DEPARTMENT OF FINANCIAL ACCOUNTING

B.TECH: INDUSTRIAL ENGINEERING

(BNIND1)

FINANCIAL ACCOUNTING FOR ENGINEERS

(FAEN101)

TOPIC GUIDE: ACCOUNTING EQUATION

2024
The following table presents the learning outcome and assessment criteria:
Learning outcome Assessment criteria
To understand the accounting concept • To apply the double entry principle
of the double entry in recording using the ledger accounts.
transactions. • To record the transactions using
the accounting equation template.

Explanatory Notes
Debtor – person who owes money to the company.
For example: person who purchases a table on credit from the company, that person is
called the debtor.

Creditor- the company owes money to another person/3rd party.

For example: company buys a table on credit from a supplier, the supplier is the
creditor.

Transaction – is an event that has a monetary impact on the business finances. All
transactions are recorded in the ledger accounts.

Financial year - The AFS reflect transactions over a period of 12 months. The 12-month
period is known as the financial reporting period (financial year).

BREAKDOWN OF ASSETS, LIABILITIES, EQUITY, INCOME & EXPENSES

Statement of Financial Position (SoFP)
➢ Assets – are divided into two categories namely, non-current assets and
current assets.

• Non-current assets - are assets that are held for a long period of time
> 5 years. [examples include: Land & buildings, Plant & equipment,
Motor Vehicles].

• Current assets - are assets held for a short period of time. [examples
include: Inventory, Debtors and Bank].

➢ Liabilities – are divided into two categories namely, non-current liabilities

and current liabilities.

• Non-current liabilities – are obligations that have a duration of >

than 5 years [examples: Long-term loan, Mortgage loan]

• Current liabilities – are obligations that have duration of +/- 1 year

[examples: Creditors, Short-term loan, Tax payable, Bank overdraft].

➢ Owners Equity – is the net worth of the company. It is reflected in ordinary

share capital, preference share capital, drawings, retained earnings.

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Statement of Comprehensive Income (SoCI)

➢ Income – examples include…rental income, interest income, dividend

income, fee income, commission received.

➢ Expenses – examples include…rental expense, water and electricity,

insurance, salaries & wages, telephone, depreciation, administrative costs.

TUTORIAL 1

Classify the following items (Assets, liabilities, Equity, Incomes or Expenses)

Item Answer
a) Ordinary shares issued by the company
b) Land and buildings
c) Machinery
d) Dividend received
e) Inventory
f) Loan received
g) Interest on loan
h) Accounts receivable
i) Accounts payable
j) Drawings
k) Telephone bill paid
l) Bank
m) Unfavourable bank balance
n) Commission earned

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RULES FOR LEDGER ACCOUNTS
IMPORTANT: The side on which the balance lies is the side the account increases,
therefore the opposite side is where the account would decrease.

Assets have debit balances. It  on debit side and on the credit side.

Assets
Dr + – Cr
Balance b/d XXXX

Owners Equity has credit balances. It on the credit side and on the debit side

Owners Equity
Dr – + Cr
Balance b/d XXXX

Liabilities have credit balances. It on the credit side and on the debit side

Liabilities
Dr – + Cr
Balance b/d XXXX

Income have credit balances. It on the credit side and on the debit side

Income
Dr – + Cr
Balance b/d XXXX

Expenses have debit balances. It  on debit side and on the credit side.

Expenses
Dr + – Cr
Balance b/d XXXX

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 The Accounting Equation Template
Date Account Account A = O + L
Debit Credit

RULES WHEN USING THE ACCOUNTING EQUATION TEMPLATE

➢ Enter each transaction onto the template in chronological order.

➢ For each transaction, identify if it is an asset, liability, income or expense.

➢ Decide which account to debit and which account to credit. Remember,

you cannot debit and credit the same account!

➢ Acc Dr AND Acc Cr columns reflect words.

➢ Monetary values go into the A, O and L columns. In the A, O or L columns,

you need to show a + or a – sign…this indicates an increase/decrease in
rand values.

➢ If the item is an income/expense the corresponding rand values goes

under owners equity column.

MODEL EXAMPLE
The following transaction appeared in the books of ACE Limited for the month of
August 2021:

01 The owner deposited R90 000 into the business bank account
05 Purchased land and buildings, paid by cheque, R40 000
09 Purchased equipment for cash amounted to R2 200
10 Paid rent by cheque for the business premises R5 000
14 Sold goods for cash R3 000
15 Received a loan R11 000 from ABC Bank
19 Paid employee wages R7 000
20 Sold goods on credit for R8 800
26 Paid telephone expenses by cheque for R900
29 Received investment income, R2 100

Required: Record the above transactions in the accounting equation

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MODEL EXAMPLE SOLUTION
Date Account Debit Account Credit A = O + L

01 Bank Capital +90 000 +90 000 0

05 Land & Buildings Bank +40 000 0 0
-40 000
09 Equipment Bank +2 200 0 0
-2 200
10 Rent expenses Bank -5 000 -5 000 0
14 Bank Sales +3 000 +3 000 0
15 Bank Loan +11 000 0 +11 000
19 Wage expenses Bank -7 000 -7 000 0
20 Debtors Sales +8 800 +8 800 0
26 Telephone Bank -900 -900 0
expenses
29 Bank Investment income +2 100 +2 100 0

TUTORIAL 2
The following transactions appeared in the books of Woody Limited for the
month ended July 2021:

01 The owner contributed R14 000 into the company’s bank account
09 Paid water and electricity by cheque for R2 000
11 Paid telephone expenses by cheque for R700
14 Received rental income amounted to R7 000
17 Purchased vehicles on credit for R6 300
18 Purchased machinery, R3 300 was paid by cheque
21 The owner withdrew R4 100 from the company bank account, for his
own personal use.

26 Sold goods on credit for R20 000

29 Received cash from debtors in settlement of their account, R12 000.
31 Paid interest on loan by cheque for the month of July 2021. The loan
of R30 000 (interest payable @ 10% p.a) was acquired on 01 January
2020.

Required: Record the above transactions in the accounting equation

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TUTORIAL 3
The following transactions appeared in the books of Sally’s Bakery for the month
ending May 2021:

02 The owner transferred R20 000 from her personal bank account to the
bank account of Sally’s Bakery.

05 Purchased baking equipment on credit for R8 900.

07 Sold goods for cash, R20 000
09 The owner contributed a motor vehicle to the business, the value of
the vehicle is R45 000.

10 Advertising costs was paid by cheque, R3 000

18 Paid creditors, R7 000 for equipment purchased on 05th May.
23 Water and electricity was paid by cheque, R12 000
26 The owner issued a business cheque for R500, to purchase a gift for
her friend.

27 R30 000 paid by cheque in part settlement of loan.

30 Interest paid on loan amounted to R350.

Required: Record the above transactions in the accounting equation

TUTORIAL 4
Jessie started her own ice-cream shop, Dip n Dots Limited on 01 June 2021.
The following are the transactions for the first month of trading:

01 Jessie invested R19 000 cash to start her business.

03 Purchased office furniture on credit, R5 600
05 Purchased a motor vehicle for R120 000 on credit. A deposit of
R20 000 was paid, and the balance will be repaid over the next 10
months.

14 Wages amounting to R7 000 was paid by cheque

15 Advertising expenses paid by cheque amounted to R1 900.
16 Sold goods for cash, R4 000
19 Received a loan from XYZ Bank for R30 000.
22 Purchased stationery R500 was paid by cheque
26 The owner withdrew R810 from the company’s bank account for his
own personal use.
28 Rent amounting to R2 700 was paid by cheque.

Required: Record the above transactions in the accounting equation

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