Chapter 14 : Equity

Question 1

Define the term equity

Answer 1

Equity refers to the claim by the owner on the net assets of the business

Question 2

Define the term capital

Answer 2

Capital refers to the contribution of resources into the business by the owner for business use

Question 3

Define the term drawings

Answer 3

Drawings refer to the withdrawal of assets from the business by the owner for personal use

Question 4

Explain the accounting theory behind why businesses should record capital contribution and drawings by the owner.

Answer 4

According to the accounting entity theory, business and owner are treated as two separate entities, and all transactions are recorded from the point of view of the business, only transactions that affect the business are recorded.
Thus, the amount contributed by the owner to the business and the amount withdrawn by the owner from the business for personal use should be recorded as capital and drawings respectively.

Question 5

State what causes the change in owner’s equity

Answer 5

• Additional contribution by owner
• Drawings by the owner
• Profit or loss made during the year

Question 6

Suggest two ways for the owner to increase the owner’s equity of the business

Answer 6

• owner contributes funds or other resources into the business
• business makes profits from selling goods and providing services
• business earns other income such as commission income and discount received

Question 7

Define the term share capital

Answer 7

Share capital is the amount of funds raised by issuing shares to shareholders

Question 8

Define the term dividends

Answer 8

Dividends refer to the portion of retained earnings that is distributed to shareholders

Question 9

Define the term retained earnings

Answer 9

Retained earnings refer to the accumulation of profits and losses that has not been distributed to shareholders yet since operation

Question 10

State what causes the change in shareholder’s equity

Answer 10

• Issuance of shares
• Declaration of dividends
• Profit or loss for the period