TERM 2 : GRADE 7 FINANCIAL LITERACY ACCOUNTING CONCEPTS

Term 2: Financial literacy

Accounting concepts

WHAT IS ACCOUNTING?

 It gives information about what a business has done with the money that it earned.
 It is the recording of information which can be used by the owner when making
decisions.

CAPITAL, ASSESTS AND LIABILITIES

Capital, assets, Liabilities are the basic concepts of Financial Literacy. Assets are what
the business own and liabilities are what it owes. For any business to be successful it
must have access to capital.

CAPITAL
 Capital is the money supplied by the owner to start a business.
 Capital is all the money, goods and property a business can use to make an
income through the activities of the business. (buying, producing and selling).

There are 5 main types of capital:

 Fixed Capital/physical capital: is the goods used to produce other goods

that satisfy our needs and wants. Fixed capital include machines, tools
factory buildings, office buildings and trucks.
 Financial capital: is the source of money or funds needed to start or run a
business.
 Share capital: money invested by the owners in the business. It provides the
funds to buy capital goods.
 Working capital/ operating capital: is the money and stock needed to run
the day to day, to pay expenses and to pay for materials.
 Start-up capital: is the money needed to start a new business.

ASSETS

 Assets are the items owned by the business that have monetary value.
 They may include the amounts of money that customers owe the business (debtors) or
that is in the bank account of the business.
 Assets also include physical assets like raw materials, machinery, vehicles and
inventory (stock).

Non-current & current Assets

COMPILED BY MR NT KOKO
TERM 2 : GRADE 7 FINANCIAL LITERACY ACCOUNTING CONCEPTS

 Non-current asset (Fixed assets): A non-current asset is purchased by the business to

be used for many years in the process of generating income. Non-current assets will not
be converted into cash within the year.
E.g buildings, vehicles, equipment and investments.
 Current assets: Current Assets that can be converted to cash in a short period of time
e.g. trading inventory being sold, cash in the bank, petty cash, debtors (people who owe
the business money) or cash float ( money in the till)

LIABILITIES

 Liabilities are money owed by the business to other people or business. The person who
the business owes money to called a creditor.
 Liabilities include the capital that was borrowed from the bank.

There are two types of liabilities:

 Non-current liabilities/long-term liabilities: they are long-term costs, such as

mortgage or loan payments. Non-current liabilities have longer period to pay (between 5
and 25 years to pay).
 Current liabilities/short-term liabilities: They are short-term cost, such as creditors,
bank overdraft (a short term loan from the bank when you run out of cash) and short
term loans. Current liabilities have short term period to pay (between 1 month to 12
months)

INCOME, EXPENSES, PROFIT AND LOSS.

In a business, money comes in (income) and goes out ( expenses). To make a profit, your
income needs to be greater than your expenses. If your expenses are greater than your income,
your business operates at a loss (it is losing money).

Expenses

 Expenses are goods and services the business pays for in order to operate from day to
day. (Money going out).
 Expenses can be divide into two categories: Fixed expenses and variable expenses

Fixed expenses and variable expenses

Fixed expenses are the expense that you have to pay every month and they don’t change.
Fixed expenses are also known as the overhead expenses of the business. For example:

 Rent you have to pay for your shop

 Telephone account
 Water and electricity account

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TERM 2 : GRADE 7 FINANCIAL LITERACY ACCOUNTING CONCEPTS

 Wages/salaries to employees.
 Interest rates to pay on your account.

Variable expenses are the costs that relate to the number of goods or services you provide and
may differ on monthly basis. Variable expenses increase if more goods or services are
produced and decrease if fewer goods or services are produced. For example:

 Raw materials
 Wages
 Services such as transport
 Stationery
 Donations
 Packaging materials

Income

Income refers to the money coming into the business which is generated by the activities of the
business. For example:

 Sales (money made by the business through selling products)

 Current income
 Rent income

Profit

 Profit is the positive difference between the selling price and cost price, which provides
an income for the business owner.

Loss

 When expenses exceed income the business has run at a loss.

Classwork

1. Give meanings of the following words:

a. Capital (2)
b. Assets (2)
c. Liabilities (2)
2. Give 2 examples of capital. (2)
3. There are 5 different types of capital. Explain the 5 main types of capital.
a. Fixed/physical capital (2)
b. Financial capital (2)
c. Working capital (2)
d. Share capital (2)
e. Start-up capital (2)

COMPILED BY MR NT KOKO
TERM 2 : GRADE 7 FINANCIAL LITERACY ACCOUNTING CONCEPTS

4. Give 2 examples of fixed/physical capital, (2)

Total: 20

Homework

1. Give 4 examples of assets. (4)

2. List 2 examples of current assets and non- current assets. (4)
3. Differentiate between current assets and non-current (fixed assets) assets. (4) total:12

Home work

1. What is a liability? (1)

2. Give two examples of non-current liabilities and current liabilities. (4)
3. Explain what does the concept accounting mean. (2)

COMPILED BY MR NT KOKO