Chapter 1 - introduction

Question 1

1. What are the 3 types of businesses?
2. Explain the difference between their ownership and liability.

Answer 1

1. Sole trader (a business owened by one person)
2. Partnership (a business owned by 2+ people)

No legal seperation between business and owner. Owner is personally liable for losses

3. Company ( a business owned by multiple sharholders) → company is looked at individually and sharholders are not liable.

Question 2

Charity do not make profits and losses. What other terms are used?

Answer 2

• Surpluses
• Deficits

Question 3

1. What is a current asset?
2. What is a non current asset?
3. What is the equation to calculate assets?

Answer 3

1. An asset held < 12 months (quickly changed for cash)
2. An asset held > 12 months
3. Assets = capital + liabilities

Question 4

1. What is capital?
2. What is the equation for capital

Answer 4

1. How mcuh money is a business owes back to its owner or sharholder. (money invested)
2. Capital = opening capital + profit for year + capital investments - drawings

Question 5

How is capital expeniture incurred?

Answer 5

• Aquiring a long to asset (a non current asset)
• An improvment to increase the revenue of a long term asset
• (legal fees, delivery costs, non private number plates)

Question 6

How is Revenue expenditure incurred?

Answer 6

• Trade purposes / purchase of raw materials or items for resale, wages etc
• To maintain the existing earning capacity of a long term asset
• One off yearly fees (insurance / licencing)

Question 7

1. What is depreciation?
2. What is the point of it
3. When does it start to be accounted for?
4. How is it calculated?

Answer 7

1. The decrease in value of a non current asset per year
2. It enables the expense of a non current asset to be spread over its life, and gives a value for an asset after its purchase.
3. As sson as the asset becomes usable
4. Depriciation amount per year = (cost - residual value) / estimated life use

Question 8

What 3 factors affect the deprecition charge?

Answer 8

1. Cost
2. Estimated residual value → the estimated value of an asset at its life end
3. Estimated useful life →how long the asset will be usale for