ACCOUNTING 1 (ACN101- M)

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1 1 ACCOUNTING 1 (ACN101- M) STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING DEFINITION: Accounting can be defined as the orderly & systematic recording of the monetary values of financial transactions of a business The reporting of results Providing financial information as a basis for decision making 3 main processes define the accounting process: 1. IDENTIFYING: Selecting evidence of economic / financial activity (transactions) 2. RECORDING transactions to provide a permanent history of the businesses financial activities 3. COMMUNICATING the recorded information to interested users by use of accounting reports IE Financial Statements The Nature Of Accounting: Accounting is used to convey the financial situation of an enterprise. It is therefore essential that the recipient of such information is able to understand it. Both words and figures are used to convey this information. Accounting is a language which is used to convey financial information to users

2 2 Forms Of Ownership: 1. Sole Trader / Proprietor 2. Close Corporation 3. Company 4. Partnership 5. Non profit Organizations Users of Financial Information: Financial information is required / used for analysis by: 1. INVESTORS: The Shareholders with a Financial Interest in the business 2. CREDITORS: The lenders of money, merchandise and services also have a Financial Interest in the business 3. EMPLOYEES: Regarding job security and wage negotiations and predictions for future employment 4. GOVERNMENT: Regarding taxes, and also for statistical purposes. Also used as an indication for Macro- Economic planning 5. MANAGEMENT: In order to plan and set new goals for future economic growth FIELDS OF ACCOUNTING: Financial Accounting VS Management Accounting Recording transactions and preparing financial statements regarding the entity as a whole GAAP (Generally Accepted Accounting Practices) standards ensure comparability of financial statements between businesses Provides financial information for specific purposes Used by management for decision making Used to assist management reach financial goals

3 3 STUDY UNIT 2: THE NATURE OF ACCOUNTING THEORY p.13 ACCOUNTING PRINCIPLES: 1. Accrual Principle: (WHEN?) The transaction must be recorded in the financial period it occurs, whether or not the cash has been received or paid 2. Consistency: (SAME) Once a method has been chosen it must be maintained. If said policy is changed, this must be reflected in the financial statements of the business 3. Prudence: (MODERATION) When there is uncertainty about the value of an element of event, use the effect that has the most Unfavorable effect on the business 4. Materiality: (SEPARATE MATERIAL TRANSACTIONS) All material transactions should be recorded separately in the financial statements. Immaterial transactions must be aggregated. (Material means substantial / of relatively large importance.) IE: Buying a building = Material Transaction Buying a stapler = Immaterial Transaction 5. Matching: This refers to the Double Entry system Expenses that create an income (IE buying goods for resale), must be recorded in the same financial period. 6. Realisations: An income / expense / transaction, should only be brought into account once it is relatively certain that that the collectability / payability of that transaction is certain. ACCOUNTING POLICY & DISCLOSURE THEREOF: A set of decisions that determine how the enterprise will treat the same type of transactions to achieve consistency, which has to be disclosed in the financial statements. EG: The enterprise needs to disclose on which basis it deals with the depreciation of property and equipment etc. GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP) This is a foundation that acts as a general framework to encompass accounting concepts, principles, methods and procedures.

4 According to GAAP there are two main statements: 4 underlying assumptions with regards to financial 1. The Accrual Basis* 2. The Going Concern * The four main qualitive characteristics are: 1. Understandability 2. Relevance 3. Reliability 4. Comparability The elements of financial statements are: Elements to measure FINANCIAL POSITION: 1. Assets 2. Liabilities Balance Sheet Accounts 3. Equity Elements to measure PROFITABILITY / FINANCIAL RESULT 1. Incomes Nominal Accounts (Expenditure Accounts) 2. Expenses

5 5 STUDY UNIT 3: THE FINANCIAL POSITION p.21 THE FINANCIAL POSITION: The Assets & Interests of the entity at a GIVEN TIME (BALANCE SHEET) ASSETS = INTEREST 1. EQUITY + 2. LIABILITIES Owners financial interest Creditors financial interest.:. ASSETS = EQUITY + LIABILITIES AND EQUITY = ASSETS - LIABILITIES NET WORTH: The enterprises NET WORTH is the difference between the values of the assets owned, less the liabilities it has incurred. ASSETS LIABILITIES = NET WORTH ( EQUITY )

6 6 STUDY UNIT 4: THE FINANCIAL RESULT p.29 THE FINANCIAL RESULT: The PROFIT or LOSS incurred by the enterprise OVER A SPECIFIC PERIOD. (INCOME STATEMENT) FINANCIAL RESULT = INCOME LESS EXPENDITURE = NET PROFIT / LOSS ASSETS = EQUITY + LIABILITIES (Capital + Income Expenditure)

7 7 STUDY UNIT 5: THE DOUBLE ENTRY SYSTEM p.39 ENTERING INFORMATION INTO THE LEDGER: 1. What is the effect of the transaction going to be on the BAE? 2. Identify the accounts involved 3. Determine which should be credited and which should be debited 4. Ensure the debited amount = credited amount 5. Indicate date of transaction 6. Indicate name if CONTRA ledger account 7. Indicate the folio number of the subsidiary journal TRANSACTIONS AFFECTING ASSETS & INTERESTS: p40 Capital Contributions: T.Tom draws from his personal bank a/c and deposits as capital for Fix N Mat ASSETS = EQUITY + LIABILITIES Bank = Capital = Acquisition of Loans: Fix N Mat obtains a loan from ABC Bank for R ASSETS = EQUITY + LIABILITIES Bank = Capital + Loan: ABC Bank = Purchase of Assets for Cash: Fix N Mat bought Equipment from XY Furnishers for R , paid by cheque ASSETS = EQUITY + LIABILITIES Bank Equipment = Capital + Loan: ABC Bank = Buying goods on credit: Fix N Mat bought furniture on Credit from Joc Limited, R2000 ASSETS = EQUITY + LIABILITIES Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd) = Payments to Creditors: Fix N Mat paid Joc Ltd s account of R2 000 ASSETS = EQUITY + LIABILITIES Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd) =

8 8 TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46 Income: CASH Fix N Mat provided services for client S. Silver and received cash cheque of R1 000 ASSETS = EQUITY + LIABILITIES Bank Furniture = (Income / Expenditures) = Income: CREDIT Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS = EQUITY + LIABILITIES Debtors Control = (Income / Expenditures) C. Canon = = Expenditure: CASH Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS = EQUITY + LIABILITIES Debtors Control = (Income / Expenditures) C. Canon = = Expenditure: CREDIT Fix N Mat placed an advert in the paper R200, payment due in 30 days ASSETS = EQUITY + LIABILITIES Debtors Control = (Income/ Expenditures) + Creditors = Advertising Cape Ads = Payments received from Debtors C. Canon settled his account in part, R2 000 ASSETS = EQUITY + LIABILITIES (Bank + Debtors) = (Income/ Expenditures) + Creditors C.Canon

9 9 BASIC FORM OF A BALANCE SHEET p50 FIX N MAT BALANCE SHEET AT 28 FEB 20.1 ASSETS R INTERESTS R Fixed Assets Equity Equipment Furniture Current Assets Debtors Bank Capital Net profit Withdrawals Fixed Liabilities Loan: ABC Bank Current Liabilities Creditors (1 000)

10 10 STUDY UNIT 6: THE ACCOUNTING PROCESS p.59 The basic form of a T- Account: DR NAME OF ACCOUNT CR DATE DETAILS FOL AMOUNT DATE DETAILS FOL AMOUNT CLASSIFYING LEDGER ACCOUNTS INTO GROUPS: ASSETS: A resource controlled by the enterprise from which future economic benefits are expected to flow NON CURRENT (Not be converted into cash within the next financial year) - Property, Plant and Equipment - Professional Library - Investments CURRENT ASSETS - Debtors - Inventory sold - Petty Cash - Bank - Prepaid Expenses - Accrued Income (Income earned but not yet received in cash) INTERESTS Investors and Creditors financial stake in the enterprise EQUITY (The owners financial interest) - Capital - Net profit / Loss - Drawings LIABILITIES FIXED LIABILITIES: (Payable over MORE than a year) - Mortgage loans - Banks Loans - Vehicle Finance CURRENT LIABILITIES: (Payable within one year) - Trade creditors - Bank Overdrafts - Accrued expenses (Expenses owed but not yet paid) - Prepaid income

11 BALANCING ACCOUNTS: (P62) 11 Where only one entry is made: Leave the account as is, this is the balance Where more than one amount appears on one side only: Add totals, this becomes balance Where the same amount appears on both sides: This account has NO balance, draw double lines Where amounts appear on both sides: Add up DR and Cr sides separately, total in pencil Subtract the smaller total from the larger total The difference is entered on the smaller side and is the balance of the account This the balance c/d (Balance to be Carried Down to next month) Totals on both side now correspond Now carry the balance down directly under the totals on the OPPOSITE side The is the balance b/d (Brought Down from previous month) Thus the closing balance of the previous month becomes the opening balance of the next month THE TRIAL BALANCE A list of ledger balances on a SPECIFIC DATE. The purpose of the Trial Balance is to test the accuracy of accounting (the double entry system), test the accuracy of arithmetic and to serve as a basis for preparing: 1. The Income Statement (showing the financial result) 2. The Statement of Changes in Equity 3. The Balance Sheet (financial position)

12 FINANCIAL STATEMENTS (p71) FIX N MAT INCOME STATEMENT FOR MONTH ENDED 28 FEB NOTE Revenue 2 Administrative and General Expenses R (1 000) Wages Advertising Net Profit for Month Income Statement for a period ended, not a specific date (FLOW variable, not STOCK variable) Income and expenditure accounts are referred to as NOMINAL ACCOUNTS THE STATEMENT OF CHANGES IN EQUITY (p73) FIX N MAT STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED 28 FEB 20.1 CAPITAL: Balance at the beginning of the month Net Profit for the month Drawings Balance at the end of the month R (1 000)

13 THE BALANCE SHEET (P74 13 FIX N MAT BALANCE SHEET AT 28 FEB 20.1 ASSETS Fixed Assets Property, Plant & Equipment 3 Current Assets Trade and other receivables Debtors Cash and cash equivalents Total Assets EQUITY AND LIABILITIES Capital and Reserves Capital Fixed Liabilities Interest bearing borrowings Loan Current Liabilities Trade and other payables Creditors Total Equity and Liabilities NOTE R NOTES TO THE FINANCIAL STATEMENTS (p75) NOTE 1 (This note discloses the accounting policy) The financial statements have been prepared on the historical cost basis and comply with the generally accepted account practices. NOTE 2 Revenue = Fees earned for services rendered to clients NOTE 3 Property, Plant and Equipment Equipment Furniture TOTAL Carrying amount: Beginning of month Cost Accumulated depreciation R R R Additions Depreciation --- Carrying amount: End of month Cost Accumulated Depreciation

14 14 STUDY UNIT 7: PROCESSING ACCOUNTING DATA p.93 The first books of entry are the journals, to which source documents are posted and from which ledger entries are extracted. 1. CASH JOURNALS A: Cash Receipts Journal: Doc No Day Details Analysis Of Receipts Bank Current Income Sundry Accounts Amount Fol Details Rec CRR T.Tom Service Fee / Sales B4 Capital (Amount banked for day) B: Cash Payments Journal Cheque No 1 2 Day Details Bank Wages 6 8 XY Furniture s Cash Sundry Accounts Amount Fol Details B1 Equipment CASH PAYMENTS JOURNAL: Source document such as CHEQUE COUNTERFOILS, DEBIT NOTES and BANK STATEMENTS will require entry into CPJ. All entries made in the SUNDRIES column are posted individually to GENERAL LEDGER. The TOTALS of other columns are posted to relevant ledger accounts.

15 15 CREDIT JOURNALS PURCHASES JOURNAL ABC DEALERS PURCHASES JOURNAL MAY 20.3 PJ5 Invoice No Day Details Fol Purchases Creditors Grand Wholesalers CL PURCHASES RETURNS JOURNAL ABC DEALERS PURCHASES RETURNS JOURNAL MAY 20.3 PRJ5 Credit note Day Details Fol Purchases Creditors No Grand Wholesalers CL SALES JOURNAL (p104) ABC DEALERS SALES JOURNAL MAY 20.3 SJ5 Invoice No Day Details Fol Sales Debtors Jason 47 DL SALES RETURNS JOURNAL (p105) ABC DEALERS SALES RETURNS JOURNAL MAY 20.3 SRJ5 Credit Note Day Details Fol Sales Debtors No D223 3 Jason 47 DL

16 16 GENERAL JOURNAL (p107) ABC DEALERS General journal May 20.3 DATE Particulars Fol Debit Credit 5 16 Vehicles ORA Motors Delivery vehicle bought on credit Per invoice f147 Packaging Material Stationery Packaging material as per Invoice z214 incorrectly debited to stationary account R R Bad Debts F Field F Fields balance written off as irrecoverable Transactions that will be recorded in the general journal include: Bad Debts written off Interest on Debtors Accounts Correction of Errors Year End Adjustments Purchases of goods other than merchandise are recorded in the general journal for the purpose of THIS MODULE VALUE ADDED TAX (VAT) OUTPUT TAX: Tax charged by business on sales of goods / services rendered by the business INPUT TAX: Tax payable by the business for goods purchased / services delivered TO the by business, including imports. OUTPUT TAX INPUT TAX = AMOUNT PAYABLE / REFUNDABLE The Value Added tax Act 89 of 1991 provides for 2 types of supply: 1. Taxable 14%, or 0% (Zero Rated Supplies) 2. Exempt Supplies ZERO RATED = Brown Bread, Petrol & oil, Transport on international flights, agricultural goods. (A vendor making exempted supplies cannot claim back input tax)

17 17 EXEMPTED SUPPLIES = Financial Services, Educational Services, Trade Union Contributions. Road or rail transport TIME OF SUPPLY: Time invoice issued OR Time of Receipt of compensation VALUE OF SUPPLY: If in money, the amount of money OR If NOT in money, the open market value of the consideration VAT ACCOUNTING BASES: INVOICE BASIS Tax is accounted when: An invoice is issued OR A payment is receipted Which ever comes first. PAYMENT BASIS Tax is accounted when: Payments are made (purchases) AND Payments are received (sales)

18 18 STUDY UNIT 8: THE CLOSING OFF PROCEDURE, DETERMINING TRADING PROFIT AND PREPARING FINANCIAL STATEMENTS p.140 In order to determine how the business has fared over the financial period, one needs to calculate profit and loss. First the GROSS PROFIT must be determined, by looking at the TRADING ACCOUNT. (Sales Cost of sales = Gross Profit) TRADING ACCOUNT To calculate NET PROFIT, one must subtract all expenditure and add all incomes. These income and expenditure accounts are closed off to the PROFIT AND LOSS ACCOUNT. (Income Expenses = Net Profit) PROFIT & LOSS ACCOUNT BOTH OF THESE GO TO INCOME STATEMENT TO CALCULATE FINANCIAL RESULT MARK UPS 1. MARK UP ON COST PRICE = 100 X (COST OF SALES AMOUNT) (% Mark up) 1 IE: Goods R75 000, work out COS on COST PRICE, 25% Mark Up 100 X R = 0.8 x R = R MARK UP ON SALE PRICE = (Sale price) - (% Mark Up) IE: Merchandise sold at R was marked up at 25% of sale Price. R % = R PERPETUAL / CONTINUOUS INVENTORY SYSTEM This system is ideally suited for businesses that sell easily identifiable items that are bar-coded. Inventory purchased is recorded directly into the INVENTORY ACCOUNT at cost price. At the time of sale, this same cost price is then transferred from the INVENTORY ACCOUNT to the COST OF SALES ACCOUNT. In the perpetual Inventory system, INVENTORY = ASSET 1. When Inventory is purchased, INVENTORY is DR at COST PRICE, CR BANK / CREDITORS 2. When the Inventory is sold, CR SALES (=INCOME) at SALE PRICE, DR DEBTORS / BANK 3. When Inventory is sold, CR the INVENTORY ACCOUNT (Asset Decreases), and COST OF SALES (= EXPENSE) is DR

19 19 Cash purchase of inventory: DR Inventory (Asset Inventory Increases) CR Bank (Cash decreased to purchase inventory) Transaction recorded in CPJ at COST Credit Purchase of Inventory: DR Inventory (Asset Inventory Increases) CR Creditor (i.e. Jason47 ) AND Creditors Control Transaction recorded in PJ at COST Returning Merchandise to Creditor DR Creditor M. Jackson AND Creditors Control CR Inventory Purchases returns Journal Cash Sales: DR Bank (Cash increased with money paid for sale) THE SELLING PRICE AMOUNT CR Sales (Sales is an Income that increases Equity) THE SELLING PRICE AMOUNT DR Cost of Sales (Cost of Sales is an expense that decreases equity) COST PRICE AMOUNT CR Inventory (Inventory is an Asset that must decrease, as Inventory has been sold) COST PRICE AMOUNT Transaction recorded in CRJ NOTE: THE DIFFERENCE BETWEEN SALES AND COST OF SALES = GROSS PROFIT Credit sales: DR Debtor (ie Paul glazby) AND Debtors control THE SELLING PRICE AMOUNT CR Sales (Income increased) DR Cost of sales (Cost of sales = Expense that is increased) CR Inventory (Inventory is an Asset that must decrease, as Inventory has been sold) COST PRICE AMOUNT Transaction recorded in Sales Journal Sales return: (Credit sale) DR Inventory (Inventory, which is an asset, has been returned, thus inventory has increased again) CR Debtor (Ie Paul Glazby ) AND Debtors Control DR Sales Return (The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR Cost of Sales (Cost of sales =expense, but this expense must be reversed if goods are returned) This transaction is recorded in the SRJ Sales return (Cash Sale) DR Sales RETURNS CR Bank This transaction is recorded in the CPJ DR inventory CR Cost of Sales This transaction is recorded in the GENERAL JOURNAL

20 20 The COST PRICE of the merchandise sold is recorded at the TIME OF SALE. This allows the business to determine the GROSS PROFIT of EACH SALE, ie PERPETUALLY!! TRADING ACCOUNT The TRADING ACOUNT determines GROSS PROFIT. DR Sales CR Trading Account ( SALES is now closed) DR Trading Account ( COST OFSALES is now closed) CR Cost of Sales These transactions take place in the GENERAL JOURNAL. CARRAIGE & RAILAGE COSTS PERPETUAL: DR Inventory Expense Drawings Donations CR Bank Inventory Inventory PERIODIC DR Carriage on Purchases A/c Drawings Donations CR Bank Purchases Purchases Delivery Costs Inventory taken by owner Inventory /Stock Donations For personal use

21 21 2. PERIODIC INVENTORY SYSTEM p149 In the Periodic Inventory system, PURCHASES = EXPENSE All purchases made during the financial year are recorded in the Purchases Account, whose total will give you cost price of inventory purchased for the year. To work out the cost price of INVENTORY SOLD: Cost Price of opening inventory + Cost Price of Inventory Purchased that year (PURCHASES TOTAL) - Cost Price of left over Inventory (As per Physical Stock take) Accounting entries on PERIODIC SYSTEM: 1. Opening Balance of INVENTORY ACCOUNT (Asset from physical stock take) is held all year 2. Inventory Purchased is Cost in PURCHASES A/C and CR Bank / Creditor. 3. When goods are sold CR SALES and DR Bank / debtor 4. Physical Inventory count cost price of said inventory. (E.g. R20 000)This amount DR to INVENTORY A/C and CR to TRADING A/C 5. DR TRADING A/C with opening inventory amount, and CR the INVENTORY ACCOUNT Purchases (CASH) DR Purchases CR Bank Transaction recorded in COST Purchases (CREDIT) DR Purchases CR M. Maartens AND Creditors Control Recorded in Purchases COST Returning Credit Purchase DR M. Maartens AND Creditors Control CR Purchases RETURNS Purchases Returns Price Sales (CASH) DR Bank CR Sales Recorded in Selling Price Sales (CREDIT) DR A.Ahmed AND Debtors control CR Sales Recorded in Sales Selling Price

22 22 Sales returned (CREDIT) DR Sales Returns The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR A. Ahmed AND Debtors Control Recorded in SALES RETURNS JOURNAL Sales Returns (CASH) DR Sales Returns The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR Bank Recorded in CASH PAYMENTS JOURNAL Physical Inventory Count at END of financial Year (This is subtracted from the combined total of opening inventory and total Purchases to give Cost of Inventory sold for year) DR Inventory (This is an Asset that is created with remaining inventory on hand at end of year) CR Trading account (this is a Nominal Account used to determine Gross Profit) Recorded in General Journal Determining GROSS PROFIT (Periodic inventory) p152 Opening Inventory (Cost) PLUS Purchases (Cost) Inventory available for Sale (Cost) LESS Closing inventory (Cost) Cost Of Sales GROSS PROFIT* (BALANCING FIGURE) Sales CLOSING OFF NOMINAL ACCOUNTS At the end of the financial period, the nominal accounts are closed off by means of closing journals, to the TRADING ACCOUNT and/ or PROFIT & LOSS ACCOUNT- (NOMINAL) DR Trading A/C with GROSS PROFIT AMOUNT CR Profit & Loss with GROSS PROFIT AMOUNT DR All Incomes (or any Nominal A/C with a CR Balance) CR Profit & Loss Similarly DR Profit & Loss CR All Expenses (or any Nominal A/C with a DR Balance) The difference between the DR and CR side of Profit and Loss the determine NET PROFIT, which is then: DR Capital (If it s a Profit, do the converse if it s a loss) CR Profit & Loss

23 THE TRADING ACCOUNT 23 To calculate Gross Profit: 1. Calculate COST OF GOODS SOLD: Opening Inventory + Purchases Closing Inventory = COST PRICE of goods sold during the financial period. 2. GROSS PROFIT: Sales Cost of Goods Sold = Gross Profit CLOSING INVENTORY DR Inventory A/c with amount physically counted CR Trading A/c with same amount. CLOSING JOURNAL ENTRIES: Closing transfers to TRADING ACCOUNT. P 160 Closing an account basically means transferring the balance to the opposite side. The following accounts are closed by usually CR to Trading Account: Inventory Opening (Cr INVENTORY, Dr TRADINGA/c) Purchases (Cr PURCHASES, Dr TRADING A/C) Sales Returns (Cr SALES RETURNS, Dr TRADING A/C) The Following accounts are usually closed by DR the TRADING A/C Inventory Closing Amount as per physical stock take (Dr INVENTORY, Cr TRADING A/C) Sales (Dr SALES, Cr TRADING A/C) Purchases Returns TRADING ACCOUNT (To CLOSE the TRADING ACCOUNT, the account is balanced on the DR side of the TRADING ACCOUNT and CR to the PROFIT & LOSS ACCOUNT.) Theses transactions are all done in the GENERAL JOURNAL. PROFIT AND LOSS ACCOUNT: P164 Closing transfers for Nominal Accounts All the NOMINAL ACCOUNTS are closed off to the PROFIT & LOSS ACCOUNT. DR All Incomes CR All Expenses, DR Trading A/C (Gross Profit Amount) CR Profit and Loss (Gross Profit amount)

24 24 CLOSING PROFIT AND LOSS TO CAPITAL ACCOUNT DR Profit and Loss (NET Profit amount) CR Capital A/c (NET Profit Amount) CLOSING DRAWINGS DR Capital CR Drawings POST CLOSING TRIAL BALANCE P.165 The post closing trial balance is prepared after the relevant accounts have been closed off. It contains the balances of the accounts, which are to be carried forward to the next financial period, the balances used to prepare the BALANCE SHEET. NOTE: ALL NOMINAL ACCOUNTS HAVE ALREADY BEEN CLOSED OFF TO CALCULATE GROSS AND NET PROFIT, AND THEREFORE DO NOT FORM PART OF THE POST CLOSING TRIAL BALANCE. POST CLOSING TRIAL BALANCE AT 31 JAN 20.1 FOL DR CR CAPITAL BANK INVENTORY VEHICLES AT COST EQUIPMENT AT COST DEBTORS CONTROL CREDITORS CONTROL B1 B3 B4 B5 B6 B7 B

25 25 FINANCIAL STATEMENTS P165 The financial statements are prepared separately from the accounting records. The accounting records = ledger accounts & journals. 1. INCOME STATEMENT: FINANCIAL RESULT (Trading Account & Profit & Loss) VICIOUS CIRCLE RECORDS INCOME STATEMENT FOR THE YEAR ENDED 31 JAN 20.1 Notes Income 2 Cost Of Sales Opening Inventory Net Purchases Closing Inventory Gross Profit Other Operating Income: Rent Income Discount Received Selling, Administrative & General Expenses Stationery Wages Water & Electricity Bad Debts Discount Allowed Net Profit for Year R (47 000) (8 000) (12 100)

26 26 STATEMENT OF CHANGES IN EQUITY (This is prepared from the information in the CAPITAL ACCOUNT, its purpose is to report to relevant parties IE those who do not see the ledger accounts what has happened to the capital account during the course of the year.)

27 27 VICIOUS CIRCLE RECORDS STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JANUARY 20.1 R Capital: Balance at the beginning of the year Net Profit Drawings (3 000) Balance at the end of the year THE BALANCE SHEET Assets, Equities and Liabilities (A= E + L) are reflected in the Balance Sheet. These accounts have balances that must be carried over to the next financial year. All the nominal accounts are closed and have been reflected in the INCOME STATEMENT. The balance sheet shows the financial position on a specific date, not for a period ended. (It is a STOCK, not flow, VARIABLE) ASSETS NOTE R Non Current / Fixed Assets Property, plant and Equipment Current Assets Inventories Trade and other receivables Debtors Cash and Cash Equivalents Total Assets EQUITY AND LIABILITIES Capital and Reserves Capital Current Liabilities Trade and Other Liabilities Creditors Total Equity and Liabilities

28 NOTES TO THE FINANCIAL SYSTEMS Accounting Policy: The annual financial statements have been prepared on the historical cost basis and comply with generally accepted accounting practice. 2. Income represents net sales to third parties 3. Property, Plant and Equipment Equipment Furniture TOTAL Carrying amount: Beginning of month Cost Accumulated depreciation Additions Depreciation Carrying amount: End of month Cost Accumulated Depreciation No Depreciation was written off during the financial year R (-) R (-) R (-) GROSS PROFIT PERCENTAGE Gross profit is calculated separately because it gives an indication of how much profit was made from selling goods. The Gross profit is normally expressed as a percentage of either the selling price or the cost price of goods sold. EG: Gross profit x 100 = x 100 Selling Price = 38,2% or Gross profit x 100 = x 100 Cost Price = 61,7%

29 29 PERPETUAL Stock purchased entered into INVENTORY A/C Carriage on Purchases and Railage DR into INVENTORY A/C Cost of sales can be determined at any period. PERIODIC Stock purchased entered into PURCHASES A/ C Railage / Carriage on Purchases entered into separate RAILAGE / CARRIAGE ON PURCHASES A/C Cost of Sales determined in Trading Account or by means of calculation. COST OF SALES CALCULATION: Opening Inventory (balance) PLUS total purchases for year LESS Closing Inventory (as per stock take) = Cost of Goods Sold SALE OF STOCK: SALE OF STOCK: Dr Bank (Cash sale) or Debtors (Credit Sale) Cr Sales Dr Cost of Sales Cr Inventory SALE PRICE COST PRICE DR Bank / or debtors CR Sales SALE PRICE Stock is balanced at end of financial period. DONATIONS OF STOCK DONATIONS OF STOCK DR Donations (Donations, an expense, increases) CR Inventory (Stock, an Asset, decreases) DR Donations (Donations, an expense, increases) CR Purchases (Stock, an EXPENSE, decreases) DRAWING OF STOCK DR Drawings CR Inventory (Stock, an Asset, decreases) DRAWINGS OF STOCK DR Drawings CR Inventory (Stock, an EXPENSE, decreases)

30 STUDY UNIT 8: ADJUSTMENTS p SHORT TERM ADJUSTMENTS 1. Prepaid Expenses An expense that has been paid in the current finacial period that is in fact for the following financial period. Example: Insurance for the year. The insurance for current period is an EXPENSE >PROFIT AND LOSS The prepaid amount is a CURRENT ASSET > BALANCE SHEET In order to remove the prepaid amount (eg R f R2 400): DR Prepaid Expense (An asset that increases) R2 000 CR Insurance (Reducing expense) R2 000 Adjustment of insurance account GENERAL JOURNAL The CLOSING TRANSFER will now be as follows: DR Profit & Loss R400 (This is the actual amount that was for current financial period, the amount that must be subtracted from the years earnings) CR Insurance R400 (This is to close the account, the balance ) Transfer of insurance to Profit and Loss GENERAL JOURNAL Also reflect these changes in the relevant General Ledger a/cs, namely: Insurance Prepaid Expenses Profit and Loss Lastly, reflect the prepaid amount, which is a CURRENT ASSET now, in the BALANCE SHEET, by adding it to CURRENT ASSETS 2. ACCRUED EXPENSES An expense that relayed to the current finacial period that has not been paid is currently outstanding. 3.

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