This document is an extract from my upcoming study guide of Accounting for all high school learners. This document is a step to step guide for grade 8 learners on how to answer the accounting equation. It includes the introduction of t-accounts and a thought process to tackle any question for the a...
Section B: Accounting Equation
Understanding the accounting equation
Assets= Owner’s equity + Liabilities
The aim of the accounting process is to check whether our Assets add up to our
Owner’s Equity account with Liabilities. This is another way to explain the double
entry principle:
Remember:
Double entry principle: for every debit, there is a credit
Accounts will always follow this process. In the accounting equation, we are
introduced to a concept that will help you known as t-accounts. The reason you are
seeing this on this section is to show you the principle of the double entry principle.
Let’s look at the principles of the t-accounts and introduction to contra accounts:
T-accounts alignments
The left side is known as the DEBIT SIDE
The right side is known as the CREDIT SIDE
• If Bank is increasing on the Debit side, it means Bank will have to decrease
on the CREDIT SIDE (double entry principle).
DEBIT Account CREDIT
ASSETS
+Assets-
Assets increase on the debit side and decrease on the credit side. They have a
value and it’s important to take note of the financial value it has. Reminder, of the
following accounts:
• Bank
• Debtors control
• Vehicles
• Equipment
• Consumable stores on hand
, • Land & buildings
• Petty Cash
• Fixed deposit
When money comes into our Bank account, the bank will increase on the debit side.
As for any other Asset too. Look at an extract from the upcoming example:
+Bank- -Capital+
Capital 40 000 Bank 40 000
When the business is told to pay items, the bank account will decrease on the credit
side. The same principle applies with any assets.
+Bank- +Drawings-
Drawings 10 000 Bank 40 000
OWNERS’ EQUITY
Owners’ Equity is divided into 4 different types
1. Incomes
-Income+
Incomes increase on the credit side and decrease on the debit side. Remember
income is the contra account for bank (or debtors- will be in more detail on section B & C).
Incomes is what the business earns. Here are some of the following incomes:
• Rent income
• Sales (more detail on sales in section B)
• Commission Income
• Current Income
• Interest incomes
• Interest on Fixed Deposit
Income increases on the credit side, because money is coming into the business.
This will mean Bank increases on the debit side. Here is an example below:
+Bank- -Current Income+
Current income 40 Bank. 40
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