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Basic Accounting Concepts Grade 12 Notes Accounting Study Guide

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 payableExpenses that are still owing at the end of the financial year.
Accrued income/income receivableIncome that is still owing to the business at the end of the financial year.
AssetItem of value owned by a person or business which enables a profit to be made.
Bad debtsDebts written off as the debtors are unlikely to settle their accounts.
Cost of salesCost of sales is the cost price of all goods that have been sold.
CreditorsPeople/suppliers the business owes money to.
DebtorsPeople who owe the business money for goods bought on credit.
DepreciationThe amount by which fixed assets reduce in value over time due to use
Income received in advance/deferred incomeIncome that has already been received by a business but which is for the next financial year.
LiabilityAn amount owed by a person or business to another person or business
LossWhen the expenses are more than the income.
Mark-upThe percentage added to the cost price to calculate the selling price, i.e. the profit %.
Owners’ equityThe net worth (value) of the business at any given time. Or, assets less liabilities.
Prepaid expensesExpenses that have already been paid but which are for the next financial year.
ProfitWhen the income is more than the expenses.
Trading stock deficitThis amount is calculated when the physical stock-take figure is less than the figure for trading stock in the general ledger.
Trading stock surplusThis 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

AssetsOwner’s equityLiabilities
 Dr A Cr

+    –
Dr Drawing Cr

 +

Dr Capital Cr

+

Dr Expenses Cr

+
(if expenses
increase
then profit
decreases)
 −
(if expenses
decrease
then profit
increases)

Dr Income Cr


(if income
decreases
then profit
decreases)
+
(if income
increases
then profit
increases)
Dr L Cr

+

1.3 Classification of Accounts

NON-CURRENT ASSETS
Tangible/fixed assets

  • Land and buildings
  • Equipment
  • Vehicles

Financial assets

  • Fixed deposit (longer than
    12 months)

CURRENT ASSETS
Inventories

  • Trading stock
  • Consumable stores on hand

Trade and other receivables

  • Debtors’ control
  • Accrued income/income receivable
  • Prepaid expenses

Cash and cash equivalents

  • Bank (DR)
  • Petty cash
  • Cash float
  • Fixed deposit (less than 12 months)
OWNER’S EQUITYNON-CURRENT LIABILITIES
(to be paid over more
than 12 months)

  • Mortgage bond
  • Loans

CURRENT LIABILITIES
(to be paid in less than
12 months)

  • Trade creditors
  • Bank overdraft (CR)
  • Short term portion
    of loan
  • Accrued expenses/
    expenses payable
  • Income received in
    advance/deferred
    income
Expenses Income
  • Cost of sales
  • Interest expense
  • Rent expense
  • Salaries and wages
  • Stationery
  • Fuel
  • Packing material
  • Repairs
  • Insurance
  • Advertising
  • Discount allowed
  • Telephone
  • Water and
    electricity
  • Loss on sale of asset
  • Bad debts
  • Depreciation
  • Trading stock deficit
  • Provision for bad debts adjustment
    (+)
  • Sales
  • Current income
  • Interest income
  • Rent income
  • Discount received
  • Bad debts recovered
  • Profit on sale of asset
  • Trading stock surplus
  • Provision for bad debts adjustment (–)

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 
  1. Fixed/tangible assets
  2. Current assets
  3. Non-current liabilities
  4. Current liabilities
  5. Income
  6. Expenses
  7. Owner’s equity
  1. This increases profit and therefore increases owner’s equity.
  2. This decreases profit and therefore decreases owner’s equity.
  3. Amounts owing that will take longer than 12 months to pay off.
  4. Assets which are expected to be kept for a long period of time, usually longer than a year. Without them the business will not exist or earn a profit.
  5. The value (net worth) of the business at any point in time (total assets – total liabilities)
  6. Amounts owing that will be paid back within 12 months.
  7. Assets which are expected to be converted into cash in a short period of time (i.e. less than a year).

[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

 1CThis is a current liability because it will be paid back within 1 year (short-term).
 2BThis 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.

  1. Read the transaction/adjustment.
    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 debitAccount CreditA =O +L
    StationeryBank−150−150O

A zero indicates no effect. DO NOT leave blank!

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?

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.)

  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.
    Account debitAccount creditA =O +L
    1
     2
     3
     4
     5

[5]

Answers to activity 3

Account debitAccount creditA =O +L
1Bad debts (expense increasing)Debtors control (asset decreasing)-500-500 0
 2 Creditors control (liability decreasing)Bank (asset decreasing)-20000-2000
 3Bank (asset increasing)Rent income (income increasing)+5000+50000
 4Trading stock (asset increasing)Creditors control (liability increasing)+18000+1800
 5Equipment (asset increasing)Bank (asset decreasing)±60000

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