LESSON
GRADE 10
8
SOLE TRADER
ACCOUNTING EQUATION
WORKSHEET 1
ACCOUNTING EQUATION
The accounting equation consists of 3 elements – Assets, Liabilities, Owner’s equity. These 3 elements
form the basis for all accounting entries
Assets and Expenses have DEBIT balances
Liabilities and Income have CREDIT balances
AN ACCOUNT IS CLASSIFIED INTO ONE OF FOUR CATEGORIES
Balance sheet accounts
Assets
Liabilities
(OWN)
(OWE)
Debit
balance
Expenses
credit
balance
Income
Nominal accounts
_____________________________________________________________________________
Dr
Cr
Dr
Cr
Balance xxx
increase
+
Balance
decrease
decrease
--
--
xx
increase
+
OWNERS EQUITY
Capital Account
decrease
increase
-+
Capital account is directly affected
by INCOMES and EXPENSES
8 Accounting Grade 10
1
ACCOUNTING EQUATION
A
=
OE
Assets
+
-
-
NON-CURRENT ASSETS
1 Fixed/Tangible assets
Land and buildings
Vehicles
Equipment
ASSETS
+
8 Accounting Grade 10
+
1
Capital
+/ increase (credit)
2
Drawings
-/ decrease (debit)
3
Profit / Loss
Cr
Expenses
-
CURRENT ASSETS
1 Inventories
Trading stock
2 Debtors
3 Cash
Bank (favourable / debit balance)
Cash float
Petty cash
increase
L
Liabilities
Dr
2 Financial assets
Fixed deposit
Investment
Dr
+
Owners Equity
Cr
decrease
-
Cost of sales
Interest expense
Rent expense
Salaries
Wages
Stationery
Fuel
Packing material
Repairs
Insurance
Advertising
Discount allowed
Telephone
Water & electricity
Income
+
-
+
NON-CURRENT LIABILITIES
Loan (long term – more than 12 months)
Mortgage bond
CURRENT LIABILITIES
Creditors
Bank overdraft (unfavourable / credit
balance)
Short-term loan (less than 12 months)
Sales
Current/fee income
Interest income
Rent income
Discount received
Dr
LIABILITIES
decrease
-
Cr
increase
+
2
Steps to follow
1
2
3
4
Determine the two accounts involved in the transaction
Each transaction has TWO accounts
Determine what type accounts they are – assets, liabilities, expenses, income
Determine the effect on the accounting equation (increase / decrease)
Check if A = OE + L
TO HELP YOU REMEMBER
If you pay you CRy – therefore the
entry in the bank account will go on
the CRedit side.
Assets = Owner’s Equity + Liabilities
Example – Accounting equation
Complete the following:
A
No
Transaction
Account
debited
Account
credited
Assets
+
-
=
OE
+
Owners equity
-
+
L
Liabilities
+
Capital
-Drawings
Profit
- expense + income
1
The business
pays the
telephone
account R200
Telephone
Bank
- 200
- 200
0
Explanation
Follow the steps
1
determine the two accounts involved in the transaction
2
Bank & Telephone
determine what type accounts they are – assets, liabilities, expenses, income
3
Bank is Asset (we own the money)
Telephone is Expense (money paid out for the day-to-day running of the business)
determine the effect on the accounting equation (increase / decrease)
4
Bank decreases – money is paid out (money becomes less)
Expenses decreases the profit – therefore decreases Owners equity
Liabilities = 0 effect
Check if A = OE + L
- 200 = -200 + 0
8 -Accounting Grade 10
3
ACTIVITY 1
Complete the following:
A
No
Transaction
Account
debited
Account
credited
Assets
+
-
=
OE
Owners equity
+
Capital
- Drawings
+ Profit
+
L
Liabilities
+
- expense + income
1
2
3
4
5
6
The owner invests
personal cash in
the business,
R200 000
The owner
withdraws cash for
personal use,
R30 000
Buy stationery and
pay by cheque
R200
Receive a cheque
for rent R500
The business
purchases
equipment for cash,
R50 000
Receive R50 000
from AB Bank for a
loan R40 000.
8 -Accounting Grade 10
4
ACTIVITY 2
Complete the following:
A
No
1
2
3
4
5
6
Transaction
Bought a vehicle
and paid by
cheque
R50 000
Issued a receipt
for rent received
R700
Buy Packing
material and pay
by cheque R500
Receive a cheque
for rent Services
rendered R1 200
The business
purchases trading
stock for and paid
by cheque
R60 000
Receive R100 000
from XZ Bank for a
loan R80 000
8 -Accounting Grade 10
Account
debited
Account
credited
Assets
=
OE
Owners equity
+
L
Liabilities
5
ANSWERS
8
ACTIVITY 1
No
1
2
3
4
5
6
Transaction
The owner invests
personal cash in
the business,
R200 000
The owner
withdraws cash
for personal use,
R30 000
Buy stationery
and pay by
cheque R200
Receive a cheque
for rent R500
The business
purchases
equipment for
cash, R50 000
Receive R50 000
from AB Bank for
a loan
Account
debited
Account
credited
Assets
Owners equity
Liabilities
Bank
Capital
+ 200 000
+200 000
0
Drawings
Bank
- 30 000
-30 000
0
Stationery
Bank
-200
-200
0
Bank
Rent Income
+500
+500
0
Equipment
Bank
+50 000
-50 000
0
0
Bank
Loan : AB
Bank
+50 000
0
+50 000
Assets
Owners equity
Liabilities
0
0
+700
+700
0
-500
-500
0
+1 200
+1 200
0
0
0
0
+80 000
ACTIVITY 2
No
1
2
3
4
5
6
Transaction
Bought a vehicle
and paid by cheque
R50 000
Issued a receipt for
rent received R700
Buy Packing
material and pay by
cheque R500
Receive a cheque
for rent Services
rendered R1 200
The business
purchases trading
stock for and paid
by cheque R60 000
Receive R100 000
from XZ Bank for a
loan R80 000
8 -Accounting Grade 10
Account
debited
Account
credited
Vehicle
Bank
Bank
Rent Income
Packing
material
Bank
Bank
Services
rendered
Trading stock
Bank
Bank
Loan: XZ
Bank
+50 000
-50 000
+60 000
-60 000
+80 000
6
CHALKBOARD SUMMARY
OWNER’S EQUITY
ASSETS
+
-
NON-CURRENT
Land & Buildings
Vehicles
Equipment
Investment
CURRENT
Trading stock
Debtors
Bank (cash)
8 -Accounting Grade 10
-
OWNER’S EQUITY
Capital
(Drawings)
Net Profit
Incomes – Expenses
+
LIABILITIES
-
+
NON-CURRENT
Mortgage Bond
Loan
CURRENT
Creditors
Bank Overdraft
7