The Accounting Equation

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The Accounting Equation
Definition of a sole trader Definition of a Partnership Definition of a Limited Partnership Definition of a Limited Company Definition of a Public Limited Company Definition of Financial Accounting Management Accounting Statement of Profit and Loss Statement of Financial Position Revenue Income Cost of Stock Sold Gross Profit Capital & Sundry Income Revenue Expenditure Net Profit or Loss Non-Current Asset Current Asset (Receivables) Current Liability (Payables) Long-Term Liabilities Net Assets Petty Cash Day Book Invoice or Credit Note for a Credit Sale Payment Received from a Credit Customer Till receipt from Cash Sale Invoice or Credit Note Received for a Credit Purchase Payment Made to a Credit Supplier Till Receipt for a Cash Purchase The Sales Day Book Cash Receipts Day Book Discount Day Book The Purchase Day Book Cash Payment Day Book Petty Cash Day Book Net Assets Equation

Definition of a sole trader

A sole trader is a self employed person who owns and runs their own business as an individual. A sole trader business doesn't have any legal identity separate to its owner, leading many to say that as a sole trader you are the business. Whereas for accounting purposes only, a sole t rad er is recognised as a separate entity to the business.

Definition of a Partnership

A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities. In a general partnership company, all members share both profits and liabilities. Each partner is responsible for the actions of the other partners.

Definition of a Limited Partnership

An English limited partnership must be formed between two or more persons and must carry on a business in common with a view of profit. Unlike a general partnership, a limited partnership has two categories of partner: one or more general partners who manage the business of the partnership and one or more limited partners who do not participate in the management of the partnership and who have limited liability.

Definition of a Limited Company

An LC limited company is a general form of incorporation that limits the amount of liability undertaken by the company's shareholders. It refers to a legal structure that ensures that the liability of company members or subscribers is limited to their stake in the company by way of investments or commitments.

Definition of a Public Limited Company

A PLC designates a company that has offered shares of stock to the general public. The buyers of those shares have limited liability. Meaning, they cannot be held responsible for any business losses in excess of the amount they paid for the shares.

Definition of Financial Accounting

In simple terms, financial accounting is the legally required practice of accounting for all money going in and out of an organisation. It involves recording, classifying, summarising, and analysing all financial transactions. At the year-end these are summarised into the final accounts statements that are used internally as performance measures and externally for the purposes of Tax and VAT calculations.

Management Accounting

Management accounting is the process of preparing internal reports about business operations that help managers make short-term and long-term decisions. It helps a business pursue its goals by identifying, measuring, analysing, interpreting and communicating information to managers. These reports are not a legal requirement.

Statement of Profit and Loss

Is a summary of the trading activities of the company. This statement will record all income earned by the business including income from normal trading activities and sundry trading activities. All costs and expenses incurred by the business on a daily basis to generate income is also recorded in this statement. Income minus cost of goods sold equals gross profits. Gross profit minus daily expenses equals net profit.

Statement of Financial Position

Records the net worth of the business. It lists assets in the form of current and non-current assets. Current assets are expected to become liquid within one year. Non-current assets are expected to be used within the business to generate an income for in excess of one year. Take n from the total of all assets are short-term liabilities that fall due for payment within one year and long-term liabilities that fall due for payment after one year. The result of all assets minus all liabilities is net assets or the net worth of the business.

Revenue Income

Is income generated from the trading activities of the business.

Cost of Stock Sold

Is the cost of the stock or services sold to generate the trading income of the business.

Gross Profit

Is the profit remaining, after the cost of stock sold has been deducted from sales revenue.

Capital & Sundry Income

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

Revenue Expenditure

Are the day-to-day running costs of the business.

Net Profit or Loss

The profit or loss remaining after all expenses have been deducted.

Non-Current Asset

An asset which is to be used for the long term in the business and not resold as part of the trading activities, for example, the purchase of a delivery van.

Current Asset (Receivables)

A short-term asset of the business which is to be used in the business in the near future i.e. cash or something that will soon be converted into cash.

Current Liability (Payables)

Is an amount owed by the business, i.e. an obligation to pay money at some future date. It will be payable within 1 year.

Long-Term Liabilities

Is an amount owed by the business, i.e. an obligation to pay money at some future date. It will be payable in excess of 1 year.

Net Assets

Is the sum of all assets minus all liabilities. Net Assets is the worth of the business.

Petty Cash Day Book

Drawings - Are amounts withdrawn by the owner for their own personal use: drawings may be of cash or items of inventory.

Profit - Is an amount taken from the business by a sole trader. The money taken will come from profits earned.

Capital - Is the amount which the owner has invested in the business; this is owed back to the owner and is, therefore, a special liability of the business.

Invoice or Credit Note for a Credit Sale

Credit sales are purchases made by customers for which payment is delayed. A credit customer will be issued with an invoice. The customer will make a delayed payment usually 30 days later allowing customers to generate cash with the purchased goods, which is then used to pay back the seller. Thus, a reasonable payment delay allows customers to make additional purchases. The use of credit sales is a key competitive tool in some industries, where longer payment terms can be used to attract additional customers. If there is a problem with some or all of the goods, a credit note will be issued.

Payment Received from a Credit Customer

Is the settlement of an invoice previously sent when the goods were issued.

Till receipt from Cash Sale

Cash sales refer to sales that incur payment on the spot. A customer can use cash, credit card or cheque to settle their account and will be issued with a receipt.

Invoice or Credit Note Received for a Credit Purchase

A credit purchase is to purchase something you receive today that you will pay for later. These are usually transactions with regular suppliers where you hold an account. Term for payment are often, but not wholly 30 days. It can be less and occasionally, particularly on major purchases, longer. The invoice is received at the point the goods are received. If there are any discrepancies in the order, a credit note will be issued.

Payment Made to a Credit Supplier

Is the settlement of an invoice previously sent by the supplier when the goods were supplied.

Till Receipt for a Cash Purchase

Purchase A cash purchase occurs when a business pays for goods or services immediately upon ordering or delivery. No credit is extended by the supplier. No account payable is created. A till receipt is issued at the point of purchase.

The Sales Day Book

In a typical business there will be numerous sales transactions of these transactions, the credit sales only are recorded in the sales day book. If a credit note is issued, the credit note will be recorded in the sales returns day book.

Cash Receipts Day Book

The cash receipts day book records cash received from credit customers, cash received from cash sales and cash received from any sundry sales that are not related to the normal trading activities of the company.

Discount Day Book

Sometimes suppliers offer or we offer our customers a settlement discount if they pay earlier. The discount offered, if taken, is recorded in the Discount Day Book.

The Purchase Day Book

In a typical business, there will be numerous purchase transactions made by the business. Of these transactions, the credit purchases only are recorded in the purchase day book. If a credit note is issued, the credit note will be recorded in the purchase returns day book.

Cash Payment Day Book

This book records all payments made to suppliers against credit purchase invoices and all purchases made by cash that are larger than petty cash transactions.

Petty Cash Day Book

Most businesses will operate a petty cash system called the Imprest System. A set amount of say £500 is entered into petty cash. When money is spent on minor purchases such as tea or coffee it is taken from petty cash. The cash taken will be replaced with the till receipt and a petty cash voucher for the amount spent. At any given time, vouchers plus cash left will equal the original amount of the petty cash float.

Net Assets Equation

Capital - Is the amount which the owner has invested in the business; this is owed back to the owner and is, therefore, a special liability of the business.

Profit - Is an amount taken from the business by a sole trader. The money taken will come from profits earned.

Drawings - Are amounts withdrawn by the owner for their own personal use: drawings may be of cash or items of inventory.