Need help with a few finance questions! (1 Viewer)

[Rianaa]

I'm a bit stuck on some of my homework questions. If anyone could help it would be much appreciated. Here are the questions:

1. Explain why drawings are deducted from the capital item under owners equity in the balance sheet.

2. Explain why depreciation is deducted from the plant and equipment item in the non-current assets section of the balance sheet.

3. Explain why an accurately constructed balance sheet must balance.

 

[the-derivative]

I'm a bit stuck on some of my homework questions. If anyone could help it would be much appreciated. Here are the questions:

1. Explain why drawings are deducted from the capital item under owners equity in the balance sheet.

2. Explain why depreciation is deducted from the plant and equipment item in the non-current assets section of the balance sheet.

3. Explain why an accurately constructed balance sheet must balance.

1. Because drawings are generally small withdrawals of cash for minor and usually unexpected or unplanned finances. Hence, most businesses wouldn’t use their assets or liabilities (e.g. loans) to fund these, rather it’d be easier to fund directly from the owner’s capital.

2. Depreciation, which affects most assets such as car and equiptment, must be deducted to account for the loss of value/worth of these profits. If the initial purchase price was recorded, this would give a false indication of the actual potential assets the business has.

3. They follow the accounting equation A = L + OE. This is because all the business’ assets had to be funded somehow, either through a liability or through the owner’s equity and hence it would not make sense if both sides did not balance.

 

[Rianaa]

Thanks so much!