Accounting - Term 1 - Week 1

Imagine Thandi in Khayelitsha starting a small spaza shop from her garage. She uses her savings to buy stock and borrows money from her uncle. To keep track of her business, she needs to know what she owns, what she owes, and what’s truly hers. The accounting equation—Assets = Equity + Liabilities—captures this. Assets are what Thandi owns (her fridge, airtime stock, cash). Liabilities are what she owes (the loan from her uncle). Equity is what’s left for her after paying off debts. This equation is like a seesaw: both sides must always balance. If Thandi buys more stock using her own money, her assets and equity both increase. If she borrows to buy stock, assets and liabilities rise together. This equation is the backbone of every business, from Soweto’s minibus taxis to big companies in Sandton.

Think about Ahmed’s tuckshop in Durban. His fridge, chips, and cash in the till are assets—resources he controls and expects to benefit from. If he owes the supplier for cooldrinks, that’s a liability—a present obligation to pay. Equity is Ahmed’s claim on the business after settling debts. A common misconception is to think that equity is just the cash Ahmed put in. In reality, equity changes as the business earns profit or suffers loss. For example, if Ahmed makes a profit, his equity grows, even if he doesn’t add more cash. If the tuckshop loses money, equity shrinks. Always remember: assets show what the business owns, liabilities what it owes, and equity what belongs to the owner.

Sipho in Soweto buys a minibus taxi for R100 000. He pays R40 000 cash and borrows R60 000 from the bank. His asset (the taxi) increases by R100 000. His cash asset decreases by R40 000, and his liability (bank loan) increases by R60 000. The total increase in assets (taxi minus cash out) is R60 000, which matches the increase in liabilities. The equation still balances. A common error is to forget that paying cash for an asset doesn’t change total assets—it just swaps one asset (cash) for another (the taxi). Only when you borrow or invest new money do total assets change.

Picture Lerato in Polokwane running a hair salon. If she buys a hairdryer for R2 000 using her own savings, her assets (hairdryer) go up R2 000, and her equity also rises R2 000. If she takes a loan for R5 000 to buy more chairs, assets (chairs) and liabilities (loan) both increase by R5 000. No matter the transaction, the accounting equation must balance after each one. If it doesn’t, there’s a mistake—maybe a misclassification or a calculation error. In the NSC exam, you’ll often be asked to show the effect of transactions on the equation. Always check: does the left side (assets) equal the right side (equity plus liabilities)? If not, retrace your steps.

Step 1: Lerato invests R10 000 of her own money to open a salon in Mthatha. Reason: This is an owner’s contribution, so it increases both assets (cash) and equity (owner’s claim). Step 2: Update the equation: Assets: +R10 000 (cash) Equity: +R10 000 (owner’s equity) Liabilities: No change Step 3: Check the equation: Assets (R10 000) = Equity (R10 000) + Liabilities (R0) Final answer: The equation balances. Sanity check: The cash Lerato put in is hers, so it makes sense that assets and equity both increase by the same amount. This is a typical NSC Paper 1 short question—always show both the numbers and the reasoning.

Step 1: Ahmed buys R5 000 airtime stock on credit from his supplier. Reason: He receives stock (asset) but hasn’t paid, so he owes the supplier (liability). Step 2: Update the equation: Assets: +R5 000 (stock) Liabilities: +R5 000 (accounts payable) Equity: No change Step 3: Check the equation: Assets (R5 000) = Equity (R0) + Liabilities (R5 000) Final answer: The equation balances. Sanity check: Ahmed owns the stock, but since he owes the supplier, his equity remains unchanged. This is a classic example where learners often think equity should increase, but it does not—only assets and liabilities change.

Question: Sipho’s taxi business owns a minibus (R120 000), owes R30 000 to the bank, and has R10 000 cash. How do we classify these? Let’s think: The minibus and cash are assets—things Sipho owns. The bank loan is a liability—money owed. Equity is what’s left for Sipho after debts. Worked response: Assets: R120 000 (minibus) + R10 000 (cash) = R130 000 Liabilities: R30 000 (bank loan) Equity: R130 000 - R30 000 = R100 000 Now you try: If Thandi’s spaza shop has R2 000 cash, owes R500 to a supplier, and owns stock worth R1 500, what are her assets, liabilities, and equity? Answer: Assets: R2 000 (cash) + R1 500 (stock) = R3 500 Liabilities: R500 Equity: R3 500 - R500 = R3 000

Question: Ahmed pays R1 000 of his supplier loan using cash from the till. What changes? Let’s reason: He uses an asset (cash) to reduce a liability (loan). No new money enters or leaves the business. Both assets and liabilities decrease by the same amount, so equity is unaffected. This is a common NSC exam scenario, and it’s important to show both the decrease in cash and the decrease in the loan. Worked response: Assets: -R1 000 (cash) Liabilities: -R1 000 (supplier loan) Equity: No change Now you try: Sipho pays R2 000 of his bank loan using cash. What happens to assets, liabilities, and equity? Answer: Assets: -R2 000 (cash) Liabilities: -R2 000 (bank loan) Equity: No change

1. List three examples of assets in a local business, such as a minibus, stock, or cash in the till. 2. State the accounting equation in words, making sure to use the correct order. 3. Identify whether each is an asset, liability, or equity: (a) cash in the till, (b) loan from bank, (c) owner’s capital. Give a reason for each choice.

1. Thandi invests R5 000 into her spaza shop. Show the effect on the accounting equation and explain why both assets and equity change. 2. Ahmed buys stock for R3 000 on credit. Update the equation and state which items increase. 3. Sipho pays R1 500 of his loan using cash. Show the changes to each part of the equation and explain why equity is not affected.

1. Lerato’s salon owns equipment worth R8 000, has R2 000 cash, and owes R3 000 to a supplier. Calculate her equity, showing all steps. 2. After making a profit of R1 000, how does the equation change for Thandi’s shop? Explain your answer. 3. A business has assets of R20 000 and liabilities of R7 000. Calculate equity and explain your reasoning, showing how you used the accounting equation.

• A resource owned by the business
• An amount owed to others
• The owner’s investment
• Cash in the bank

Answer: An amount owed to others

Liabilities are present obligations to pay others. Many confuse cash in the bank with liabilities, but cash is an asset.

• Only assets
• Only liabilities
• Both assets and liabilities
• Only equity

Answer: Both assets and liabilities

Both assets (taxi) and liabilities (loan) increase. Equity does not change because no owner’s money is involved.

• Stock in the shop
• Bank loan
• Cash in hand
• Equipment

Answer: Bank loan

A bank loan is a liability, not an asset. Learners often confuse sources of money with assets.

• Assets increase, liabilities decrease
• Assets decrease, liabilities decrease
• Assets and equity decrease
• Liabilities increase, equity decreases

Answer: Assets decrease, liabilities decrease

Both cash (asset) and the loan (liability) decrease by R2 000. Equity remains unchanged because no profit or loss occurs, and the owner’s investment does not change. Many learners mistakenly think equity should decrease when cash is used, but here, only the composition of assets and liabilities is affected.

• Show assets are greater than liabilities
• Balance after every transaction
• Have more equity than liabilities
• Be checked only at year-end

Answer: Balance after every transaction

The equation must balance after each transaction, not just at year-end. This is a frequent exam trap.