Pastel Grade 12 Accounting Study Guide

Transcription

1 Pastel Grade 12 Accounting Study Guide

2 Table of Contents [ Lesson 1-An Introduction ]... 3 A. Types of Companies... 3 B. The Double Entry System... 5 C. Bookkeeping Cycle... 8 [ Lesson 2-Introduction to VAT ] A. Introduction to VAT B. Terms used in VAT C. VAT Processing D. Calculating VAT E. Bank Statements [ Lesson 3-Source Documents ] A. Source Documents B. Customer Invoices C. Supplier Invoice [ Lesson 4-Inventory ] A. Inventory Systems B. Costing Methods [ Lesson 5-Subsidiary Journals ] A. Introduction B. Cashbook Journals C. Creditors and Debtors Journals D. Creditors and Debtors Allowance Journals E. Petty Cash Journals F. The General Journal G. Reconciliation H. Credit Notes and Returns I. Bank Reconciliation [ Lesson 6-General Ledger ] A. Different Sections of a General Ledger B. Posting to the General Ledger C. Closing off Ledger Accounts [ Lesson 7-Trial Balance ] A. Integrated Inventory B. Posting to Trial Balance [ Lesson 8-Statement of Income ] A. Posting to the Statement of Income [ Lesson 9-Statement of Financial Position ] A. Posting to the Statement of Financial Position Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

3 [ Lesson 1-An Introduction ] A. Types of Companies There are four main types of business models in South Africa. Each type of company has a different structure, as well as a different legal, taxation and account structure. In order to be as efficient as a bookkeeper, you need to know the requirements of each type of company. The following table illustrates the different company requirements. SOLE PROPRIETOR SOLE PROPRIETOR Formation: Membership: Owner Accounts: Tax Implications: Liability of Debts: Accounting Requirements: Legal Representation: Continuity: Termination: No Legal Requirements One owner Capital and drawing accounts Personal income tax The owner is personally responsible for all the debts None Owner as an individual Limited Death or sequestration PARTNERSHIP Formation: Membership: Owner Accounts: Tax Implications: Liability of Debts: Accounting Requirements: Legal Representation: Continuity: Termination: Valid partnership agreement 2 to 20 partners Capital, current and drawings accounts for each partner Personal income tax for each partner Partners are individually or jointly responsible for all the debts None Partners Limited Death, sequestration or dissolution Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 3

4 CLOSE CORPORATION Formation: Membership: Owner Accounts: Tax Implications: Liability of Debts: Accounting Requirements: Legal Representation: Continuity: Termination: Founding Statement and Certificate of Incorporation 1 to 10 members Members Contributions, Retained Income and Members Loan Accounts Taxed at company tax rate and STC (secondary tax on companies) on dividends Only to the extent of outstanding members contributions. (Members may in some instances be personally liable for the debts of the company for instance if they have signed personal surety.) Requires an accounting officer Members Unlimited Liquidation or deregistration PUBLIC AND PRIVATE COMPANIES Formation: Memorandum, Article of Association and Certificate of Incorporation Membership: Owner Accounts: Tax Implications: Liability of Debts: Accounting Requirements: Legal Representation: Continuity: Termination: Private 1-50 and public 7 - unlimited Ordinary Share Capital, Ordinary Share Premium, Retained Income and Distributable Reserves. (There can also be preference share and non distributable reserves). Taxed at company tax rate and STC (secondary tax on companies) on dividends Only to the extent of outstanding payments on share capital. (Directors may in some instances be personally liable for the debts of the company for instance, if they have signed personal surety.) Requires an audit by a certified auditor Board of Directors Unlimited Liquidation or deregistration Although these businesses are different entities, many of the reports which are produced as part of the bookkeeping and accounting functions, are the same. 4 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

5 B. The Double Entry System Bookkeeping is a process of ensuring that all financial activity of a company is intact. What this means, is that for every transaction that takes place there must be another balancing entry to indicate the source of that transaction. Let s look at an example: As the owner of a business you go to a supplier and buy stock to resell using cash. Here the owner took the cash from the company, so this is one side of a transaction. To indicate the reason for it, we will record another side too and that will be that he bought stock, so we will have more stock in the accounting system for resell. In order to understand the double entry system, you first need to understand the different types of accounts. TYPES OF ACCOUNTS Accounts are classified based on the types of transactions they record. The categories are detailed in the following table. Income Expenses Income is commonly known as an increase of benefits for the company, for example: Sales income Interest received Profit on sale of fixed assets All of this indicates money coming into the business. Expenses decrease the benefits for the company, for example: Cost of sales Salaries and wages Telephone Electricity All of this indicates money going out of the business. It is important to note that this is for operational purposes that a company has to spend money in order to operate. The accounts discussed in the table will be used in a Statement of Income report of a business to display the business profit or losses. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 5

6 This table details the accounts reflected in a Statement of Financial position. Capital Owners Equity or This shows the net worth of the business. There are two main types of accounts we use here, namely: Capital Contribution Drawings Asset In essence, this indicates what the owners share in the business is. Capital Contribution can at times also be called Share Capital, Share Contribution, Members Loans, etc. This is what the owner has invested in the business. Drawings are what the owner has taken for personal use from the company. This is what the company owns. Assets can be either Non-Current Assets or Current Assets. Non-Current Assets - Motor Vehicles; Furniture & Fittings; Office Equipment. Liabilities Current Assets - Trade Debtors, Stock, Bank, Deposit Received. Non-current assets, formally known as fixed assets, are those assets that the company does not wish to convert to cash within a specific period. Current assets are assets that change value quickly, or can easily be converted into cash. This is what the company owes to third parties. We can classify liabilities as either Current or Non-Current Liabilities. Non-current Liabilities - Mortgage bonds, Vehicle Finance, Instalment Creditors, and so forth. Current Liabilities - Trade Creditors, Bank Overdrafts, Deposits Received, and so forth. Non-current liabilities are money owing that will be paid over a long period of time. Company policies may differ but is generally 5 years or longer. Current Liabilities are money owing over a short period of time and can normally be settled in less than 5 years, depending on company policies. This is used when formulating the businesses Statement of Financial position. This report shows the company s net worth. To do this we use the accounting equation which is represented as follows: Assets = Owners Equity + Liabilities Or Owners Equity = Assets Liabilities Or Liabilities = Assets Owners Equity 6 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

7 T-ACCOUNTS When accounts are drawn up, they are put into frames called T-Accounts. These T-Accounts are referred to as your General Ledger. The left side of the ledger is for debits, which is abbreviated to Dr, and the right side of the ledger is for credits, abbreviated to Cr, as shown below. Dr Cr To understand where we input the information let s look at the following: Assets and expenses increase on the debit side, while income and liabilities increase on the credit side. Assets and Liabilities are both Statement of Financial position accounts, as they deal with the long term operation of the company. Expenses and Income are both Statement of Income accounts, as they are used to calculate the company s profitability. Statement of Financial position accounts are recorded in the Statement of Financial position section of the general ledger, and Statement of Income accounts are recorded in the Statement of Income section of the general ledger. To remember this we use one of the following pneumonic: AEDLIC (Addlic): Assets and Expenses are debited and Liabilities and Income are credited when they increase. Dr. Cr. A L Statement of Financial position E I Statement of Income The owner s equity section needs to be handled the exact same way as a liability. The reason for this is that when an owner invests money in the business, that money is owing to the owner. This is why we will have a credit balance for capital. When the owner takes money or something of value from the business, their money owing to them decreases, so with drawings we have a debit balance. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 7

8 C. Bookkeeping Cycle Transaction Transaction takes place Reports Trial Balance Statement of Income Statement of Financial position Monthly Bookkeeping Cycle Source Document Gives detail of the transaction General Ledger Summary of the Subsidiary Journals Reconciliation Monthly recon's confirm journals Subsidiary Journal Summary of the Source Documents Monthly & Annual reporting forms the Accounting Cycle Trial Balance Summarises the general ledger Statement of Income Indicates profitability. Statement of Financial position Outlines financial performance. With reference to the diagram, the accounting cycle is a yearly cycle, which includes the bookkeeping cycle. In some business, the accounting cycle is a quarterly or even monthly cycle. The bookkeeping cycle runs on a monthly basis. In this course, we are going to go through each of the steps in the accounting cycle to give you an understanding of the responsibilities of a bookkeeper. 8 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

9 TRANSACTIONS This is the sale or the purchase that takes place. This is then recorded in the next step of the cycle. SOURCE DOCUMENTS Source documents are used to record a transaction and are then kept as proof of the transaction. The information is taken from the source document and written into the subsidiary journal. It is essential that source documents are filed safely as SARS (South African Revenue Services) requires that they are kept for five years. It is also very important that source documents are kept in an orderly filing system. This makes it much easier to find documentation that you might need, for example to solve a query, or prove that a payment was made. Examples of source documents include: Invoices (duplicate and original) Credit notes (duplicate and original) Receipts Deposit books/slips Cheque counterfoils SUBSIDIARY JOURNALS Subsidiary journals are used to group and summarise the transactional information from the source documents of a company. A business will use a number of subsidiary journals, in which transactions of a particular type are recorded, depending on the size and diversity of the business. Below are examples of the subsidiary journals that a company would typically use, and the source documents from which the information comes. Petty cash journal Cash book receipts Cash book payments Sales journal / debtors journal Purchases journal / creditors journal General journal Journal to record all of the petty cash transactions of a business. A business will generally use petty cash voucher slips to record the transactions. Recording of all of the receipts into the bank account that a business has received. A business will either use their deposit slips or receipts as their source document. All payments made from a bank account are recorded, using cheque counterfoils as the source document. Records all of the customer invoices issued by a business, whether for cash or on credit. The duplicate Invoices we have issued will be used in this instance. Invoices from suppliers / creditors are recorded. An original Invoice will be our source document in this instance. Miscellaneous transactions, such as payroll control transactions and drawings that do not fit into any of the other journals are captured in the general journal. Any type of other source document can be used here such as a cash requisition form from the owner for cash. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 9

10 RECONCILIATION Once all of the source document entries for a month have been captured into a journal, reconciliations are done to ensure that they have been done correctly. For example, a bank reconciliation is done by comparing the cash books with the bank statement, and a creditor reconciliation is done by comparing the purchases journal to the creditor s statement. The reconciliation process is a very important, and often a neglected step in the bookkeeping cycle. It is important to a business that the financial records are accurate. You will never know that your work is correct unless you check it against documents from another source. GENERAL LEDGER The general ledger is used to bring all of the information from the subsidiary journals into one place. When transferring / posting information from the journals into the general ledger, two entries are made for each transaction. This process is called the Double Entry System. TRIAL BALANCE A trial balance is a report or list showing all of the balances from the general ledger accounts. It can also be used to make sure that the balances on all of the accounts are correct, as it will show if there is an entry missing. It does not show if entries have been made into the incorrect accounts, or if the value transferred from the journals to the general ledger were incorrect. STATEMENT OF INCOME On a periodic basis a Statement of Income is drawn up from the general ledger. This report shows all of the income versus the expenditure of the business over the period, and is used to show the profitability of the business. STATEMENT OF FINANCIAL POSITION A Statement of Financial position is also drawn up from the general ledger on a periodic basis. This report shows the assets, liabilities and owners equity of the company giving an indication of the long term viability of the business. 10 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

11 [ Lesson 2-Introduction to VAT ] A. Introduction to VAT VAT stands for Value Added Tax. At present, the standard rate for VAT in South Africa is 14%. In some countries, a similar tax is charged called GST, or General Sales Tax. SARS requires that you keep all records relating to tax in a safe place and in a logical order for a period of at least five years. By law, certain goods and services attract VAT and thus VAT must be charged on these items. There are some exceptions to the rule: for goods and services that are zero rated; and for goods and services that are tax exempt. In the case of zero rated items, these have tax but at a rate of 0%. This tax is most often applied to exports. SARS does this to help exporters. Examples of the items commonly taxed at 0% are: exports, but only if you are paying the transport cost; and petrol, diesel and illuminating paraffin (only for the garage owner). Tax exempt means that there is no tax at all, not even at 0%. If you buy goods or services that are tax exempt, you will exclude tax on the transactions, so the entry will look much like a normal entry and the same as a zero-rated entry. However, if you sell only tax-exempt products, you do not need to register for VAT, so you cannot claim back any VAT on purchases you make. Some of the most common taxexempt supplies that you will come across are: food such as brown bread, milk, fresh fruit and vegetables, some canned foods like pilchards, samp and so on; interest received and interest paid (remember this for your bank account transactions); life assurance; products supplied by a welfare organisation, when these have been donated to the organisation; transport in a passenger vehicle in South Africa, that is a bus, train or taxi; rental of your home, excluding holiday accommodation; and services given by non-profit and welfare organisations. There are times that you are charged VAT for something, but you are not allowed to claim it back from SARS, with certain exceptions: You cannot claim back VAT for entertainment expenses, including VAT on tea, coffee, sugar and other staff refreshments. However, if you have a hotel bill for an employee that was away on business and stayed overnight, you can claim that VAT. Another example of a non-allowable item is VAT on passenger vehicles. If you can prove that your business has to buy passenger vehicles so that you can conduct business, you can apply to SARS for a concession. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 11

12 B. Terms used in VAT The following important terms are used when working with VAT. Input Tax Output Tax Your supplier charges you VAT. It is an asset to your business, as SARS must refund you the money. There are certain things that must be in place for you to claim VAT back. In the following cases, you cannot claim VAT. If there is no valid tax invoice from your supplier. If the product is zero-rated, tax exempt or not allowable. If the product is not essential to the running of the business. For example, stationery, telephone costs and office rental are essential expenses, because a business cannot run without them. On the other hand, a lunch out for the staff is not regarded as essential by SARS. This is the VAT that you charge your customers, and will need to be paid over to SARS. Output tax is therefore seen as a liability. C. VAT Processing Any business that operates in South Africa that has a turnover of more than R1,000, in one year must register for VAT with SARS. Most businesses pay taxes every second month, on the 25 th of the month. When you register for VAT, SARS will specify when your payments and VAT returns are due. If a business has, an annual turnover of more than 30 million, tax is due on a monthly basis. There are other models for the payment of tax, and you can find more detail on them on SARS website at SARS changes the tax thresholds for businesses from time to time. You can confirm your situation by asking your local SARS office, or checking for updates on the SARS website. VAT return forms reflect what you owe SARS for the output tax levied by your business, and what SARS owes you in the input tax on goods and services supplied to you, a simple calculation will tell you how much tax you owe to SARS. Output Tax - Input Tax = Tax due to SARS / Tax due to you from SARS If your input tax is more than your output tax, the difference will be due to you by SARS. 12 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

13 There are two types of VAT processing available when you register as a VAT vendor. These are known as the Invoice Based and Payment Based VAT. When you register as a vendor with SARS, they will decide on which VAT system you need to operate. Let us look at the differences between the two. INVOICE BASED This VAT system is the most commonly registered VAT system. If we look back at the bookkeeping cycle, the first step involved is the source documents. At this stage of the cycle, the vendor will indicate the VAT on the return forms even if no payment was made on that document. Let us look at an example of using this system and what accounts are affected. As the owner of a company, you go and buy stock for the business to the value of R inclusive of VAT on credit. Dr. Inventory Cr. Dr. Supplier Cr. Dr. VAT Control Cr From the above, you can see that the inclusive value goes to the supplier account. The reason for this is that when we decide to pay the supplier, we owe the full amount inclusive of the VAT. The Inventory has the exclusive value because when it comes to reselling the item we will add the VAT back to the item at that point. The third account we have is the VAT control account. Here the VAT portion of the transaction is a debit as it is Input VAT. This means that we will claim the VAT back from SARS. We use the VAT control account so that we immediately know that what amount is due or owed to SARS. Let s see what happens when you decide to now pay the supplier the R cash. Dr. Supplier Cr. Dr. Bank Cr You can see from the above that only two accounts are affected. The first is the supplier account. We previously had a credit balance, as we owed the money to the supplier, we now debit the account to indicate that we have paid and we do no longer owe the supplier. The second account is the bank account. As we used cash to pay the supplier, we could only have taken this money from our bank account. We also credit this account due to our asset decreasing in value. You will notice that no VAT account was used as we have already taken the VAT into account and advised SARS of it when we purchased the inventory. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 13

14 D. Calculating VAT When calculating VAT, you need to remember the following principles: The exclusive value is treated as being 100% of the value of the product or service. The VAT amount is 14%, so the inclusive value will then be 114% of the exclusive value. If you have the exclusive value, and need to calculate VAT, you will multiply the value by If you have the inclusive value and need to calculate VAT, you will divide by Examine the examples below. EXCLUSIVE VALUE = R To work out the inclusive value, multiply by R100 x 1.14 = R114.00, which is the inclusive value. To work out the VAT, subtract the inclusive value from the exclusive value. R R = R INCLUSIVE VALUE = R To work out the exclusive value, divide by R = R200.00, which is the exclusive value. To work out the VAT, subtract the inclusive value from the exclusive value. R R = R E. Bank Statements Bank statements are also very important source documents in a business. Firstly, they are tax invoices for the bank charges levied. They are also source documents for all of the transactions that have been deducted from your bank account of which you have no other record, for example, debit orders. You will also find direct deposits made into your bank account from customers. In many businesses, receipts are made out for deposits that are made directly into the bank account. You must then remember not to duplicate the receipt in the subsidiary journal by capturing the receipt and the deposit in the bank statement from the customer. Only one must be captured, so it would be better to cross off the receipt on the bank statement. Along with your bank statement, the bank will return all of the cheques that you issued, which were presented at the bank. These need to be filed safely and in numeric order, as they are proof that you have paid your suppliers, and that the supplier has received the money. Below is an example of a bank statement. You must bear in mind that the format of a bank statement will vary from bank to bank, but all of the necessary information will display. Remember that there is no VAT on interest paid or on interest received. 14 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

15 [ Lesson 3-Source Documents ] A. Source Documents Source documents are the initial documents on which all the details of a transaction are recorded. It is very important to store the documents in an orderly fashion for at least five years, or as required by your country s legislation. Various source documents are listed in the following table: Invoices Credit Notes Receipts Deposit Books/Slips Cheque Counterfoils Invoices are documents that record the sale of goods or services and can be for customers [Duplicate] or from suppliers [Original]. Credit notes and Returns are documents that record that goods have been returned. The same legislation requirements for an invoice will also have to be included on a credit note. Receipts are documents that record money coming into a business. A receipt can be written out for cash, cheques, credit card payments or any other kind of transfer. Deposit books and slips are used when money is deposited into a bank account. For a business, it is beneficial to ask the bank for a deposit book if you are going to be doing bank deposits regularly. This makes record keeping much easier. Cheque counterfoils or stubs record that a payment by cheque has been made. Petty Vouchers Cash Petty cash vouchers record money that has been spent from petty cash. Most stationery stores stock petty cash voucher books. Bank Statements Bank statements are important source documents for transactions that happen directly into and out of your bank account, for example, deposits made directly into your account, bank charges taken directly out of your account, and so on. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 15

16 RECEIPT Receipts are used to capture cash being received by the business. Receipt books can be bought from most stationery shops and, these books allow you to easily process a carbon copy of the receipt. The original copy is given to the customers and the duplicate copy is for you to file. Below is an example of a receipt. DEPOSIT BOOK / SLIPS Deposit books / slips are used to enter information, into your cash book receipts journal. This information is also gathered from the receipts on what was received and going to be banked. Both deposit books and slips are available from your bank. Deposit slip layouts vary from bank to bank, but all banks will require the same information. Study the example below. D S 16 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

17 CHEQUE COUNTERFOILS Cheque counterfoils, or cheque stubs, are used to capture payment information for the cashbook. These source documents are proof that you have made a cheque payment. It is important to complete both the cheque and the cheque counterfoil when issuing a cheque, as it is not always easy to remember whom the cheque was made out to at a later stage. However, cheques, once presented at the bank for payment will be stamped and posted back to you for filling. Most cheque counterfoils have the same layout and information as shown below. The grey section on the left represents the cheque stub, with information on filling it in given on the right. Date To For Balance brought forward Deposit Sub total This cheque ATM Withdrawals Balance carried forward Date of the cheque. The person or business to whom the cheque was written out. Reason for writing the cheque. Balance from the previous cheque stub. Deposits made since the last cheque stub. Balance brought forward plus any deposits. Value of this cheque Any ATM withdrawals made since the last cheque. Bank withdrawals and transfers since the last cheque. This is the subtotal less ATM and other withdrawals. Completing this section of the cheque counterfoil is also known as balancing your cheque book Cheque number. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 17

18 When completing a cheque, certain information needs to be completed correctly so that the bank will honour it. See an example of a cheque below. Name[s] of signatory Here are some points to remember when issuing cheques. Either draw two lines across the top left hand corner of the cheque and write Not Transferable on the cheque, or stamp it with a stamp that says Not Transferable. This means that the cheque cannot be deposited into any other account but the one for which it is made out. This is called crossing a cheque, and is used to keep cheques safe from theft and fraud. Do not cross a cash cheque otherwise, you will not be able to cash it at the bank. Cross out the words or bearer on all cheques except cash cheques. This allows only the person for whom the cheque is made to, permission to bank it. In the section for adding the value of the cheque in words, start writing as close to the sum of as possible and try to complete the line before going to the next line, so that no one can alter the value of the cheque. At the end of the section, put in the word Only so no further amount can be added at the end. In the section for adding the value of the cheque in numbers, start writing as close to the R as possible, so that no one can alter the value by adding digits before the value. Make sure that you write clearly. Banks will not accept cheques with alterations on them, to prevent fraud. Cheques are only valid for six months, and they then go stale. A stale cheque cannot be deposited into a bank account. Remember that the signatures need to be present and they need to match those that are held by the bank. PETTY CASH VOUCHERS Petty cash is a cash float kept at a business premises. The money is used to cover incidental, small expenses in the business such as postage stamps, tea, milk and sugar. Petty cash vouchers are slips that need to be completed every time money is taken out of the petty cash box. Again, these can be bought in book format from most stationery stores. It is not necessary to make duplicate copies, as you will keep the voucher with your petty cash reconciliation. You cannot claim back the VAT spent on entertainment, which includes staff refreshments. For more information, refer to SARS website at 18 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

19 Let us look at an example of a petty cash voucher. TAX INVOICE There are various formats for tax invoices. Whichever format is used, there are rules about the information that needs to display on the invoice. For invoices of less than R50.00, SARS states that a till slip or shortened invoice is adequate. According to SARS, there is certain information that must appear on an invoice, namely: The trading name and address of the supplier. The document name Tax Invoice must appear clearly on the document. The invoice number needs to display clearly. This number must be unique to each invoice, and they must run in sequence. The VAT number of the supplier also needs to be present. The date the invoice was issued also needs to display. The legal name and address of the recipient of the invoice. The VAT number of the recipient, if the value of the invoice is more than R3, An accurate description of the goods or services supplied. The quantity or volume of the goods or services supplied. The per unit selling price of the goods or services supplied. The VAT amount, or the relevant percentage of VAT needs to display on the Invoice. The total value of the Invoice. If any of this information is missing from an invoice, the invoice is not valid according to SARS and the VAT may not be claimed. B. Customer Invoices You could buy a book of invoices from a stationery store, or make your own invoices. The advantage of buying stationery is that the book will generally have a facility for making duplicates. It is very important to have at least two copies of your invoices. One copy [the original] is for your customer and the other copy [the duplicate] is for you to file for reference purposes. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 19

20 C. Supplier Invoice Invoices that you receive from your supplier are source documents and recorded in your Supplier Journal. The rules that apply to customer invoices also apply to supplier invoices; they must include all of the required information and be filed in a filing system. The difference here is that the original will be yours and the duplicate will go to the supplier. On the next page, you will find a sample of an invoice layout. Note that provision has been made for all of the required information. You will also note that they are the same but the headings differ. Below is an example of a customer Invoice. Note the heading starts with Duplicate. 20 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

21 Below is an example of a supplier Invoice. Note the heading starts with Original. The Unit Price column and Total column will normally be entered at exclusive value unless the document requires different information. CREDIT NOTES AND RETURNS Credit notes are completed in exactly the same way as tax invoices, only the document name will change and you may include the original invoice number for reference purposes. Credit notes are issued to customers who return goods for a refund, and will be issued to you by a supplier if you return goods to them. In your accounts, you will record a Return and Debit note to your supplier for returns. If you have given a customer a discount on the original invoice, you must remember to use the same discount percentage on the credit note. VAT that was on the invoice must also be included on the credit note. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 21

22 For example, if you process an invoice for 10 items, with 14% VAT and a 10% discount, and customer returns 1, you will process the credit note with 14% VAT and 10% discount also. Let us look at the above-mentioned documents on the next 2 pages. The above document is a credit note you will issue when a customer returns goods to you. On the next page you will find an example of a return and debit note. This is also the Original. You will receive this from your supplier when you have returned goods to them for a refund. 22 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

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24 [ Lesson 4-Inventory ] A. Inventory Systems Inventory is one of the most important control systems a company has to have in place. This is important to ensure that your inventory levels are maintained but more importantly, to ensure that your inventory does not go missing. In bookkeeping, there are two control methods available. As a company, you will need to review the two systems and determine which system will work for you. INTEGRATED INVENTORY The integrated system, also known as the perpetual inventory system, is the most commonly used system. This is integrated into the general ledger, as it constantly updates your inventory control accounts with the value of your inventory and allows you to see at a glance the exact inventory levels on hand. The common example of a company that uses the system would be your retail outlets. They will need to know exactly what they have on hand of an item and what its value is. With this system updating your general ledger constantly, you are also now able to view at any stage the cost of sale for any process. Let us look at an example to demonstrate this process. You buy 10 inventory items with the value of R75.00 each exclusive VAT on credit. You then sell 7 of these items at R90.00 each exclusive of VAT on credit. When we buy the items (1 above) the following accounts are affected: Dr. Inventory Cr. Dr. Supplier Cr. Dr. VAT Cr We have used only a VAT account. This will change depending on the VAT system you are registered to use. Refer to lesson 2 should you not be aware of the different systems available to you. You can see from above that the Inventory is debited as we increase our on hand value by R (10 units x R75.00 per unit). We also owe our supplier the money so we write this to our supplier account and the difference is our VAT. We can immediately see at this stage that 10 items at a value of R75.00 per unit is on hand and available for resale. 24 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

25 Let us see what happens when we sell the goods to a customer on credit. Dr. Sales Cr. Dr. Customer Cr. Dr. VAT Cr The first step that happens here is we credit our sales account, as this is our income account with the exclusive value. We then debit our customer account with the inclusive value as they are liable to pay us the full amount and the balance is then written to the VAT account as a credit balance because we need to pay this over to SARS. Now that we have made the sale, we need to indicate that inventory has left us and gone to a customer. So at the time of sale the following transaction also happens. Dr. Inventory Cr. Dr. Cost of Sale Cr Bal It is important to remember this last step as it is part of the backend procedure and is not always mentioned. Here the inventory decreases by 7 units of R75.00 each, so we credit the Inventory account and we then write this off to a cost of sales account, to indicate how much the sale actually cost us. We now also know from this that we have R worth of inventory on hand, which is 3 units at R75.00 each ( / 75.00). Using the method you can see that at any given stage you know how much your inventory is worth and how much is on hand. Also at the time of the sale, you know exactly what the cost of the sale is. PARTIAL INTEGRATED INVENTORY The partial integrated inventory is also referred to as the periodic system. This is not an effective system to use when you need to know your inventory valuation and quantities at any given time. The most common industries that would use this system are the service related companies where stock is not so much an issue. Another example is a company that only buys on demand so will buy today for a job and use it on a project the same day. They need not keep control of what is in stock. With this system, you would need to manually calculate what the inventory levels are and the value of the inventory. Let us look at the same example as the other system. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 25

26 You buy 10 inventory items with the value of R75.00 each exclusive VAT on credit. You then sell 7 of these items at R90.00 each exclusive of VAT on credit. The first process we need to look at is the purchase of the goods. Bearing in mind we defined this system as not updating your stock levels or valuation. The first accounts that are affected is the following. Dr. Purchases Cr. Dr. Supplier Cr. Dr. VAT Cr From the above T-Accounts, you can see that we have merely replaced the Inventory account with the Purchases account. Due to us not keeping track of the inventory, we don t track the quantity we have bought. The customer now comes in and he buys the stock from you and mentioned in point 2 of the example. The accounts now affected are as follows. Dr. Sales Cr. Dr. Customer Cr. Dr. VAT Cr As you can see, the first part of the sale is the same as the integrated method. The same accounts will be affected with no change. The second part however does not automatically take place. This again will involve a stock take from your side whereby you need to physically go and count the actual stock available. Once this stock take is done, the following will happen. Once you have counted the stock levels, you will note that there are 3 units on hand at R75.00 bringing your closing balance to R to work out what your Cost of Sale is now, you will use the following formulae: COST OF SALE = Opening Stock Closing Stock + Purchases Worked out in this example is as follows: COST OF SALE = R0.00 R R = R Dr. Inventory Cr. Dr. Cost of Sales Cr Bal You will notice that no matter which system you use, the result is still the same. The partial integration method however will just require more work on your side and more control too. In this manual we use the original purchase price for Cost of Sales. It is possible that you are given a mark-up % on sales or cost of sales to determine the respective values. 26 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

27 B. Costing Methods When working with inventory, you will need to calculate the value of your stock on hand. There are various types used and we will discuss the weighted average and show you the calculations. You will need to see what the industry requirements for costing of your inventory is as you cannot just choose this one to use. Let us look at an example to demonstrate this method: Day 1: Owner buys 10kg of Cheese at R5.00 p/kg. Day 2: Owner buys another 15kg of cheese at R6.00 p/kg. Day3: Owner sells 13kg of cheese at R10.00 p/kg. WEIGHTING AVERAGE This is the most common used costing method and is used by many software applications. This method looks at the total quantity on hand and calculates (based on all purchases) the average of the stock value. Let us calculate the average cost using the introduced example: Date KG Price Day 1 10kg R50.00 Day 2 15kg R90.00 Total 25kg R Average R5.60/kg To calculate this, we took the total money spent on purchases (R R90.00 = R140.00) and divided this by the total kg on hand (10kg + 15kg = 25kg). This then gives us an average of what you spend p/kg of cheese you buy (R / 25kg = R5.60p/kg). When you sell the cheese on day 3, the Cost of Sales will then be the average cost. You stock on hand will be 25kg-13kg = 12kg on hand at a cost of R5.60p/kg. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 27

28 [ Lesson 5-Subsidiary Journals ] A. Introduction The information from every source document is transferred to the subsidiary journals. This gives the subsidiary journals their other name, Prime Books of Entry. Transactions are entered into these books directly from the source documents, so they are the prime or first book of entry. Specific journals contain information regarding specific transactions. For example the sales journal, or customer journal, contains all the information about customers sales and the receipts cash book is used to store information about all of the receipts into the bank account. Transactions from every source document are summarised into the appropriate subsidiary journal. This makes closing off at month end much easier. As with blank documents for your source documents, pre-printed journal and ledger books can be bought at most stationery stores. According to SARS, these records must be kept for at least five years, in an orderly manner for reference and auditing purposes. B. Cashbook Journals It is very important for every business to carefully record the movement of cash in and out of the business. These records are kept in two prime books of entry: the cash book and the petty cash journal. Any change in the value of the company s bank account is recorded in the cash book. Any change in the amount of money in the petty cash box is recorded in the petty cash journal. The cash book can either be divided into two parts, left and right, or kept in two separate journals, one for receipts and one for payments. Because the bank account and petty cash account of a business are both assets, the journals are divided as shown below. An increase in the value of an asset is a debit, and so you will post the entry on the left. A decrease in the value of an asset is a credit, and so you will record the entry on the right. Bank Debit entry Increase in account Receipt Credit entry Decrease in account Payment Previously, we looked at receipts as a source document. These will be captured in the cash receipts journal. Another source document for the cash receipts journal is the bank statement, which will give details of deposits that went directly into the bank account. Cheque counterfoils will be captured in the cash payments journal. Another source document for the cash payments journal is the bank statement, which gives details of any EFTs [electronic funds transfers] that was deducted from the account, as well as debit orders and bank charges. It is important to have a good numbering system in place for the transactions that come from your bank statement, as this will simplify your bank reconciliation process. 28 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

29 To make it easier to record entries from your bank statement, number the transactions on your statement before you begin capturing them. The best numbering systems are ones that are easy to maintain. A good example is BSMMNNN, where you start the number with BS for Bank Statement, and then for MM, put in the Month, for example 03 for March. Then NNN to number your transactions from 001 onwards for example, so that each transaction that appears on you bank statement has a unique number. Do not number the cheques or your deposits that appear on the statement, as they already have a unique number We will now look at the cash receipts and payments journals. We are going to split the cash book into two separate journals, as it is easier to show the transactions. THE CASH RECEIPTS JOURNAL Receipt books, bank statements and deposit slips are used as source documents for this cash book. The cash receipts journal will have the following columns. Date Doc No Details Fol. Bank Customers VAT Sundry Amount Fol. Detail Each of the columns is described in the following table. Date Doc No Details Fol. Bank Customers VAT Amount Fol. The date of the receipt is entered here. The receipt number, from the receipt book, bank statement or deposit book is recorded here. The details of the person from whom you received the money is entered here. The detail that you need to put in may vary from company to company. For example, for a cheque receipt, you may need to put in the cheque number; for a customer account payment you would need to record the customer account number and for cash customers, you would record the invoice number. Here you would record the detail of the account in the general ledger or customer ledger where this journal entry is posted. All of your receipts will be recorded in this column, to indicate the money that is banked. This column is used to record the money received from customers. VAT on the entry is recorded here. For receipts from customers, no VAT is recorded here as the VAT is recorded in the customer journal when the Invoice was issued. The VAT exclusive value of any other type of receipt of money is recorded here. The reference of the account that you post the entry to in the general ledger would be recorded here, at the time of posting. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 29

30 Detail The details of the sundry transaction would be recorded here. THE CASH PAYMENTS JOURNAL Payments are recorded in the same way as receipts. The source documents for posting to the cash payments journal are cheque counterfoils and bank statements. Remember to number your statement transactions before you start recording the transactions. The columns in the cash payments journal are very similar to the cash receipts journal, as shown below. Date Doc No Details Fol. Cr Bank Dr Suppliers VAT Sundry Amount Fol. Detail Each of the columns is described in the following table. Date Doc No Details Fol. Bank Suppliers VAT Amount Fol. Details The date of the payment is entered here. The number of the cheque or bank statement transaction is recorded here. The details of the person who you made the payment to are entered here. Here you would record the detail of the account in the general ledger or supplier ledger where this journal entry is posted. You would only record this when you post the transaction. This column is used to record the value of the transaction, including VAT. This column is used to record the money paid to suppliers. Any VAT on the entry is recorded here. For payments to suppliers, no VAT is recorded here as the VAT is recorded in the supplier journal when the invoice was received. If the payment was not to suppliers, you would enter the exclusive amount here, in the sundry section. The reference of the account that you post the entry to in the General Ledger would be recorded here. The details of the sundry transaction would be recorded here. Money spent on purchases and expenses is treated differently. Purchases are things that you buy that you then resell. Expenses are costs that are involved in the day-to-day running of your business. For example, if you were processing the books for a petrol station, petrol bought would be a purchase, because you are going to resell it. If you are not processing the books for a petrol station, any money spent on petrol is an expense, because it is a running cost of the business. 30 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

31 C. Creditors and Debtors Journals A creditor or debtor s journal is used to capture the sales and purchases of the business. When doing purchases, you could use the Debtors Journal but it is more common to use a Purchases Journal. When capturing sales, you would use a creditor s journal or a sales journal. Creditors and debtors journals have the same layout; both follow the format shown below. Date Doc No Details Fol. Control Account VAT Excl Sundry Amount Fol. Details The following table explains each column: Date Doc No Details Fol. Control Account VAT Excl Amount Fol. Details This column is where you would fill in the date of the transaction. Here you would fill in the document number. This would generally be the invoice number from your supplier or your invoice number issued to the customer. The name of the customer or supplier is entered here. This is the reference for the customer or supplier ledger account that the transaction will be posted to. This will be handled in more detail in the next lesson. The full inclusive value of the document is entered here. At the end of the month, the column is totalled and the value is posted to the control account in the general ledger. If you are registered for VAT, the VAT amount of the invoice is entered here. The exclusive value of the transaction is entered here. This will be headed as either sales [customers], purchases / inventory [suppliers] account in the general ledger, dependant on the inventory system being used. If it needs to be posted elsewhere, it will be recorded in the Sundry columns. If the transaction must not be posted to the sales or cost of sales account, you will record here the exclusive value of the transaction. When you post the value to the sundry general ledger account, you will record the folio number for that account here. Note that this will only be filled in at the end of the month when you post the transaction. Here you will record the name of the general ledger account you posted the sundry value to. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 31

32 D. Creditors and Debtors Allowance Journals When a customer returns goods, or you return goods to one of your suppliers, you will either process or be given a credit note. These documents are not recorded in your customer and supplier journals [Sales Journals or Purchase Journals], because they have the opposite effect of those journals. For example, if you have a sale in your customer journal for a particular customer, the balance of the journal will be a debit. You cannot post a credit transaction here, which means you cannot process a credit note in this journal. You will use a creditors return journal [CRJ] or sales return journal [SRJ] for these transactions. Likewise, if you receive a rebate or a credit note from your supplier, you will record the document in the debtors returns journal [DRJ] or purchase return journal [PRJ]. E. Petty Cash Journals Most businesses have a cash box in which some cash is kept for small expenses. This cash must be accounted for in detail. According to SARS, these records must be kept for at least five years. The source documents used for this journal is your petty cash vouchers As already explained, receipts are always posted on the left, as a debit and payments are posted on the right, as a credit, when working in your cash books. Date Doc No Details Fol. Petty Cash Post & Stationery Staff Refresh VAT Sundry Amount Fol. Details Other Each of these columns is described in the following table: Date Doc No Details Fol. Petty Cash Other VAT Amount This is where the date of the transaction is recorded. The petty cash voucher number is recorded here. The details of the expense are recorded here. Here you would indicate the folio of the general ledger account. The inclusive value of the transaction is entered here. At month end, this column is totalled, and the value posted to the General Ledger on the credit side in the petty cash account. These columns are used for the most common expenses, and would vary from business to business. You would record the exclusive amount in the relevant column. The VAT amount of the transaction is entered here. Note that some foodstuffs have no VAT. To make sure you don t make an error, refer to your till slip for the VAT details. If the expense does not belong under either of the other headings, you would enter the exclusive value here. 32 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

33 Fol. Details When you post to the General Ledger, you will record the folio number of the account you post the sundry amount to in this column. Here you would enter details of the account you are posting the sundry amount to. You cannot claim back the VAT spent on entertainment, which includes staff refreshments. For more information regarding VAT, refer to the SARS website at F. The General Journal The general journal is used to record any transactions that do not match any of the other journals. The structure of the general journal is also different from the structure of the other journals. A common example of an entry that would go into the general journal is an expense paid for directly by a director, member or the owner of a business. For example, a director takes stationery for personal use. This example would be recorded in the general journal as shown below. Date Doc No Details Fol. Debit Credit xx Drawings BS VAT BS Members Contribution BS Mike took stationery for personal use. Date Doc No Details Fol. Debit Credit This is the date of the transaction. This will be document number of the relevant source document. Here you will enter the details of the general ledger accounts to be debited and credited. This will be the folio number of the general ledger accounts you update. This will be the amount you post to the general ledger account debited. This will be the amount you posted to the general ledger account credited. Examine the example above and remember the following: The details column is used to insert the names of the accounts affected by the transaction. The entry has both debit and credit components, and they balance. The debit transaction is captured before the credit transaction. There is a short explanation of the transaction, which is underlined to indicate the end. The transaction is finished off by ruling a dark line across the journal. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 33

34 G. Reconciliation At the end of every month, you will need to add up the values in each subsidiary journal so that they can be posted to the general ledger. H. Credit Notes and Returns As part of your month end process, you must reconcile your accounts. To make sure that your work is accurate, you need to compare your work with sources from outside your company. It is essential that you do regular reconciliations to eliminate possible errors. Four main reconciliations need to be done on a regular, monthly basis as discussed in the following table: Bank reconciliation Creditors/supplier reconciliation Debtors/customer reconciliation Petty cash reconciliation You will compare your cash book journals with your bank statement. You will compare your creditors journal with the statements you receive from your creditors. You will compare your debtors journal with the remittance advises you receive from your debtors. You will compare your petty cash journal with the actual cash in the petty cash box. I. Bank Reconciliation This is probably the most important reconciliation that you do on a monthly basis. If you have made errors in your cash book processing, it can have a serious impact on your business if you do not correct them. Before you begin your bank reconciliation, it is a good idea to make a photocopy of your bank statement. While you are doing your reconciliation, you will write on the bank statement, and it is important to keep the original legible. Various things would cause a difference in your bank reconciliation: Occasionally, you will find a deposit into your account that you were not aware of. This usually happens when one of your customers makes a deposit into your bank account and does not send you a proof of payment. You will then need to record the receipt into your cash book receipts. You might also find that you have recorded a cheque in your cash book payments, and it does not yet show on your bank statement. Postal delays or your supplier having not yet presented the cheque at the bank can cause this. You do not need to adjust your cash book payments in any way. These items will be shown on your bank reconciliation as unreconciled payments. There may be bank charges on your statement that you were not aware of. These will need to be posted to your cash payments journal so that your bank reconciliation will balance. 34 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

35 The bank reconciliation process is easiest if you do it in a step-by-step process, as shown on the next page. Step 1 Step 2 Step 3 Make a photocopy of your bank statement for you to work on. Make sure that your transactions are numbered as detailed on page 8 in this lesson. Compare all of the credits that show on your bank statement with the bank column in your cash book payments. The easiest way to do this is to begin with the oldest entries on the bank statement, in other words, start at the beginning of the month. One by one, mark off each transaction as you find it in your cash book. Check for postings from other journals such as your general journal. If you find any discrepancies, you will need to sort them out immediately before continuing. Step 4 Compare all of the debits that show on your bank account with the bank column in your cash book receipts. Again, start with the oldest transaction and mark off each one as you go. Clearly mark any cheques that you have recorded that do not yet show on your bank statement. Check for postings from other journals such as your general journal. As with the cash book receipts, you will need to sort out any discrepancies immediately. Step 5 Draw up your bank reconciliation. There are many different formats for processing a bank reconciliation, but they all follow the same formula. Closing balance as per the bank statement: Less outstanding cheques: [Here you would list any cheques not yet presented for payment and subtract the total value to the closing bank balance.] Plus outstanding deposits: [Here you would list any deposits not yet presented at bank and add the total value to the previous total.] Reconciled bank balance: [Enter the previous balance this is your reconciled bank balance.] Control Account Balance: [This is the balance of your general ledger bank account.] Difference: [This is the difference between the reconciled bank balance and the control account. It must be zero, or you have an error that must be corrected.] Bank Balance - less cheques + deposits Reconciled balance GL bank account Difference Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 35

36 CREDITOR RECONCILIATION On a monthly basis, your creditor will send you a statement of your account, showing any outstanding amount that you might owe them. This document needs to be compared with the balance of the creditors account in your creditors ledger [your creditors reconciliation will be done after you have posted all of your journals to your creditors ledger]. In some businesses, there is a form to complete for the supplier reconciliation, but in other businesses, it is less formal. It is a good idea to have a formal reconciliation for you creditors, especially if your creditors ledger does not match the creditors statement. An example of how you could record supplier reconciliation is shown below. Some typical reasons for differences are: Payments to creditors that do not appear on the creditor s statement yet. Credit notes that you have requested that the creditors has not yet processed. DEBTOR RECONCILIATION Most statements have a remittance (proof of payment) section that should be cut off and sent back with payment. When you send out your statements, it is a very good idea to include a remittance section. There are many different formats for these, so have a look at a number of different statements to see which one is going to suit your needs. When you do your debtor reconciliation, you will compare your debtor s remittance advice with the debtors account in your ledger. Again, you will only do the reconciliation after you have posted all of your subsidiary journals to your debtor journal. You can use the same format as you used for the debtor reconciliation to do your debtor reconciliation. 36 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

37 Examine the example below. Some typical reasons for the difference are: The debtor has given you a postdated cheque that you have not yet deposited. You banked a debtor s payment after the closing date of the ledger. The debtor has requested a credit note that you have not yet processed. PETTY CASH RECONCILIATION After you have closed off your petty cash journal, you will have a balance for the petty cash account. This balance should be the same as the value of the physical cash in the box. You need to regularly reconcile this. Again, different businesses have different forms that they use to record the petty cash reconciliation. Examine the example below to see how you could design a Petty Cash reconciliation form. Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 37

38 [ Lesson 6-General Ledger ] A. Different Sections of a General Ledger The General Ledger reflects all of the information gathered from your subsidiary journals. It is the core of your business s financial records, and the source of the information for your financial statements. Understandably, your General Ledger is a very important part of your bookkeeping cycle. The structure of the General Ledger will follow a specific guideline called the chart of accounts. The way in which the elements are arranged will change from business to business, but all of them will have the following: Revenue Expenses Owner s Equity Assets Liabilities The first two accounts are your Statement of Income accounts, or your nominal accounts. The last three accounts are the Statement of Financial position accounts. Below is a table showing some of the characteristics of these two types of accounts. Statement of Income/Nominal Accounts Records the year-to-date balance of the account. Accounts go back to a zero balance at the beginning of each financial year. For example, it is more beneficial to see the value of telephone expenses just for this year, rather than for the entire life of the business. Income increases on the credit side (righthand side) and expenses increase on the debit side (left-hand side). Statement of Financial position Accounts Records the ongoing balance of the account. Accounts are not affected by year end. For example, your bank balance does not go back to zero at year end. Assets increase on the debit side (left-hand side), liabilities and owners equity increase on the credit side (right-hand side). SETTING UP THE GENERAL LEDGER Your General Ledger is a book that is divided into sections for each of the above categories. In each section, you will have space that is designated for each account; very often one page of the General Ledger is given to each account, and more pages for accounts that are likely to have more transactions. Each of those accounts will be given a number, and those numbers correspond to the type of account that they are. When you set up your General Ledger, the first step is to make a list of the accounts that you need to keep a record of. On the next page is a list of the most common General Ledger accounts. You must keep in mind that this will differ from one business to another. Each of the accounts will be given a number, as shown in the table. You will note that the accounts in the Statement of Incomes or nominal section of the General Ledger are numbered numerically and each begins with the letter IS. In the Statement of Financial position section, each of the numbers begins with the letter BS. These are your folio numbers. 38 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

39 This table shows the accounts in the Statement of Income section of the chart of accounts. Type of account Description Folio Revenue Sales IS1 Discount Received Interest Received Rental income IS2 IS3 IS4 Cost of Sales Cost of Sales IS5 Expenses Accounting Fees IS6 Advertising Bank Charges Cleaning Materials Discount Allowed Donations Duty Fees Electricity and Water Fines Insurance Interest Paid Levies Motor Vehicle Expenses Printing and Stationery Postage Rent Paid Salaries and Wages Staff Refreshments Telephone IS7 IS8 IS9 IS10 IS11 IS12 IS13 IS14 IS15 IS16 IS17 IS18 IS19 IS20 IS21 IS22 IS23 IS24 Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 39

40 This table shows the accounts in the Statement of Financial position section of the chart of accounts. Type of account Description Folio Owner s equity Retained Income BS1 Capital BS2 Assets Drawings Fixed assets Furniture and Fittings Land and Buildings Motor Vehicles Plant and Machinery Current assets Bank Account Inventory/Stock Debtors/customers/ Accounts Receivable Petty Cash BS3 BS4 BS5 BS6 BS7 BS8 BS9 BS10 BS11 Liabilities Deposit Paid Long term liabilities Long Term Loans Instalment Sale Creditors Short term Creditors/suppliers/ Accounts Payable BS12 BS13 BS14 BS15 VAT Control BS16 Short Term Loans BS17 Depending on the company, you can have more accounts. For easy reference, it is recommended to keep your accounts in alphabetical order. 40 Pastel Grade 12 Accounting Study Guide Softline Pastel Accounting 2012

41 B. Posting to the General Ledger When transactions are posted to the General Ledger from your subsidiary journals, they will always be posted using the double entry system which we demonstrated in Lesson 1. Because of this, if you add up all of the debit entries in your General Ledger, they would balance with the credit entries of the General Ledger. Once you have closed off all of your subsidiary journals for the month, you are ready to post to the General Ledger, and the customer and supplier ledgers. The General Ledger is usually done in a book with two columns in which traditional T-Accounts are done, although it can also have three columns. If you use three columns, one is generally used to record a running total, and one is used for details or explanations of the line. On occasion, you will post from two different subsidiary journals to one account in your General Ledger. This will most often be to the bank account and the customer and supplier control accounts. Control accounts are accounts that have a sub-ledger attached to them. For example, you will have a customer control account that shows the total value of all of your customers, and you will also have a customer ledger that shows each of the individual customer accounts with their balances. The other most common control accounts are the suppliers control account and the inventory control account. Each balance that is posted from the subsidiary journals will also have a reference given to it when you post. This reference is recorded with the transaction in the General Ledger, and with the balance in the subsidiary journal. This will make it easier to find a balance if you need to check your work, or if you are looking for information on a balance. C. Closing off Ledger Accounts After you have posted all of the entries from your subsidiary journals to your General Ledger, you will need to close off each of the accounts in your General Ledger so that you can see the balance. Closing off the account involves adding up all of the debits and adding up all of the credits, and then recording the difference on the side with the smallest balance, as shown in the example on the next page. This entry is called the balance carried down, and has the reference c/d. The balance of the account is then recorded, and an entry made for the opening balance of the next month. This entry is the balance brought down, and will have the reference b/d. If we look at the bank account from the case study above, you will see the transaction below. In the example above, you can see that the entry you make in the credit column of R8, is balanced by the entry you make for April s opening balance, in the debit column (In this example, the opening balance or balance brought down for March is R0.00). Softline Pastel Accounting 2012 Pastel Grade 12 Accounting Study Guide 41