Page 36 - Book-keeping for Secondary Schools Student’s Book Form One

Book-Keeping for Secondary Schools

(c) Net income (net loss): The capital account is affected by the net income or
net loss generated by the business. Net income arises when revenues exceed
expenses, while net loss occurs when expenses exceed revenues. Net income
increases the capital account, while net loss decreases it.
(d) Drawings or withdrawals: If the owner(s) withdraw funds or assets from
the business for personal use, these amounts are referred to as drawings or
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withdrawals. Drawings reduce the capital account.
(e) Retained earnings: Retained earnings represent the portion of net income

that is not distributed to the owner(s) as dividends but is instead reinvested
back into the business. Retained earnings increase the capital account.
The formula to calculate the balance of the capital account is:

Capital account balance = (Initial capital + Additional contributions + Net income) - Drawings

The capital account provides valuable information about the financial health and
ownership interest in the business. It is crucial for tracking the growth and changes
in equity over time. Additionally, it plays a significant role in determining the value
of the business because it reflects the owner’s claim on the company’s assets after all
liabilities are settled.

Statement of affairs

Statement of affairs can show the effect of different changes in the accounting equation.
It lists the elements of the accounting equation in a systematic manner to show how
such equation balances. The statement lists all the assets (with their values) together,
and in the same manner lists all items of capital and liabilities.

Statement of affairs

A statement which lists all assets and liabilities (together with their financial
value) at a particular date to enable one calculate value of capital.

This approach is specifically helpful in a situation where one knows the assets and
liabilities of the business and wants to calculate the figure of capital. In this case, the
figures of assets will be listed together and the total assets known. Thereafter, the figures
for liabilities will be listed and the total liabilities established. The capital figure will
be calculated as the difference between total assets and total liabilities and is usually
presented below the liabilities’ section. Habibu’s statement of affairs from the above
data can now be presented as follows.

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Student’s Book Form One

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