Accountancy Book 1

What is capital?

Capital in Accounting is also known as owner's interest or equity.

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Accounting value of a business

The value of a business is the difference between total assets and liabilities as recorded in a balance sheet. The overall value is known as the net assets, net worth or capital of the business

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What is the difference between the cash made or lo

The amount of cash any business has made or lost in a period is easy to calculate. It is the difference in cash held at the beginning and the end of that period. 

If the cash position is greater at the end of the period than the beginning, then the business has generated a positive cash flow. If less, then the result will be a negative cash flow.

The profit or loss made in the same period is all income earned less all expenses incurred in generating that income. All income and all expenses include cash as well as credit transactions. 

If total income is greater than total expenses in a period than a profit has been made regardless of if cash flow is negative or positive. If less, a loss has been suffered regardless of the cash flow. 

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Owner's interest

The capital represents the owner's investment in a business and is thus commonly known as owner's interest. 

Every enterprise starts with no money. It needs the owner to put in capital (their own or borrowed cash). Other assets such as inventory (goods) to be sold, are bought for future financial benefit. 

Business need to separate out the money put into a business by the owner from the liabilities it incurs which need to be repaid. 

The money 'owing' to the owners is known as capital.

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Sole trader's business's

All debts of the business are their personal debts, unlike a limited company, they have unlimited liability for honouring these debts. 

They must still keep their accounting records of the business separate from their own personal affairs. This is known as the business entity concept and is relevant to small sole traders like multinational companies. 

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Profit and Loss in Balance sheets

If a business makes a profit, then capital figure in the balance sheet increases by the same amount. If a loss, then capital figure decreases to the extent of the loss. 

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True and Fair

True and Fair means that financial statements are accurate, complete and not misleading in any way

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Income statements and balance sheets

Income statements and balance sheets report on the past financial performance and position of an organisation. 

These reports are normally required by tax officials and expected to follow certain formats and principles. This legal requirement states in the UK that financial statements, (Income Tax Act 2007) should be fair and true. In the USA, the equivalent legal requirement is that they should be a faithful presentation. 

The financial reports today are based on a double-entry system, which was developed in Italy over 600 years ago.

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