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It’s explained in the FA1 notes. Download free FA1 course notes form here:
Capital is a liability of the business By owner’s of the business. What does it mean???
please explain.Initially,businesses raise money in two ways
1 Their owners pay in capital
2 They borrow from banks or suppliers.Obviously the borrowings are a liability of the business that will have to be paid back at some point. However, strictly owners’ capital is also a liability that the business owes back to the owners. It would be paid back to the owners were the business to come to an end.
Subsequently, if the business makes a profit, those profits are also owed the owners. They can leave the profits in the business, adding to their capital or have the profits paid out either by drawings (an unincorporated business) or by dividends (a company).
Whatever i under stood from this topic is that we did sale 10000 and discount allowed 2000 to the mr A on credit .then the entry will be ..Mr. A debit , discount allowed debit and sales credit .
This is the double entry system .
If i am not correct plz correct meguide me plz
x starts business with 50000 cash,buying inventory 10000 from cash and paying business expenses of 10000 .inventory is purchased on credit for 5000. following these transactions, what is the capital of x’s business?The purchase of inventory for cash just swaps one asset (cash) for another (inventory) so does not alter capital.
The purchase of inventory on credits increases one asset er (inventory) and also increases a liability (payable) so there is not net effect and this does not alter capital.
Paying business expenses of 10,000 reduces teh asset of cash (an increases the expense of a business). Expenses reduce capital because that that value has gone, never to be seen again.
THerefore capital = 50,000 – 10,000 = 40,000.
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