Accounting Homework 3

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Accounting homework (Chapter 4)

Discussion Questions

4.2 Why do you think it’s important to keep separate the transactions made by the business and its owner? Give an example of a personal transaction that has implications for the business entity.

According to entity concept, every type of entity – sole trader, partnership, company and trust – must keep records of its business transactions separately from any personal transactions. Personal transactions are transactions of the owners, partners or shareholders that are unrelated to the operation of the business. Such transactions are not classified as business transactions because they do not involve an exchange of goods or services between the business entity and another entity. It is because, the accounting reports must reflect only to the business’ financial performance and position. Thus, the owner of the business should not include any personal assets on the entity’s balance sheet and any personal expenditure of the owners in the entity’s expenses in the income statement. An example of personal transaction that has implications for the business entity is drawings. Drawings are the withdrawals of assets from the entity by the owners that are recorded as decreases in equity.

4.8 What is the link between the accounting equation and the balance sheet?

The financial statement known as the balance sheet is based on the accounting equation. The balance sheet reports the entity’s assets, liabilities and equity. Its common format is to show assets net of liabilities (net assets), which are represented by the equity of the entity. The equity section of the equation can be expanded to show the impact of income and expenses for the entity, which will determine the entity’s profit or loss for the reporting period. A profit increases equity and a loss decreases equity.

a) Cash at bank = current asset
b) Land = Non current asset
c) Creditor = Current liability
d) Debtor =...
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