Basic Accounting Concepts Grade 12 Notes Accounting Study Guide. Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance. Accounting also serves as a useful way for people and companies to honor their tax obligations
1.1 Basic Concepts
| Term | Definition |
| Accrued expenses/expenses payable | Expenses that are still owing at the end of the financial year. |
| Accrued income/income receivable | Income that is still owing to the business at the end of the financial year. |
| Asset | Item of value owned by a person or business which enables a profit to be made. |
| Bad debts | Debts written off as the debtors are unlikely to settle their accounts. |
| Cost of sales | Cost of sales is the cost price of all goods that have been sold. |
| Creditors | People/suppliers the business owes money to. |
| Debtors | People who owe the business money for goods bought on credit. |
| Depreciation | The amount by which fixed assets reduce in value over time due to use |
| Income received in advance/deferred income | Income that has already been received by a business but which is for the next financial year. |
| Liability | An amount owed by a person or business to another person or business |
| Loss | When the expenses are more than the income. |
| Mark-up | The percentage added to the cost price to calculate the selling price, i.e. the profit %. |
| Owners’ equity | The net worth (value) of the business at any given time. Or, assets less liabilities. |
| Prepaid expenses | Expenses that have already been paid but which are for the next financial year. |
| Profit | When the income is more than the expenses. |
| Trading stock deficit | This amount is calculated when the physical stock-take figure is less than the figure for trading stock in the general ledger. |
| Trading stock surplus | This amount is calculated when the physical stock-take figure is more than the figure for trading stock in the general ledger. |
These definitions help you understand the meaning of basic accounting concepts that are used in this study guide.
Spend time learning the meanings of these terms. Use mobile notes to help you learn them. See page ix for more infomation.
1.2 Rules of Accounting
| Assets | Owner’s equity | Liabilities | ||||||||||||||||||||
Dr A Cr
| Dr Drawing Cr
Dr Capital Cr
Dr Expenses Cr
Dr Income Cr
| Dr L Cr
|
1.3 Classification of Accounts
| NON-CURRENT ASSETS Tangible/fixed assets
Financial assets
CURRENT ASSETS
Trade and other receivables
Cash and cash equivalents
| OWNER’S EQUITY | NON-CURRENT LIABILITIES (to be paid over more than 12 months)
CURRENT LIABILITIES
| |
| Expenses | Income | ||
|
| ||
Activity 1: Matching items
Choose a definition from COLUMN B that matches the type of account in COLUMN A.
Draw a line from COLUMN A to COLUMN B to match the definitions.
| Column A | Column B |
|
|
[7]
Answers to activity 1
| Column A | Column B |
| D G C F A B E |
Activity 2: Multiple-choice questions
Three options are provided as possible answers to the following questions.
Circle the correct answer.
| 1. Bank overdraft is classified as a… | 2. Consumable stores on hand is classified as… |
| A Non-current liability | A Owner’s equity |
| B Current asset | B Current asset |
| C Current liability | C An expense |
[2]
Answers to activity 2
| 1 | C | This is a current liability because it will be paid back within 1 year (short-term). |
| 2 | B | This is a current asset because the business will use them within the next 12 months. |
[2]
1.4 Steps to recording transactions
Refer to Rules of Accounting and Classification of accounts on page 2.
- Read the transaction/adjustment.
Bought stationery and paid by cheque, R150. - Identify the two accounts affected – (double entry principle).
1. Stationery 2. Bank - Decide what type of accounts these are (classify).
Stationery = expense and therefore affects owner’s equity
Bank = current asset - Decide which account is debited and which account is credited.
The expense is increasing therefore DR stationery
The asset is decreasing therefore CR bank - 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 O
A zero indicates no effect. DO NOT leave blank!
Three questions that will assist you:
- If an Asset: is it increasing or decreasing my possessions?
- If a liability: is it increasing or decreasing my debt?
- If an Owners’ equity: it is increasing or decreasing the interest of the owner?
Activity 3: Accounting equation
Refer to Steps to recording transactions 1–4 above.
Record the transactions in the Table below assuming bank is favourable (Dr) at all times.
(When a bank is favourable it means it is an asset of the business and remains in a debit balance.)
- Wrote off a debtor’s account of R500 as a bad debt.
- Sent a cheque to a creditor to settle our account of R2 000.
- Received rent of R5 000 from a tenant.
- Bought trading stock on credit for R1 800.
- Bought equipment for R600 and paid by cheque.
Account debit Account credit A = O + L 1 2 3 4 5
[5]
Answers to activity 3
| Account debit | Account credit | A = | O + | L | |
| 1 | Bad debts (expense increasing) | Debtors control (asset decreasing) | -500 | -500 | 0 |
| 2 | Creditors control (liability decreasing) | Bank (asset decreasing) | -2000 | 0 | -2000 |
| 3 | Bank (asset increasing) | Rent income (income increasing) | +5000 | +5000 | 0 |
| 4 | Trading stock (asset increasing) | Creditors control (liability increasing) | +1800 | 0 | +1800 |
| 5 | Equipment (asset increasing) | Bank (asset decreasing) | ±600 | 0 | 0 |