Balance Sheet Equation
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State the Balance Sheet Equation in simplest form.
Assets = Capital + Outside Liabilities.
When a firm borrows a term loan, does Capital reduce?
No. Term loan increases Assets and Outside Liabilities; Capital remains unchanged.
How does Profit flow into the Balance Sheet Equation?
Profit increases Capital; Loss decreases Capital. Profit = Net Revenue − Net Costs.
What is the sole purpose of a Trading Account?
To ascertain Gross Profit or Gross Loss from trading (purchase and sale) activities.
Name the items that appear on the DEBIT (left) side of Trading Account.
Opening Stock, Net Purchases, Direct Expenses (cost-of-goods items).
Name the items that appear on the CREDIT (right) side of Trading Account.
Sales (Revenue), Closing Stock (inventory-generating items).
What account type is the Trading Account?
Nominal Account. Its balance transfers to Profit & Loss Account.
Define Gross Profit ratio as a percentage.
Gross Profit ÷ Sales × 100. Measures profitability on trading before operating expenses.
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