I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

Assets  

=  Capital  

+ 

 

Liabilities 

 

 

$    

 

 

 

$    

 

 

Stall 

  

1,800   Original 

investment 

  

2,500  

 

Flowers and plants 

         

0   Retained 

profit 

 

 

 

Cash (50 + 900) 

  

   950   

   (900 – 650) 

  

   250 

 

 

 

  

2,750   

 

  

2,750  + $0 

We can rearrange the accounting equation to help us to calculate the capital balance. 

Assets – liabilities 

=  Capital, which is the same as 

Net assets 

=  Capital 

At the beginning and end of 3 July 20X6, Liza Doolittle's financial position was as follows. 

  

Net 

assets 

Capital 

(a) 

At the beginning of the day:  $(2,500 – 0) = $2,500 = 

$2,500 

(b) 

At the end of the day: 

$(2,750 – 0) = $2,750 = 

$2,750 

There has been an increase of $250 in net assets, which is the amount of profits earned during the day. 

3.4 Drawings 

Drawings

 are amounts of money taken out of a business by its owner.  

Note. Drawings are relevant in sole traderships and partnerships. In limited companies, the owners, ie 

shareholders, are paid dividends. If the owner of a limited company is also a director of that company, 

they may opt to pay themselves a salary as an employee. If they withdraw any other money from the 

company for their personal use, this should be accounted for as a director's loan, which they must repay 

in accordance with an agreed repayment schedule. 

 

 

Since Liza Doolittle has made a profit of $250 from her first day's work, she might want to withdraw 

some money from the business. After all, business owners, like everyone else, need income for living 

expenses. Liza decides to pay herself $180 in 'wages'. However, the $180 is not an expense to be 

deducted in arriving at the figure of net profit. In other words, it is incorrect to calculate the net profit 

earned by the business as follows. 

  

$  

 Profit on sale of flowers etc 

250

 Less 'wages' paid to Liza 

 180

 Net profit earned by business (incorrect) 

   70

This is because any amounts paid by a business to its proprietor are treated by accountants as 

withdrawals of profit (the usual term is drawings) and not as expenses incurred by the business. In the 

case of Liza's business, the true position is that the net profit earned is the $250 surplus on sale of 

flowers. 

  

$  

 Net profit earned by business 

250

 Less profit withdrawn by Liza 

 180

 Net profit retained in the business 

   70

Profits are capital as long as they are retained in the business. Once they are withdrawn, the business 

suffers a reduction in capital. 

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CHAPTER 5  

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  LEDGER ACCOUNTS AND DOUBLE ENTRY