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Name: Group: Date:: FA2 Managing Financial Records

This document discusses the accounting equation and how it applies to a fruit and vegetable stall business owned by Courtney Wilder. It goes through 5 iterations of the accounting equation to show how the business transactions affect assets, capital, liabilities, profits, and drawings. The accounting equation balances the business's assets with its capital, retained earnings, and liabilities. It also introduces the business equation that relates profit, increase/decrease in net assets, drawings, and capital introduced in the current period.

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Suy Yanghear
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268 views4 pages

Name: Group: Date:: FA2 Managing Financial Records

This document discusses the accounting equation and how it applies to a fruit and vegetable stall business owned by Courtney Wilder. It goes through 5 iterations of the accounting equation to show how the business transactions affect assets, capital, liabilities, profits, and drawings. The accounting equation balances the business's assets with its capital, retained earnings, and liabilities. It also introduces the business equation that relates profit, increase/decrease in net assets, drawings, and capital introduced in the current period.

Uploaded by

Suy Yanghear
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

G

Sunday, July 16, 2017 10:31 AM

FA2 Managing Financial Records


Chap 1 Exercise
Lecturer: Christine Colon, ACCA

Name:
Group: Date:

Accounting equation 1: Assets = Capital + Liabilities

On 1 September 20X8, Courtney Wilder decides to open up a stall in the market, to sell West Indian fruit and
vegetables. He has saved up some money and has $1,000 to put into his business.

Accounting equation 1: Assets = Capital + Liabilities

Courtney Wilder uses some of the money invested to purchase a market stall from George Sobers, who is
retiring from his fruit and vegetables business. The cost of the stall is $600.

He also purchases some fruit and vegetables from a trader in the wholesale market, at a cost of $340.

Accounting equation 1: Assets = Capital + Liabilities

This leaves $60 in cash, after paying for the stall and goods for resale, out of the original $1,000. Courtney
keeps $30 in the bank and draws out $30 in small change. He is now ready for his first day of market trading on
3 September 20X8. How does the accounting equation look now?

accounting equation exercise Page 1


Accounting equation 2: Assets = (Capital introduced + Retained profits) + Liabilities
Suppose that on 3 September Courtney has a very successful day. He is able to sell all of his fruit and
vegetables, for $500 cash.

. How do we reflect this in the accounting equation?

Accounting equation 2: Assets = (Capital introduced + Retained profits) + Liabilities

Accounting equation 3:

Assets = Capital introduced + (Retained profits - Drawings) + Liabilities

Courtney Wilder has made a profit of $160 from his first day's work, We will suppose that Courtney decides to
pay himself $100, in what he thinks of as 'wages', as a fair reward for his day's work.

We can therefore restate the accounting equation again.

Assets = Capital introduced + (Retained profits - Drawings) + Liabilities

accounting equation exercise Page 2


The accounting equation 4:

Assets = Capital introduced + Liabilities


+ Profit retained
in previous periods
+ Profit earned in
current period
- Drawings

On 10 September, Courtney purchased more fruit and vegetables for cash, at a cost of $400. He hired his aunt
Sheila for the day, whom he agrees to pay a wage of $50 at the end of the day.

Courtney and Sheila sold all their goods for $760 cash. Courtney pays Sheila her wage of $50 and draws out
$150 for himself. How do these transactions affect Courtney's capital?

The accounting equation before trading begins on 10 September, and after trading ends on 10
September, can be set out as follows.

The accounting equation 4:

Assets = Capital introduced + Liabilities


+ Profit retained
in previous periods
+ Profit earned in
current period
- Drawings

The accounting equation 5

Assets = Capital introduced in previous periods + Liabilities


+ Profit retained in previous periods
+ Profit earned in current period
+ Capital introduced in current period
- Drawings in current period

Suppose on 10 September, in addition to all the other transactions, Courtney decides to hire a van at a cost of
$30 to transport the fruit and vegetables, paying for the hire out of cash from his own pocket. How would this
affect the accounting equation at the end of 10 September?

Assets = Capital introduced in previous periods + Liabilities


+ Profit retained in previous periods
+ Profit earned in current period
+ Capital introduced in current period

accounting equation exercise Page 3


Assets = Capital introduced in previous periods + Liabilities
+ Profit retained in previous periods
+ Profit earned in current period
+ Capital introduced in current period
- Drawings in current period

The business equation:


P=I+D–C

P = profit earned in current period


I = increase/decrease in net assets in current period
D = drawings in current period
C = capital introduced in current period

accounting equation exercise Page 4

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