ACCOUNTING 1 (ACN101- M) THE NATURE AND FUNCTION OF ACCOUNTING doc

GENERAL JOURNAL p107ABC DEALERS General journal – May 20.3 Packaging material as per Invoice z214 incorrectly debited to stationary account Bad Debts F Field F Fields balance written of

• 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 thatthe 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”

1

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

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 specificpurposes

• Used by management for decision making

• Used to assist management reach financialgoals

Accrual Principle : (WHEN?)

The transaction must be recorded in the financial period it occurs, whether or not the cash hasbeen received or paid

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 samefinancial period

6 Realisations:

An income / expense / transaction, should only be brought into account once it is relativelycertain 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 andequipment etc

GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP)

This is a foundation that acts as a general framework to encompass accounting concepts, principles,methods and procedures

3

According to GAAP there are two main underlying assumptions with regards to financialstatements:

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

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STUDY UNIT 3:

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”

AND EQUITY = ASSETS - LIABILITIES

STUDY UNIT 4:

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

(Capital + Income – Expenditure)

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STUDY UNIT 5:

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 13 000 from his personal bank a/c and deposits as capital for Fix N Mat

+130 000 = +130 000

• Acquisition of Loans:

Fix N Mat obtains a loan from ABC Bank for R25 000

Bank = Capital + Loan: ABC Bank

• Purchase of Assets for Cash:

Fix N Mat bought Equipment from XY Furnishers for R100 000, paid by cheque

Bank Equipment = Capital + Loan: ABC Bank

• Buying goods on credit:

Fix N Mat bought furniture on Credit from Joc Limited, R2000

Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd)

• Payments to Creditors:

Fix N Mat paid Joc Ltd ‘s account of R2 000

Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd)

7

TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46

Fix N Mat provided services for client S Silver and received cash cheque of R1 000

Bank Furniture = (Income / Expenditures)

• Income: CREDIT

Fix N Mat provided services worth R6 000 to C.Canon on credit

Debtors Control = (Income / Expenditures)

• Expenditure: CASH

Fix N Mat provided services worth R6 000 to C.Canon on credit

Debtors Control = (Income / Expenditures)

• Expenditure: CREDIT

Fix N Mat placed an advert in the paper R200, payment due in 30 days

Debtors Control = (Income/ Expenditures) + Creditors

= Advertising Cape Ads

• Payments received from Debtors

C Canon settled his account in part, R2 000

(Bank + Debtors) = (Income/ Expenditures) + Creditors

C.Canon + 2 000 - 2000

STUDY UNIT 6:

The basic form of a T- Account:

CLASSIFYING LEDGER ACCOUNTS INTO GROUPS:

“ Investors and Creditors financial stake in the enterprise”

EQUITY (The owners financial interest)

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BALANCING ACCOUNTS: (P62)

• 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 thebalance 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 nextmonth

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), testthe 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)

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6 000

• 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)

R

130 000

6 000 (1 000)

135 000

8 00

2 00

EQUITY AND LIABILITIES

Capital and Reserves

160 200

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

100 000 -

R

2 000

R

102 000

100 000 2 000 102 000

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STUDY UNIT 7:

The first books of entry are the journals, to which source documents are posted and from whichledger entries are extracted

Current Income

Sundry Accounts Amount Fol Details

(Amount banked for day)

• B: Cash Payments Journal

Cheque

Sundry Accounts Amount Fol Details

100 000

1 000 1 000

100 000 B1 Equipment

101 000 1 000 100 000

CASH PAYMENTS JOURNAL:

• Source document such as CHEQUE COUNTERFOILS, DEBIT NOTES and BANKSTATEMENTS 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

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CREDIT JOURNALS

• PURCHASES JOURNAL

ABC DEALERS

GENERAL JOURNAL (p107)

ABC DEALERS

General journal – May 20.3

Packaging material as per Invoice z214

incorrectly debited to stationary account

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 businessINPUT 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 supplies @ 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)

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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:

Tax is accounted when:

• An invoice is issued OR

• A payment is receipted

Which ever comes first

Tax is accounted when:

• Payments are made (purchases) AND

• Payments are received (sales)17

STUDY UNIT 8:

THE CLOSING OFF PROCEDURE,

DETERMINING TRADING PROFIT

AND

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 =

2 MARK UP ON SALE PRICE =

(Sale price) - (% Mark Up)

IE:

Merchandise sold at R75 000 was marked up at 25% of sale Price.

R75 000 – 25%

= R56 250

1 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

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• 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)

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:

• PERIODIC

DR Carriage on Purchases A/c Drawings Donations

Delivery Costs Inventory taken by owner Inventory /Stock Donations

For personal use

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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 willgive 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 DR @ Cost in PURCHASES A/C and CR Bank / Creditor

3 When goods are sold CR SALES and DR Bank / debtor

4 Physical Inventory count taken @ 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

CR M Maartens AND Creditors Control

Recorded in Purchases Journal @ COST

• Returning Credit Purchase

DR M Maartens AND Creditors Control