CAT / FIA FFA Syllabus F. Preparing Basic Financial Statements - Statement of financial position. - Notes ^{1 / 4}

The accounting equation expresses the statement of financial position as an equation.

It emphasises the equality between assets and liabilities (including capital as a liability).

In accounting, capital is an investment of money (funds) with the intention of earning a return.

A business proprietor invests capital with the intention of earning profit.

As long as that money is invested, accountants will treat the capital as money owed to the proprietor by the business.

Also, the business entity concept states that, regardless of how a business is legally set up, in accounting a business is always treated separately from its owners(s).

Assets = Liabilities
Assets = (Capital + Profit - Drawings) + Payables
Assets - Payables = Capital + Profit - Drawings
Net Assets = Proprietor’s Interest

Example

At 1.1.X3 Henry has net assets of $120,000. During the year he puts in capital of $50,000 and draws out $90,000. His net assets at 31.12.X3 are $25,000.

Required:

What is his profit or loss for the year?

Answer

Closing Net Assets = Opening Net Assets + Capital Introduced + Profit - Drawings
25,000 = 120,000 + 50,000+ P - 90,000
Loss = 55,000