Introduction
Accounting Equation -
- Evaluation of relationships between Assets, Equity and Liabilities ( Is the company funded through owner's capital or debts)
This chapter is the first exposure to the field of accounting. It will teach you the basic background rules of accounting and they do not change, hence you should learn to understand them for you to be able to apply and master your learning to create, calculate and balance your financial statements. In a simple format below is the explanation you need to understand.
Accounting equation is equal your Balance sheet
Assets = Liabilities + Owners' Equity
Because you make purchases with debt or capital, both sides of the equation must equal.
OR
Liabilities = Assets - Owners' Equity OR Owners' Equity = Assets - Liabilities
OE has an equal effect on both sides of the equation, for you to calculate the third part of the accounting equation, you need to know the other two parts. This is to assist your understanding when calculating accounting equation or/and balance sheet statements.
| Assets | Owner's Equity | Liabilities | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Task
Activity 1 - Accounting Equation
Required:
Record the transactions in the Table below assuming bank has a favourable balance (Dr) at all times.
1. Wrote off a debtor’s account of R500 as a bad debt.
2. Sent a cheque to a creditor to settle our account of R2 000.
3. Received rent of R5 000 from a tenant.
4. Bought trading stock on credit for R1 800.
5. Bought equipment for R600 and paid by cheque.
Process
Refer to Rules of Accounting and Classification of accounts.
1. Read the transaction/adjustment below.
Bought stationery and paid by cheque, R150.
2. Identify the two accounts affected – (double entry principle).
1. Stationery
2. Bank
3. Decide what type of accounts these are (classify).
Stationery = expense and therefore affects owner’s equity Bank = current asset
4. Decide which account is debited and which account is credited.
The expense is increasing therefore DR stationery
The asset is decreasing therefore CR bank
5. Record your answer showing the effect on Assets (A), Owners’ equity (O) and Liabilities (L):
| Account debit | Account credit | A= | O + | L |
|---|---|---|---|---|
| Stationery | Bank | - 150 | - 150 | 0 |
Evaluation
This activity is out of 10 marks in total.
2 marks allocated for each transaction question answered correct.
2 marks if learner shows the effect of the accounts involved/ 1 mark if not effect not shown.
A method mark of 1 tick, is allowed if learners' answer is in the correct place or format (showing understanding of content), although their answer is incorrect.
Conclusion
Summary of the lesson.
Three questions that will assist you:
1. If an Asset: is it increasing or decreasing my possessions?
2. If a liability: is it increasing or decreasing my debt?
3. If an Owners’ equity: it is increasing or decreasing the interest of the owner?
A zero indicates no effect. DO NOT leave blank!
When a bank is favourable it means it is an asset of the business and remains in a debit balance.
Credits
- Curriculum and Assessment Policy Statement (CAPS) Mind the Gap Grade 12 Study Guide Accounting.
Teacher Page
By the end of this lesson,
- You should be able to understand the importance, purpose and need of accounting equation.
- Identify assets, liabilities, and owner’s equity
- Classifying and Applying the accounting effects.
- Calculate total assets, total liabilities, and owner’s equity calculate.