Topic 2 - Accounting equation + double-entry

Question 1

Capital expenditure

Answer 1

Capital Exp. in SOFP
Amounts which carry forward to next opening SOFP
User over number of periods (contributes to their revenue)
e.g. motor vehicles, fixtures + fittings
Includes cost of buying NCA

Question 2

Accounting equation

Answer 2

Assets = Capital + liabilities

(rearrange)
Assets - Liabilities = Capital
Net resources of business = Owners interest in business

Question 3

Revenue Expenditure

Answer 3

Revenue Exp. in SOPL
Matched against period’s revenue
Value of 0 at end of period
e.g. heat + light, rent

Question 4

How does a transaction get into the ledger

Answer 4

Books of prime entry first, then ledger
Transactions of the same type are put into the same book of prime entry which is periodically posted to the ledger in total

Question 5

How are transactions recorder in the ledger

Answer 5

Double-entry bookkeeping
(Each transaction affects accounts in a way which keeps the accounting equation balanced - A=L+C)

Question 6

Debits

Answer 6

Left hand side

INCREASE
Assets + Expenses

DECREASE
Liabilities
Equity
Income

Question 7

Credits

Answer 7

Right Hand Side

INCREASE
Liabilities
Equity
Income

DECREASE
Assets
Expenses

Question 8

Cash transaction vs Credit transaction

Answer 8

Cash - goods/services paid for in cash/cheque/bank transfer when received/delivered

Credit - payment made some time after delivery

Question 9

Cash transaction ledger effects

Answer 9

Receipts:
Debit Cash/Bank account
Credit relevant account

Payments:
Debit relevant account
Credit cash/bank account

Question 10

Credit transaction ledger effects

Answer 10

Sales:
Debit customers account
Credit sales revenue account

Purchases:
Debit purchases account
Credit suppliers account