FAC Learning Unit 1

Accounting Equation (BAE Format)

• The accounting equation is A = E + L (Assets = Equity + Liabilities).
• Transactions impact the accounting equation by increasing or decreasing accounts.
• Each account is either a debit or a credit based on its type.
• Owner's equity is affected by capital, drawings, and profit.
• Owner withdrawals of cash affects the equation
• Purchasing equipment with a loan affects assets and liabilities
• Income affects owner's equity

Depreciation

• Depreciation calculations need to be accurate across time.
• Distinguish current from non-current assets.
• Select appropriate depreciation rates and methods for each asset.
• Straight-line depreciation spreads cost evenly over time.
• Vehicles are depreciated, unlike inventory.
• Depreciation calculation must be pro-rata if assets were bought mid-year.

VAT (Value-Added Tax)

• VAT is claimed and paid at specific times.
• Output VAT is collected, while input VAT is paid.
• Understand the difference between input and output VAT.
• VAT is involved in purchase and sale transactions.
• Correctly read VAT-inclusive and exclusive invoices.
• Output VAT is paid when collected from customers on sales.
• Claim input VAT on most purchases, but not on exempt supplies.
• Calculation of VAT from a VAT-inclusive invoice requires determining the VAT portion of the total amount.

Journal Entries (General Ledger)

• Debits are on the left, and credits are on the right.
• Identify which accounts are affected by transactions.
• Differentiate between capital and business payments.
• Record personal use withdrawals, loan entries, and asset purchases correctly.
• Owner injecting capital into the business involves debiting cash/bank and crediting capital.
• Buying a motor vehicle on credit involves motor vehicle and loan accounts.
• Journal entry for cash drawings requires debiting drawings and crediting cash.

BAE in Different Scenarios

• Every transaction affects at least two accounts.
• Information must be accurately split across Assets, Equity, and Liabilities.
• Every debit must link with a corresponding credit.
• Properly record credit purchases and business expenses.
• Taking a bank loan to buy equipment increases both assets and liabilities.
• Paying off a creditor with cash decreases both assets and liabilities.
• Income from sales increases assets and equity.

Source Documents & Journals

• Match transactions to the correct journals.
• Identify source documents such as invoices, EFTs, and receipts.
• Use the correct columns (Bank, VAT, Sundry, Control).
• Cash sales are recorded in the Cash Receipts Journal (CRJ).
• The purchase of equipment on credit is recorded in the General Journal.
• A bank deposit is verified by a deposit slip/receipt

Study Priority Checklist

• Track Assets, Equity, and Liabilities for each transaction.
• Understand the cause-and-effect relationship per entry.
• Learn when to use Straight-Line (SL) vs. Reducing Balance (RB) depreciation.
• Apply partial-year depreciation rules.
• Know when VAT applies and differentiate clearly between Input/Output VAT.
• Sort transactions into CRJ and CPJ.
• Learn source document types.
• Match entries accurately and spot common pairings (e.g., Bank/Capital, Drawings/Bank).
• A = Dr ↑ / Cr ↓
• L & E = Dr ↓ / Cr ↑

The Accounting Equation (BAE)

• Assets = Equity + Liabilities
• Increase in assets is recorded as positive.
• Decrease in assets is recorded as negative.
• Same principle applies to equity and liabilities.

Transaction Effects:

• Purchase asset (cash): Debit Asset, Credit Bank (Asset)
• Capital contribution: Debit Bank (Asset), Credit Capital (Equity)
• Drawings: Debit Drawings (Equity), Credit Bank (Asset)
• Loan received: Debit Bank (Asset), Credit Loan (Liability)
• Repay loan: Debit Loan (Liability), Credit Bank (Asset)
• Pay expense: Debit Expense (Equity), Credit Bank (Asset)

Debits & Credits

• Debit when assets increase.
• Debit when expenses increase.
• Debit when drawings increase.
• Credit when liabilities increase.
• Credit when income increases.
• Credit when Equity/Capital increases.

Depreciation

• Current assets are not depreciated.
• Non-current assets (vehicles, equipment, furniture) are depreciated.

Methods:

• Straight-line: (Cost - Residual Value) ÷ Useful Life
• Reducing-balance: Carrying amount × Depreciation rate
• Apply pro-rata if asset was not used the full year.

VAT Basics

• Output VAT is VAT charged on sales to customers.
• Input VAT is VAT paid on purchases and can be claimed.
• Input VAT can be claimed for up to 5 years from the invoice date.

Source Documents & Journals

Important Columns in Cash Journals:

• Bank: Cash flow in/out
• VAT: Input/output
• Sundry: Non-regular entries like capital, loans
• Control Accounts: Trade Receivables/Payables

Ledger Account Pairing

Quick Reminders:

• Use full stops for decimals (e.g., 1000.00).
• Use negative signs for decreases.
• Do not show "R" – only the number.
• Enter zero (0) if the column doesn't apply.

What Is Accounting? (1.1)

• Accounting records, summarizes, and reports financial information.
• It produces the Statement of Profit or Loss and the Statement of Financial Position.
• The double-entry system means every transaction has equal debits and credits.
• Accounting can be computer-based or manual.

What Is Accounting? (Podcast Summary – 1.2)

• Accounting tells the financial story of a business.
• Economic events are identified and recorded in monetary value and communicated in a standardized format.
• Internal users use management accounting for decisions, while external users use IFRS standards and tax information.

Nature of Accounting & Forms of Ownership (1.3 & 1.4)

Nature of Accounting

• Accounting helps track financial performance, assists in decision-making, promotes accountability, and ensures legal compliance.

Forms of Ownership & Users of Statements

• Entities include sole proprietorship, partnership, and personal liability company.
• Users include owners, managers, creditors, SARS, and investors.

Internal Controls (1.5)

• Internal controls are required by the Legal Practice Council (Rule 54.14.7.1).
• They protect trust funds, ensure accuracy/integrity, prevent fraud, and promote compliance.
• They are tailored to sole proprietors, partnerships and personal liability companies.

Financial Frameworks (1.6)

• Rule 54.6: Law firms must record business & trust account transactions and prepare compliant financial statements.
• Frameworks used in SA: IFRS / SA GAAP.
• Must fairly reflect the financial position of the firm.

Principles to Remember:

• Underlying Assumptions: Going Concern, Accrual Basis
• Qualitative Characteristics: Relevance, Faithful Representation, Comparability | Verifiability | Timeliness, Materiality, Complete, neutral, free from error

Financial Statements (1.7)

Statement of Financial Position

• A snapshot at a specific date.
• Reports on assets, liabilities, and equity.
• Assets = Economic resources controlled.
• Liabilities = Present obligations.
• Equity = Residual interest (Assets - Liabilities).
• Reflects liquidity and solvency.
• Assets = Equity + Liabilities

Statement of Profit or Loss (and Other Comprehensive Income)

• Reports income, expenses, and profit or loss over a period.

Double Entry Principle (1.8)

• Each transaction affects 2 accounts.
• T-account format: Left = Debit, Right = Credit

Key Rules:

• Assets & Expenses → Increase = Debit
• Liabilities, Income, Equity → Increase = Credit

Contra Account (1.9)

• Describes the other side of the transaction.
• Example: If Bank increases (Debit), Contra account = Capital (Credit).
• Purpose: To clearly explain why a transaction occurred.

Debits and Credits

• Whether debit or credit increases/decreases depends on account type.
• Dividends, expenses, and assets increase when debited and decrease when credited.
• Liabilities, owner's equity, and revenue increase when credited and decrease when debited.

• Whether you debit or credit an account doesn’t inherently mean increase or decrease — it depends on the type of account.
• You debit the electricity expense account → it goes up
• You credit the bank account → it goes down.

Visual Reminder: D.E.A.L.E.R.

• “Any ‘category’ can go on either the credit or debit side, but depending on what it is and the nature of the transaction will determine whether it increases or decreases.”
• It would be better to say my bank is credited when it decreases and electricity is debited when it increases.

The Core Concept: What Do Debit and Credit Mean?

• Debit (DR) and credit (CR) are simply accounting terms used to record the two sides of a financial transaction.
• Debit and credit do NOT mean increase or decrease
• Whether a debit or credit increases or decreases an account depends on what type of account it is.

The D.E.A.L.E.R. Rule

• D.E.A. → Increase with a Debit
• L.E.R. → Increase with a Credit

What Actually “Increases or Decreases”?

• The transaction amount affects the balance of an account.

For example:

• If your Bank account (an Asset) increases by R1,000:
  • Debit the Bank account with R1,000.

Example 1: Owner Invests R10,000 in the Business

What’s happening?

• The business receives cash → Asset increases
• That money comes from the owner’s capital → Equity increases

Accounts Affected:

• Bank (Asset) → Increase → Debit
• Capital (Equity) → Increase → Credit

CopyEdit
Dr Bank                   R10,000
     Cr Capital                      R10,000

Example 2: Business Buys Equipment for R3,000 Cash

What’s happening?

• You get Equipment → Asset increases
• You pay cash → Bank (Asset) decreases

Accounts Affected:

• Equipment (Asset) → Increase → Debit
• Bank (Asset) → Decrease → Credit

Dr Equipment             R3,000
     Cr Bank                         R3,000

• Even though both accounts are Assets, one goes up (debit) and one goes down (credit).

Example 3: Business Earns R5,000 Revenue, Paid in Cash

What’s happening?

• Business receives cash → Bank (Asset) increases
• Earned Revenue → Income increases

Accounts Affected:

• Bank (Asset) → Increase → Debit
• Sales Revenue (Income) → Increase → Credit

Dr Bank                   R5,000
     Cr Revenue                      R5,000

Quick Analogy: Think of Debits and Credits Like Plugs

• Imagine a T-account like a socket with two sides:
  • Left side = Debit side
  • Right side = Credit side
  • Depending on what you're plugging in (Asset, Income, Liability, etc.), it either charges up (increases) or discharges(decreases) from that side.

Summary Chart: What Side Increases What?

| Account Type | Normal Balance | To Increase | To Decrease |

| ----------------- | -------------- | ----------- | ----------- | | Assets | Debit | Debit | Credit | | Expenses | Debit | Debit | Credit | | Dividends | Debit | Debit | Credit | | Liabilities | Credit | Credit | Debit | | Equity (Capital) | Credit | Credit | Debit | | Revenue | Credit | Credit | Debit |

Final Rule

• Every transaction affects TWO accounts. One is Debited, the other is Credited.
• The goal is always to keep the accounting equation balanced:

Assets = Liabilities + Equity

Self-Assessment Q&A

• What does bookkeeping entail?
  • Bookkeeping is the systematic recording of transactions.
• How does accounting convey information?
  • Accounting uses words and figures.
  • Concepts, Principles, Procedures
• What is a current liability?
  • A debt owed to third parties
  • creditors or bank overdrafts.
• What is income?
  • Revenue from selling goods/services.
  • Returns on investments
• What is accounts payable?
  • Money owed to suppliers for goods/services.
  • A liability.
• What is an expense?
  • A cost related to daily operations.
  • It is a debit.
• What is the objective of financial statements?
  • To provide info about an entity’s: Financial position, Performance, Changes in financial position
  • To help users make economic decisions.
• What category of account is accounts payable?
  • Liability account.
• How do you define financial accounting?
  • The systematic identification, recording, and reporting of the monetary value of transactions, presented in financial statements to support decision-making.
• What is accounting?
  • The bookkeeping method that generates a financial record of all business transactions.
• What element is accounts payable?
  • Liability
• What is accounts receivable?
  • Amounts due to the business from customers for credit sales or services already delivered.
• What is the objective of financial accounting?
  • To show the financial results and position of an entity clearly for users of the information.
• What is a current asset?
  • A cash resource or one that can be converted into cash within 12 months.

Explain the nature of:

Assets:

• The possessions or resources of the entity.

Equity:

The owner’s interest in the business; what the business “owes” back to the owner.

Liabilities:

• The debts of the business; what it owes to others (creditors).