12. Equity

Question 1

How to close drawings account end of the financial year?

What the double entries?

Answer 1

Close to “capital” account.

Dr Capital total drawings
Cr Drawings total drawings

Question 2

Which two transactions that must be done to the capital account at the end of the financial year? What are the double entries?

Answer 2

1.Transfer total drawings to capital account
Dr Capital total drawings
Cr Drawings total drawings

2. Transfer profit or loss to the capital account.
   Dr Income summary profit amt
   Cr Capital profit amt

Or

Dr Capital loss amt
Cr Income summary loss amt

Question 3

What causes the change in capital?

Answer 3

1. Capital contribution
2. Drawings by owner
3. Profit for the year or loss for the year

Question 4

Double entries for new shares issued

Answer 4

Dr cash at bank $XX
Cr share capital $XX

• $XX = price per share number of new shares issued

Question 5

Double entries for declare dividend

Answer 5

Dr Dividend $AA
Cr Dividend payable $AA

*$AA = dividend per share x total number of shares

Question 6

What are the two transactions that must be done to the retained account at the end of the financial year? What are the double entries

Answer 6

1.Transfer Dividend to Retained earning
Dr Retained earnings $AA
Cr Dividend $AA

2. Transfer profit or loss to the retained earningsl account.
   Dr Income summary profit amt
   Cr Retained earnings profit amt

Or

Dr Retained earnings loss amt
Cr Income summary loss amt

Question 7

Double entries for paid dividend next year

Answer 7

Dr Dividend payable $AA

Cr Cash at bank $AA

Question 8

Define dividend.

Answer 8

Part of the profits distributed to the shareholders.

Question 9

Defined retained earning

Answer 9

Accumulated profits over the years that are not distributed to the shareholders

Question 10

Define share capital

Answer 10

The amount of money business raised by selling company shares.

Question 11

What causes the shareholder’s equityof the business to change?

Answer 11

1. Issue of new shares
2. Profit for the year or losses for the year
3. Dividend declared in the current financial year.

Question 12

What is a negative balance of retained earning called?

Answer 12

Accumulated losses

Question 13

Nature of theses account

a. Share capital
b. Retained earnings
c. Dividend
d. Dividend payable

Answer 13

a. Share capital - CR
b. Retained earnings - CR
c. Dividend - DR
d. Dividend payable – CR

Question 14

Advantages of limited company over sole proprietor

Answer 14

1. Limited liability for the shareholders
2. Easier for the companies to raise funds as banks are more willing to grant loans to companies
3. Continuity as company has a longer business lifespan than a sole proprietorship which may end at the death of a sole proprietorship.
4. Limited company is able to issue shares to rise capital