• Profile photo of John Moffat says

      That is correct. A sole trader is personally liable, but shareholders of a limited company are not personally liable.
      (This is explained in Chapter 1, and again in the later chapter on limited companies)

    • Profile photo of John Moffat says

      Revenue is another word for the total sales; purchases is the name given to goods purchased for resale; the trading accounting is what we call the first bit of the Statement of profit or loss (i.e. the calculation of the gross profit).

    • avatar says

      hi John , i have a question
      chapter 2 , test question 3
      I have noted that you deducted profit and capital
      from the net assets , would you explain why

      am abit confused with this formula that says

      And on question 1 same chapter , why are we deducting closing assets from opening

      many thanks

      • Profile photo of John Moffat says

        In both questions I have used the accounting equation that you have typed out.

        In question 3, you are given the net assets at the end of the year. Since the increase over the year is due to the profit + cap int – dwgs, to get the net assets at the start of the year we need to subtract the increase, which means subtracting the profit and cap int, and adding the drawings.

        In question 1, we are not deducting closing net assets from opening net assets. All of the choices involve subtracting the opening from the closing (which gives the increase).

  1. Profile photo of Rustam says

    Mr John, are the drawings are levied by income/profits tax? and if the owner could have managed to make a tax collector believe that it is actually wages, then it ? net profit and ? tax levied…does it actually happen in business entities?
    Thank you sir,

    • Profile photo of John Moffat says

      No. The owner is taxed personally on all the profit made by the business – it makes no difference how much or how little he/she took as drawings (or whatever he/she called the drawings).

      All of the profit belongs to the owner, and so the owner pays tax on all the profit. (That is the ‘real life’ position for sole traders!!)

    • avatar says

      Hi John!
      One thing I didn’t get, why would we consider wages and salaries as (drawings)? Just because it was taken by the owner? From what I know wages and salaries are considered to be business expense called salaries expense or so and yes they are deducted from the capital but they are not called “drawings”, drawings are what the owner takes out the capital for his own personal use, can you explain please?

      • Profile photo of John Moffat says

        Wages and salaries paid to other people are an expense and appear in the Statement of profit or loss.

        However anything taken by the owner is drawings. As I explain in the lecture, it does not matter if the own decides to call it something else (such as salary) – anything the owner takes is drawings and therefore does not appear in the Statement of profit or loss.

        (If I own a business then all the profit belongs to me – it would be ridiculous for me to take out more or less money and have as a result more or less profit, just because I decided to call it a salary)

  2. avatar says

    Hi John!

    Pretty long time! ln a merchandising company limited by shares, if one of the directors or shareholders took out goods which he didnt pay for, how l am going to treat that transcation: which of the accounts will l post it to?

    • Profile photo of John Moffat says

      That will not happen in the exam – if they did not intend to pay for them then it would be illegal!

      However, assuming they were intending to pay for them, then Dr Receivables Cr Sales (as with any customer buying on credit).

  3. avatar says

    if the owner takes out cash as wages…..why would it be a withdrawal….he maybe paying himself and others from the sum that he took from the business. How may we know then what exactly he took fro himself?

    • Profile photo of John Moffat says

      If he is paying himself then it is always drawings – never wages – whatever he/she might call it. Anything the owner takes for himself/herself is drawings whatever he/she calls it.

      If any of the money was in fact being used to pay wages to employees, then the question would tell you (and that money would indeed be wages). If you are not told that then you assume that it is all kept by him or her.

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