Business Finance and Accounting
Business Finance and Accounting tests sources of finance by time and type, the accounting equation, double entry and the three financial statements.
Core rules
- Accounting equation: Assets = Capital + Liabilities. Expanded: A = C + L + (Revenue − Expenses) − Drawings.
- Double entry: debits increase expenses, assets and drawings; credits increase liabilities, income and capital (DEAD CLIC).
- Capital expenditure buys non-current assets; revenue expenditure covers day-to-day running.
- Profit is not cash: credit sales, loan repayments and drawings cause the two to diverge.
- Depreciation: straight-line = (cost − residual value) ÷ useful life.
Worked example
Start with E10,000 capital in the bank. Buy equipment E3,000 cash: bank E7,000, equipment E3,000. Buy stock E2,000 on credit: stock E2,000, creditors E2,000. Sell goods costing E1,200 for E2,000 cash: bank E9,000, stock E800, profit E800. Assets = 9,000 + 3,000 + 800 = E12,800. Capital = 10,000 + 800 = E10,800; liabilities = E2,000. Check: 10,800 + 2,000 = E12,800.
Traps
- Recording drawings as an expense - they reduce capital.
- Treating a loan received as income.
- Mixing debtors, who owe you, with creditors, whom you owe.
- Preparing a profit statement without adjusting for closing stock.