Accounting terminology

It is very important to familiarize with the following definitions.

Asset: Is a resource controlled by the organization because of past event out of

which the economic benefit will flow into the organization.

Non-Current Assets (NCA): A non-current asset is an item of value with a life

span of more than one year. Example: Buildings and vehicles. This includes
property, plants and equipment, intangible assets, and financial assets.

Non-current not easy to convert to cash.

Current Assets: A current asset is an item of value with a life span of less than 1
year which is easily converted to cash. Example: Cash in the bank and debtors.

current assets are easily converted into cash.

Liabilities: Is a present obligation (existing commitment) resulting from past

events, the settlements of which leads to decrease in economic benefits.
There are two categories of liabilities:

Non-Current Liabilities: These are obligations of the business which are

payable over a period of more than one year. Example: A bond from the bank on
a property.

Current Liabilities: These are obligations of the business which are payable
within 1 year. For example, Bank Overdraft and creditors.

Net Assets value = Total Assets – Total Liabilities

Owner’s Equity

This is the interest of the owners in the business. For example, Capital,
Contribution and Drawings.

Income – Expenses= Net Profit (Dist 50%) undistributed (RETAINED PROFIT)

The net profit belongs to the owner of the business and falls under owner’s equity.

Income: Income consists of receipts by a business for its normal operations. For
example, Sales, fees earned, rent received and interest received. These
increases economic benefit within a current period.

Expenses: Expenses are amounts spent by a business during its normal

operations. It excludes capital expenses. Example: Rent paid, Adverts, salaries,
and insurance.

Exercise 1

a. What is the definition of accounting?

b. What is the difference between Management Accounting and
Financial Accounting?
c. Who are the different internal and external users of Accounting Information?
Internal Users External Users

d. What are the different forms of Business owners in SA.?

Exercises 2
a. Describe the characteristics of assets, equity and liability
b. Classify each of the following items as either a Non-current
asset (NCA), Current assets (CA), Non-current liability (NCL);
Current liability (CL); Income (I); Expenses (E)
 NCA CA NCL CL OE I E
a) Capital 
b) Delivery vehicle 
c) Weekly wages 
d) Sales 
e) Trading stock 
f) Mortgage loan 
g) Telephone account 
h) Debtors (trade receivables) 
i) Computer 
j) Interest received 
k) Creditors (trade payables) 
l) Interest paid 
m) Property 
n) Discount allowed 
o) Discount received 
p) Depreciation 
q) Stationery used 
r) Stationery unused (stationery on hand) 
s) Bank overdraft 
t) Drawings 
u) Photostat machine 
v) Shop fittings 
 Accounting Equation

The accounting equation is the formula used to capture the effect of the relationship
of financial activities within a business. The equation is a simplified breakdown of
the values entered in the balance sheet.

Assets = Owners equity + Liabilities

The basic accounting equation (BAE) and its components are summarized as follows:
 The basic accounting equation (BAE) and its components are summarised as follows:
Assets = Owner’s equity + Liabilities
Non-current assets Owner’s funds Income Expenses Non-current liabilities
Land and buildings Capital Sales Purchases Long-term loans Mortgage
Furniture Equipment Add: Net profit Fees earned Rent paid bond
Motor vehicles Fixed Less: Drawings Rental income Salaries and
deposit wages Current liabilities
Interest income Interest paid Creditors (ac- counts
Current assets Commission received Stationery payable) VAT
Debtors (accounts used Discount received
receivable) Trading stock Telephone
(inventory) Water and
Bank electricity
Petty cash Bank charges
Repairs
Advertising
Petrol and oil
Discount
Allowed
DATE ASSETS = OWNERS’ EQUITY + LIABILITIES
Vehicles Equipment Debtors Bank Capital/ Income/ Loan Creditors
drawings expense

R R R R R R R R
1 +15 000 +15 000
2 +60 000 -6 000 +56 000
3 -2 000 -2 000
10 +15 000 +15 000
12 -500 +500
14 +20 000 +20 000
15 +10 000 +10 000
17 -3 000 -3 000
20 -800 +800
24 -1 500 -1 500
26 -8 000 +8 000
28 -250 -250
31 +75 000 +75 000