APPLIED ACCOUNTING SKILLS

AAS11A1
UNIT 2: BASIC ACCOUNTING EQUATION
Learning outcomes: Unit 2

•Explain the duality concept

•Record transactions in the accounting equation

•Basic Accounting – Chapter 2 and 3

•Accounting: All-in-1 – Chapter 11

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BASIC ACCOUNTING EQUATION (BAE)

ASSETS = EQUITY + LIABILITIES

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1.1 Classification of accounts: Assets

Assets are defined as follows:

A present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.

There are two categories of asset:

Non-current assets (NCA)

A non-current asset is an item of value with a lifespan of more than one year, for example buildings
and vehicles. This includes property, plant and equipment, intangible assets and financial assets.

Current assets (CA)

A current asset is an item of value with a lifespan of less than one year, which is easily converted to
cash, for example cash in the bank and debtors.

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1.2 Classification of accounts: Liabilities
Liabilities are defined as follows:
A present obligation of the entity to transfer an economic resource as a result of past events.
For a liability to exist, three criteria must be satisfied:
(a) The entity has an obligation
(b) The obligation is to transfer an economic resource
(c) The obligation is a present obligation that exists as a result of past events

There are two categories of liabilities:

Non-current liabilities (NCL)
These are obligations of the business which are payable over a period of more than one year, for example a
bond from the bank on a property.

Current liabilities (CL)

These are obligations of the business which are payable within one year, for example bank overdraft and
creditors.
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1.3 Classification of accounts: Owner’s Equity, Income & Expenses

Owner’s equity (OE)

This is the interest of the owner in the business, for example capital contribution and drawings.

Income – Expenses = Net profit

The net profit belongs to the owner of the business and so also falls under owner’s equity.

Income (I)
Income consists of receipts by a business for its normal operations, for example sales (revenue), fees earned,
rent received and interest received. These increase economic benefits within a current period.

Expenses (E)
Expenses are amounts spent by a business during its normal operations (but excluding capital expenses), for
example rent paid, advertising, salaries and insurance. These decrease economic benefits within a current
period.

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1.4 Class Activity: Classification of accounts

ABC Traders is a supermarket that is run by a sole proprietor. He has

been successfully trading for the past 6 months and is operating on the
‘going concern’ assumption.

As the sole owner of his business, he is struggling to complete his

financial statements accurately as he is not an accounting specialist.

Please assist him with correctly identifying how the accounts relating to
his business transactions should be classified.
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2.1 The duality concept

•EQUITY = ASSETS – LIABILITIES or

•ASSETS = EQUITY + LIABILITIES

• The duality concept determines that the financial position of an entity is

defined in terms of the accounting equation
• Each transaction has a dual effect in order to ensure that the accounting
records comply with the duality concept
• The accounting equation must always balance as for every debit there
must always be a corresponding credit i.e. the double entry principle

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2.2 Duality concept – effect of accounts on debits and credits
(T-accounts)

Fundamental
Fundamental Accounting
Accounting Equation
Equation using
using Debits
Debits
and
and Credits
Credits

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2.2 Duality concept – effect of accounts on debits and credits
(“ALICE” method)

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3. Format of recording transactions in the BAE
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
05/01/23 Bank Capital 50 000 50 000
20/02/23 Land Bank 350 000 50 000 300 000
Loan
25/02/23 Advertising Bank 750 750
expenses

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4. The accounting process: Where are we?
Analyse transactions
to determine the
economic impact on
the basic accounting
equation

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Class activity: Recording transactions in the BAE
ABC Traders is a supermarket that is run by a sole proprietor. The financial period of his business is 1 January
to 31 December. Please record the following transactions that occurred during his first month in business during
the 2022 financial period in the BAE:
1. A bank account was opened in the name of business and R300 000 was invested as an initial investment.
2. She purchased inventory for his supermarket to the value of R60 000 and paid in cash.
3. She bought furniture and equipment to be used in the business for R35 000 and agreed to pay for it in 6
months time.
4. One of the pieces of equipment bought in transaction 4, valued at R5 000, was found to be defective and
returned before it was paid for.
5. She sold inventory to the value of R10 000, R3 000 of which was sold on credit.
6. She paid the monthly rent of R5 000, salaries and wages of R8 000, bank charges of R1 000 in cash.
7. A customer returned inventory of R500 bought on credit as he purchased the incorrect item (Trans. 5).
8. The sole proprietor withdrew R8 000 from the business for personal use.
9. Received a notice that a customer who she sold inventory on credit (Trans. 5) to is no longer able to pay for it
and the account of R300 must be written off as irrecoverable.
10. Provide for depreciation of R500 on the purchase of furniture and equipment in transaction (Trans. 3).
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Class activity: Recording transactions in the BAE - Solution

1. A bank account was opened in the name of business and R300 000 was
invested as an initial investment.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
1. Bank Capital 300 000 300 000

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Class activity: Recording transactions in the BAE - Solution

2. She purchased inventory for his supermarket to the value of R60 000 and paid in
cash.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
2. Inventory Bank 60 000 60 000

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Class activity: Recording transactions in the BAE - Solution

3. She bought furniture and equipment to be used in the business for R35 000 and
agreed to pay for it in 6 months time.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
3. Accounts
Furniture & 35 000 35 000
Equipment payable

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Class activity: Recording transactions in the BAE - Solution

4. One of the pieces of equipment bought in transaction 4, valued at R5 000, was

found to be defective and returned before it was paid for.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
3. Furniture & Accounts 35 000 35 000
Equipment payable
4. Accounts Furniture & 5 000 5 000
payable Equipment

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Class activity: Recording transactions in the BAE - Solution

5. She sold inventory to the value of R10 000, R3 000 of which was sold on credit.

DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES

NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
5a. Bank Inventory 7 000 7 000
5b. Accounts Inventory 3 000 3 000
receivable

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Class activity: Recording transactions in the BAE - Solution

6. She paid the monthly rent of R5 000, salaries and wages of R8 000, bank
charges of R250 in cash.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
6a. Rent Bank 5 000 5 000
expense
6b. Salaries & Bank 8 000
8 000
wages
6c. Bank Bank 250 250
charges

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Class activity: Recording transactions in the BAE - Solution

7. A customer returned inventory of R500 bought on credit as he purchased the

incorrect item (Trans. 5).
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
5a. Bank Inventory 7 000 7 000
5b. Accounts Inventory 3 000 3 000
receivable
7.
Inventory Accounts 500 500
receivable

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Class activity: Recording transactions in the BAE - Solution

8. The sole proprietor withdrew R8 000 from the business for personal use.

DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES

NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
8. Drawings Bank 8 000 8 000

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Class activity: Recording transactions in the BAE - Solution

9. Received a notice that a customer who she sold inventory on credit (Trans. 5) to
is no longer able to pay for it and the account of R300 must be written off as
irrecoverable.
DATE / ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
NO. DEBIT CREDIT
DR CR DR CR DR CR
+ - - + - +
5a. Bank Inventory 7 000 7 000
5b. Accounts Inventory 3 000 3 000
receivable
9. Bad debts Accounts 300
300
receivable

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Class activity: Recording transactions in the BAE - Solution

10. Provide for depreciation of R500 on the purchase of furniture and equipment in
transaction (Trans. 3).
DATE ACCOUNT ACCOUNT ASSETS = EQUITY + LIABILITIES
/ DEBIT CREDIT
NO.
DR CR DR CR DR CR
+ - - + - +
3. Furniture & Accounts 35 000 35 000
Equipment payable
4.
Accounts Furniture & 5 000 5 000
payable Equipment
10.
Depreciation Accumulated 500 500
Depreciation
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Class activity: BAE
1. Business has inventory of R20 000; Equipment of R250 000, Accounts payable of R30 000
• what is the value of the EQUITY?
EQUITY = ASSETS – LIABILITIES
EQUITY = (R20 000 + R250 000) – (R30 000) = R240 000

2. Business has Capital of R50 000, Accounts Receivable of R 90 000, Drawings of R10 000
• What is the value of the LIABILITIES?
LIABILITIES = ASSETS – EQUITY
EQUITY = (R90 000) – (R50 000 – R10 000) = R50 000

3. Business has Capital of R200 000, Long-term loan of R80 000, Accounts payable of R50 000
• What is the value of ASSETS?
ASSETS = EQUITY + LIABILITIES

EQUITY = (R200 000) + (R80 000 + R50 000) = R330 000

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Homework!

• Classification of accounts:
• Assets
• Non-current assets
• Current assets
• Liabilities
• Non-current liabilities
• Current liabilities
• Equity
• Income
• Expenses
• Duality concept
• Effects of different accounts on the BAE equation
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