• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Principles of accounting

Extracts from this document...


PART A Introduction A sole trader is a form of business with only one owner. The owner usually manages the business with the help of family members or a few paid employees. The owner contributes all the capital and takes all the profits and bears all the losses. The relationship between the total assets, owner's equity and liabilities of a sole trader is expressed very clearly in the accounting equation that is Assets = Owner's equity + Liabilities. Accouonting Entity concept According to the accounting entity concept, the business is regarded as an accounting entity to itself, separate and distinct from its owner. Thus from the viewpoint of the business, any capital contributed by the owner is something that the business owes the owner. It is called owner's equity as distinguished from liabilities which represent the debts that the business owes the other parties. The owner's equity represents the owner's financial interest in the business. From the business point of view, the owner's equity is a liability. In the course of business' operations, the individual elements in the accounting equation, that is the owner's equity, assets and liabilities in the accounting equation will change, as new transactions take place. Increase in the owner's equity can be brought about by additional to capital and net profit from the year's business activities. ...read more.


The business may use funds borrowed from the sources outside the business. These outside sources or external creditors have a claim on the assets of the business. Liabilities are classified according to their period of repayment. They are as follows: Long-term liabilities- These are debts of the business which have a repayment period of more than one accounting period, e.g. loans and mortgages. Current liabilities- These are short-term debts of the business that are usually settled within one accounting period, e.g. creditors and bank overdrafts. Capital When a proprietor invests in his business, he credits the Capital Account. Profits, since they increase capital, are credited, while drawings from capital are debited to the account as they decrease capital. EXAMPLE: Nat is a sole trader. The following Trial Balance was extracted from his books on 31 December 2005. Debit ($) Credit($) Debtors 380 Drawings 1000 Cash in hand 30 Cash at bank 420 Fixtures and fittings 1180 Stock, 1 January 2005 805 Purchase 4200 Carriage inwards 40 Rent and rates 820 Light and water 90 Miscellaneous expenses 130 Returns outwards 30 Capital 2055 Creditors 515 Sales 6450 Discount received 45 _____ 9095 9095 The following adjustments have to be taken into consideration before preparing the final accounts: 1. ...read more.


However, the business may have to take this important information into consideration when making business decisions. Objectivity There must always be objective verifiable evidence for reporting any accounting information. The evidence that a business transaction has taken place and the details pertaining to that transaction are contained in a source document. Source documents are examples of objective evidence of transactions that have taken place. These documents include receipts, invoices, cheques and vouchers. Each source document initiates the process of recording a transaction and all accounting entries are supported by these source documents. It is this desire for objectivity that also explains why historical cost rather than current market value forms the basis of valuation of assets. The cost price of the purchase of an asset can be objectively verified through the documentary evidence of its purchase, either in the form of an invoice (in the case of a credit purchase) or a receipt (in the case of a cash purchase). Conclusion Although not every business compiles its records in exactly the same way, all business organizations observe the general accounting principles, adapting them to the special requirements of each business. The difference between the accounts of these three types of business organizations (sole proprietorship, partnership, a company) lies in the recording of the owner's capital and the distribution of profits. The keeping of other accounts remains the same. 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    Tesco do have other aims regarding environmental issues including reducing the levels of CO2 emissions from their distribution and transportation. It means that they should cut down on their total carbon footprint making them look better in the public eye.

  2. Profit and Loss Account

    that over the course of my first year, I will spend �39,577. The cost of sales in my case would include burgers buns, pizza toppings, cheese, burger fillings etc. Over the years this figure will increase as my business increases in popularity through customer loyalty, promotions and advertising and also

  1. The purpose of accounting is to keep track of transactions and recording revenue and ...

    All revenue expenditures have to be taken away from the income by the firm. All revenue items will be taken to the profit and loss accounts. The differences between capital and revenue expenditures can change the fundamental principle of a correct accounting.

  2. Introducing Accounting - Purpose, Information, Statements and Ledgers

    Capital Cash RM RM RM RM Jan 1 Cash 15,000 Jan 1 Capital 15,000 We credit the capital account to show there is an increase in capital and we debit the cash account to show there is an increase in current asset.

  1. Business Income and Expenditure

    a business newly they may worry businesses might able to pay back the money on time. So they check the credit history if they have good report they may able to give out as much loan as they can could trust them to pay back within the limited time.

  2. Explain the difference between capital income, revenue income, capital expenditure and revenue expenditure.

    It also may it set of customers. This will increase the value of the business and also may increase the selling price of the business. A sum of money is added to the value of the business to reflect the value if this goodwill.

  1. Explain the difference between capital and revenue items of expenditure and income for a ...

    This percentage is called commission. Fixed Assets Fixed assets are items owned by a business that will remain in the business for a reasonable period of time. These are shown on a business?s balance sheet and include land and buildings, office equipment, machinery, furniture and fittings, and motor vehicles.

  2. I am going to produce a report which assesses the working capital management of ...

    Acid test ratio: this is similar to current ratio because it measures liquid assets in relation to current liabilities and also the amount of liquid assets available to pay the debts of the business. The differences between current ratio and acid ratio is that, current ratio looks at liquidity and

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work