chapter 7 Flashcards
(24 cards)
profit
the amount by which the income (or revenue) exceeds the expenses of the business
loss
the amount by which expenses exceed the income (or revenue) of the business
unlimited liability
the owner of a business is personally responsible for all the debts and losses of the business
advantages of sole traders
being in full control of their own business
running a business that is linked to one of their hobbies or interests
hoping that it will provide them with a large income
why is it vital for a sole trader to make profit
the profit belongs to the sole trader
sole traders have unlimited liability
disadvantages of being a sole trader
a limit on how much finance can be introduced to the new business
having to work very long hours
being expected to have a wide range of skills and knowledge to run every aspect of the business
not having another owner to discuss ideas with when they are considering several possible alternatives
statement of profit or loss
account prepared periodically to find the profit or loss made by a business.
gross profit
the profit calculated by deducting the cost of sales from the net sales in the statement of profit or loss.
revenue
the sales of goods or services made by a business.
cost of sales
the net cost of the goods sold to customers.
net sales
the difference between the original sales made and the amount of refunds that were given.
profit or loss for the year
the profit or loss calculated by adding other income to the gross profit and deducting the business expenses.
what does the statement of profit or loss show
gross profit
profit or loss for the year
expenses
inventory
the unsold goods of a business involved in buying and selling at a particular point in time
carriage inwards
the additional delivery cost paid by a business in excess of the purchase price of the goods purchased for resale
carriage outwards
the additional cost charged by the seller to deliver goods sold
cost of sales
opening inventory + purchases - closing inventory = cost of sales
who receive credit items
it is often only given to customers who have proved to be reliable and the business may have carried out checks before deciding to offer credit terms.
disadvantage of credit
the business needs money to pay for purchases and day to day expenses. cash (or settlements) discounts can be used to encourage businesses pay faster, it involves the customer having the option of paying a smaller amount if payment is made before a specified date
why is discount allowed recorded as an expenses
the discount is dependent on payment and not on the sales
theoretically, when a discount is offered, there is no guarantee that the customer will take advantage of it
how is discount received recorded
it is kept separate from purchases figures. it is added to the gross profit figure
other income
income earned by the business from sources other than its main sources. added to the gross profit
how are drawings recorded
the double entry to record this would be
debit: drawings
credit: purchases
wages
wages are added to the work related to cost of sales
