
Increases inventory, decreases cash/ increases payables

Question 8

Double entry for sales of goods

Answer 8

Dr cash/ trade receivables, Cr sales income
Decreases inventory

Question 9

Double entry for adjusted inventory

Answer 9

Dr inventory, Cr cost of sales