Chapter 14 Equities Flashcards
Define the term equity
Equity refers to the claim by the owner(s) on the net assets of the business.
Define the term capital
Capital refers to the contribution of resources into the business by the owner for business use.
Define the term drawings
Drawings refers to the withdrawal of assets from the business by the owner for personal use.
Explain the accounting theory behind why business should record capital contribution and drawings by the owner
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Thus, the amount contributed by the owner to the business and the amount withdrawn by the owner from the business for personal use should be recorded as capital and drawings respectively.
State what causes the changes in owner equity
-Additional contribution by owner
-Drawings by the owner
-Profit or loss made during the year
Suggest two ways for the owner to increase the owner’s equity of the business
-owner contribute funds or other resources into the business
-business makes profit from selling goods and providing services
-business earns other income such as commission income and discount received
Define the term share capital
-Share capital are the amount of funds that a company raised by issuing shares to shareholder
Define the term dividends
Dividend is a portion of the retained earnings that is distributed to the shareholders
Define the term retained earnings
Retained earnings are the accumulation of profits and losses that has not been distributed to shareholders yet since operation.
State what causes the change in shareholder’s equity
-Issuance of new shares
-Declaration of dividends
-Profit or loss for the period
