Chapter 1: What Is Accounting

? GRADE 7 — The Foundations of Accounting Chapter 1: What Is Accounting? Imagine you get R200 pocket money every month. You buy lunch, buy airtime, save a little. At the end of the month your mother asks: "Where did the money go?" Accounting is exactly the process of answering that question — for a family, a school tuck shop, or a massive company like Pick n Pay. Accounting is the system of recording, organising, and reporting all the money movements of a business so that owners and managers can make smart decisions. Why does accounting exist? To keep track of money coming in (income) and money going out (expenses). To know how much you owe other people (liabilities). To know how much other people owe you (assets). To show whether a business made a profit or a loss. To pay the right taxes to the government. Chapter 2: Basic Accounting Concepts The Accounting Equation — The Heart of Everything This equation is the most important thing in all of accounting. Everything — every journal, every ledger, every balance sheet — comes back to this one idea: ASSETS = + LIABILITIES EQUITY Assets = things the business OWNS (cash, equipment, stock, buildings). Liabilities = things the business OWES to others (bank loans, money owed to suppliers). Owner's Equity = what belongs to the owner = Assets minus Liabilities. The Two Sides of Every Transaction Every single financial event — no matter how big or small — affects the accounting equation in two ways. This is called the dual effect and it is the foundation of double-entry accounting. Transaction First Effect Second Effect Owner puts R1000 cash in business Assets ? (cash increases) Equity ? (owner's contribution increases) Buy stock for R300 cash Assets ? (stock increases) Assets ? (cash decreases) Borrow R500 from bank Assets ? (cash increases) Liabilities ? (loan increases) Pay R100 electricity bill Assets ? (cash decreases) Equity ? (expense reduces profit) Chapter 3: Source Documents Before anything is recorded in the books, there must be proof that a transaction actually happened. These proofs are called source documents. Document When Used Who Keeps It? Invoice Seller sends to buyer when goods are sold on credit Buyer keeps it as proof of what they owe Receipt Proof that cash was paid Payer keeps the receipt Cheque Written order to the bank to pay someone Cheque stub stays with the business Deposit slip Proof that money was deposited into a bank Business keeps the slip Credit note Sent when goods are returned — reduces what you owe Buyer keeps it Debit note Sent by buyer to request a reduction in their bill Seller keeps it