Please enable JavaScript.
Coggle requires JavaScript to display documents.
The accounting equation (Liabilities (The debts of the business, Represent…
The accounting equation
-
-
-
Initial capital of the business records what the owner has contributed to the business from their private resources to start the business
-
-
The assets of the business must come from somewhere, in fact they are financed by the liabilities of the business
The application of the business entity concept distinguishes the owner and the business, and thus the business incurs a liability back to the owner of the invested capital
-
Recording both aspects of a transaction keeps the accounting equation in balance and is the principle underlying bookkeeping systems
The balance sheet forms the basis of the balance sheet and forms the foundation of the profit and loss account
As a business grows, it is likely to increase the number of transactions that will impact upon the value and the structure of the capital, liabilities and assets
Capital
-
-
-
The size and value may increase over the life of the business, can increase in two ways
- The owner can put more of their own money into the business. The new funds will increase the capital of the business
2.The business itself can great additional capital by selling goods or services at a profit. This profit is earned on behalf of the owner by the business. The profit belongs to the owner and provided it is not taken out the business by the owner, will increase the capital element of the accounting equation
Liabilities
-
-
The external liabilities or obligations, called the creditors, of the business may be classified according to the time period within which they have to be settled
Long term liabilities: includes bank loans which normally do not all due for repayment within one year
Current liabilities : fall due for repayment within one year, eg monies owed to suppliers for goods bought on credit, bank overdrafts and taxes owed to the government
Assets
-
-
Fixed assets
-
-
-
Subdivided into three types, tangible, intangible and investments
Tangible fixed assets
A group of fixed assets owned by an entity with a lifespan greater than 12 months with a physical existence
-
-
-
-
-
Intangible Fixed Assets
Useful not because of their physical characteristics but because the rights they carry can be extremely valuable
Patents: Where the government grants a patent owner the exclusive right for a period of years to produce and sell a particular invention, such as a mini music system
Trademarks (or brand names): The distinctive identifications by which customers recognise a product of service, eg Nike, Coca-Cola, Apple
A group of fixed assets owned by an entity with a lifespan greater than 12 months that do not have a physical existence; they cannot be seen or touched
-
Current assets
-
-
-
Stock, debtors, bank & cash balances
-
The balance sheet
Fixed assets + Current Assets - Current Liabilities - Long term Liabilities = Initial capital + Retained profits
-
-
Certain figures are added to produce subtotals and totals (eg the fixed assets are added together to give a figure for total fixed assets)
-
Working capital (net current assets): The capital available for conducting the day-to-day operations of an organisation, normally the excess of current assets over current liabilities
The profit and loss account shows how the business has generated profits/sustained losses over a specified period
The calculation of profit involves identifying the sales revenue of business and comparing this with the expenditure incurred in generating that income