Grade 10 Accounting Study Guide

Imagine that Thabo opens a small spaza shop in Soweto with R20 000 of his own savings. By the end of the first month he has stock on the shelves, a fridge he bought on credit from a supplier in Johannesburg, and some cash in the till. How does Thabo know whether his shop is doing well? How does he know how much of the business truly belongs to him and how much he still owes? Accounting is the system that answers these questions. It is the process of recording, classifying, summarising and reporting the financial information of a business so that the owner and other interested people can make good decisions.

1.1 What accounting is and who uses it

Accounting turns thousands of separate money events — a sale of bread, the payment of wages, the purchase of a new shelf — into a clear, organised picture of the business. The people who rely on this picture are called the users of financial information. The most important user is the owner, who wants to know whether the business is making a profit. Other users include SARS (the South African Revenue Service), which needs the figures to work out tax; banks deciding whether to grant a loan; creditors (suppliers who sell on credit) checking whether they will be paid; and employees, who want to know that the business is stable.

A central idea in South African accounting is the business entity concept: the business is treated as completely separate from its owner. Thabo and his spaza shop are two different things. When Thabo puts in his R20 000, the money now belongs to the business, and the business owes that amount back to Thabo. This separation is what makes the accounting equation work.

1.2 The three elements: assets, liabilities and owners equity

Every business is built from three basic elements.

• Assets are the things the business owns or controls that have value, such as cash in the bank, trading stock, equipment, vehicles and money owed to the business by debtors.
• Liabilities are the amounts the business owes to outsiders, such as a loan from Standard Bank or money owed to a creditor for stock bought on credit.
• Owners equity (also called capital) is the owner's interest in the business — the part of the assets that truly belongs to the owner after all debts are settled. It increases when the owner contributes capital or the business earns income, and it decreases through drawings and expenses.

The link between income, expenses and owners equity is simple: when the business earns income the owner is better off, so owners equity grows; when the business pays an expense the owner is worse off, so owners equity shrinks. Drawings — money or goods the owner takes for private use — also reduce owners equity.

1.3 The accounting equation

The three elements are always in balance. This is captured by the accounting equation, the foundation of all accounting:

\[ A = O + L \]

where A is assets, O is owners equity and L is liabilities. The equation says that everything the business owns (assets) was financed either by the owner (owners equity) or by outsiders (liabilities). If Thabo's shop has assets of R30 000 and owes R8 000 to a creditor, then his owners equity must be:

\[ O = A - L = 30\,000 - 8\,000 = \text{R}22\,000 \]

The equation can be rearranged in any direction: \( A = O + L \), \( O = A - L \), or \( L = A - O \). It must balance after every single transaction.

1.4 The effect of transactions on the equation

A transaction is any event that changes the financial position of the business. Every transaction has a double effect — it affects at least two items — and after it is recorded the equation must still balance. We analyse each transaction by asking which elements change and whether they increase (+) or decrease (-).

This transaction analysis is the heart of Grade 10 accounting. Every more advanced topic — journals, the ledger and the financial statements — is simply a faster, more organised way of doing exactly what we did above: recording the double effect of transactions while keeping \( A = O + L \) in perfect balance.