accounting 1 - gimmenotes.co.za...c. canon = + 6 000 = + 6 000 •expenditure: credit fix n mat...

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ACCOUNTING 1(ACN101- M)

STUDY UNIT 1: THE NATURE AND FUNCTION OFACCOUNTING

DEFINITION:

• Accounting can be defined as the orderly & systematic recording of the monetary values offinancial 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 financialactivities

3. COMMUNICATING the recorded information to interested users by use of accountingreports 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”

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Forms Of Ownership:

1. Sole Trader / Proprietor2. Close Corporation3. Company4. Partnership5. 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 FinancialInterest 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 preparingfinancial statements regarding the entityas a whole

• GAAP (Generally Accepted AccountingPractices) standards ensure comparabilityof financial statements betweenbusinesses

• Provides financial information for specificpurposes

• Used by management for decision making• Used to assist management reach financial

goals

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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 hasbeen received or paid

2. Consistency: (SAME)Once a method has been chosen it must be maintained. If said policy is changed, this must bereflected 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 themost 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 systemExpenses 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 toachieve 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.

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http://wikistudent.ws/UnisaAccording 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. Understandability2. Relevance3. Reliability4. Comparability

The elements of financial statements are:

• Elements to measure FINANCIAL POSITION:1. Assets2. Liabilities Balance Sheet Accounts3. Equity

• Elements to measure PROFITABILITY / FINANCIAL RESULT1. Incomes Nominal Accounts (Expenditure Accounts)2. Expenses

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STUDY UNIT 3:THE FINANCIAL POSITION p.21

THE FINANCIAL POSITION: The Assets & Interests of t he 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 theliabilities it has incurred.

ASSETS – LIABILITIES = NET WORTH (“EQUITY”)

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STUDY UNIT 4:THE FINANCIAL RESULT p.29

THE FINANCIAL RESULT: The PROFIT or LOSS incurred b y the enterprise OVER

A SPECIFIC PERIOD.

(INCOME STATEMENT)

FINANCIAL RESULT = INCOME – LESS EXPENDITURE = NET PROFIT / LOSS

ASSETS = EQUITY + LIABILITIES(Capital + Income – Expenditure)

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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 involved3. Determine which should be credited and which should be debited4. Ensure the debited amount = credited amount5. Indicate date of transaction6. Indicate name if CONTRA ledger account7. 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

ASSETS = EQUITY + LIABILITIESBank = Capital+130 000 = +130 000

• Acquisition of Loans:Fix N Mat obtains a loan from ABC Bank for R25 000

ASSETS = EQUITY + LIABILITIESBank = Capital + Loan: ABC Bank +25 000 = + +25 000

• Purchase of Assets for Cash:Fix N Mat bought Equipment from XY Furnishers for R100 000, paid by cheque

ASSETS = EQUITY + LIABILITIESBank Equipment = Capital + Loan: ABC Bank-100 000 +100 000 =

• Buying goods on credit:Fix N Mat bought furniture on Credit from Joc Limited, R2000

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

+2 000 = +2 000

• Payments to Creditors:Fix N Mat paid Joc Ltd ‘s account of R2 000ASSETS = EQUITY + LIABILITIESBank Furniture = Capital + (Loan: ABC Bank + Joc Ltd)-2 000 = -2 000

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TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46

• Income: CASHFix N Mat provided services for client S. Silver and received cash cheque of R1 000

ASSETS = EQUITY + LIABILITIESBank Furniture = (Income / Expenditures)+ 1 000 = + 1 000

• Income: CREDITFix N Mat provided services worth R6 000 to C.Canon on credit

ASSETS = EQUITY + LIABILITIESDebtors Control = (Income / Expenditures)C. Canon =+ 6 000 = + 6 000

• Expenditure: CASH

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

ASSETS = EQUITY + LIABILITIESDebtors Control = (Income / Expenditures)C. Canon =+ 6 000 = + 6 000

• Expenditure: CREDIT

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

ASSETS = EQUITY + LIABILITIESDebtors Control = (Income/ Expenditures) + Creditors

= Advertising Cape Ads= - 200 + +200

• Payments received from Debtors

C. Canon settled his account in part, R2 000

ASSETS = EQUITY + LIABILITIES(Bank + Debtors) = (Income/ Expenditures) + Creditors

C.Canon+ 2 000 - 2000

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BASIC FORM OF A BALANCE SHEET p50

FIX N MAT

BALANCE SHEET AT 28 FEB 20.1

ASSETS R INTERESTS R

Fixed Assets

EquipmentFurniture

Current Assets

DebtorsBank

100 000 2 000

4 000 54 200

Equity

CapitalNet profitWithdrawals

Fixed LiabilitiesLoan: ABC Bank

Current LiabilitiesCreditors

130 000 6 000 (1 000)135 000

25 000

200

160 200 160 200

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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

LIABILITIESFIXED 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

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http://wikistudent.ws/UnisaBALANCING 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 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), 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 Equity3. The Balance Sheet (financial position)

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FINANCIAL STATEMENTS ( p71)FIX N MAT

INCOME STATEMENT FOR MONTH ENDED 28 FEB 20.1

NOTE

Revenue 2Administrative and General Expenses

Wages Advertising

Net Profit for Month

R

7 000 (1 000)

6 000

• Income Statement for a period ended, not a specific date (FLOW variable, not STOCKvariable)

• 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

130 000

6 000

(1 000)

135 000

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8 00 2 00

http://wikistudent.ws/UnisaTHE BALANCE SHEET (P74

FIX N MAT

BALANCE SHEET AT 28 FEB 20.1

ASSETS NOTE

Fixed AssetsProperty, Plant & Equipment 3

Current AssetsTrade and other receivables DebtorsCash and cash equivalents

Total Assets

EQUITY AND LIABILITIESCapital and ReservesCapital

Fixed LiabilitiesInterest bearing borrowings Loan

Current LiabilitiesTrade and other payables Creditors

Total Equity and Liabilities

R102 000 102 000

58 000 4 000 4 000 54 200

160 200

135 000 135 000 25 000 25 000 25 000

200 200 200

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 acceptedaccount practices.

NOTE 2Revenue = Fees earned for services rendered to clients

NOTE 3 Property, Plant and Equipment Equipment Furniture TOTAL

Carrying amount: Beginning of month Cost Accumulated depreciationAdditionsDepreciation Carrying amount: End of month Cost Accumulated Depreciation

R ---- ---- ----

100 000 ---

R ---- ---- ----

2 000 ----

R ---- ---- ----

102 000 ----

100 000 2 000 102 000

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STUDY UNIT 7: PROCESSING ACCOUNTING DATA p.93

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

1. CASH JOURNALS

• A: Cash Receipts Journal:

DocNo

Day Details

AnalysisOf

ReceiptsBank Current

Income

Sundry Accounts

Amount Fol Details

RecCRR 1

12

T.TomServiceFee /Sales

130 000 1 000

130 000 1 000 1 000

130 000 B4 Capital

131 000 1 000 130 000(Amount banked for day)

• B: Cash Payments Journal

ChequeNo Day Details Bank Wages

Sundry Accounts

Amount Fol Details12

68

XY Furniture’sCash

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 GENERALLEDGER.

• The TOTALS of other columns are posted to relevant ledger accounts.

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CREDIT JOURNALS

• PURCHASES JOURNAL

ABC DEALERS

PURCHASES JOURNAL – MAY 20.3 PJ5Invoice No Day Details Fol Purchases Creditors

1534 3 Grand Wholesalers CL2 1258 1258

1258 1258

• PURCHASES RETURNS JOURNAL

ABC DEALERS

PURCHASES RETURNS JOURNAL – MAY 20.3 PRJ5Credit noteNo

Day Details Fol Purchases Creditors

1534 3 Grand Wholesalers CL2 158 158

158 158

• SALES JOURNAL (p104)

ABC DEALERS

SALES JOURNAL – MAY 20.3 SJ5Invoice No Day Details Fol Sales Debtors

1534 3 Jason 47 DL2 169 169

169 169

• SALES RETURNS JOURNAL (p105)

ABC DEALERS

SALES RETURNS JOURNAL – MAY 20.3 SRJ5Credit NoteNo

Day Details Fol Sales Debtors

D223 3 Jason 47 DL2 69 69

69 69

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GENERAL JOURNAL (p107)

ABC DEALERS

General journal – May 20.3

DATE Particulars Fol Debit Credit

5

16

18

Vehicles ORA MotorsDelivery vehicle bought on credit Per invoice f147

R43 000

430

84

R

43 000

430

84

Packaging Material StationeryPackaging material as per Invoice z214incorrectly debited to stationary account

Bad Debts F FieldF Fields balance written off as irrecoverable

Transactions that will be recorded in the general journal include:Bad Debts written offInterest on Debtors AccountsCorrection of ErrorsYear End Adjustments

� Purchases of goods other than merchandise are recorded in the general journal for thepurpose 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:

INVOICE BASIS PAYMENT BASIS

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)

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STUDY UNIT 8: THE CLOSING OFF PROCEDURE,DETERMINING TRADING PROFITANDPREPARING FINANCIAL STATEMENTS p.140

In order to determine how the business has fared over the financial period, one needs to calculateprofit and loss. First the GROSS PROFIT must be determined, by looking at the TRADINGACCOUNT.

(Sales – Cost of sales = Gross Profit) TRADING ACCOUNT

To calculate NET PROFIT , one must subtract all expenditure and add all incomes. These incomeand 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 F INANCIAL RESULT

MARK UPS1. MARK UP ON COST PRICE =

100 X (COST OF SALES AMOUNT)100 + (% Mark up) 1

IE: Goods sold @ R75 000, work out COS on COST PRICE, 25% Mark Up 100 X R75 000 125 1= 0.8 x R75 000= R60 000

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. Atthe time of sale, this same cost price is then transferred from the INVENTORY ACCOUNT tothe 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), andCOST 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 ControlTransaction recorded in PJ at COST

• Returning Merchandise to CreditorDR Creditor “M. Jackson” AND Creditors ControlCR InventoryPurchases returns Journal

• Cash Sales:DR Bank (Cash increased with money paid for sale) THE SELLING PRICE AMOUNTCR 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 AMOUNTCR Inventory (Inventory is an Asset that must decrease, as Inventory has been sold) COST PRICE AMOUNTTransaction recorded in CRJ

NOTE: THE DIFFERENCE BETWEEN SALES AND COST OF SALE S = GROSS PROFIT

• Credit sales:DR Debtor (ie Paul glazby) AND Debtors control THE SELLING PRICE AMOUNTCR 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 AMOUNTTransaction 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 ontransaction is now lost) SELLING PRICE AMOUNTCR 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 RETURNSCR BankThis transaction is recorded in the CPJ

DR inventoryCR Cost of SalesThis transaction is recorded in the GENERAL JOURNAL

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The COST PRICE of the merchandise sold is recorded at the TIME OF SALE. This allows thebusiness to determine the GROSS PROFIT of EACH SALE, ie PERPETUALLY!!

TRADING ACCOUNTThe TRADING ACOUNT determines GROSS PROFIT.

DR SalesCR 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 DonationsCR Bank Purchases PurchasesDelivery 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 = EXPENSEAll 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 year2. Inventory Purchased is DR @ Cost in PURCHASES A/C and CR Bank / Creditor. 3. When goods are sold CR SALES and DR Bank / debtor4. 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/C5. DR TRADING A/C with opening inventory amount, and CR the INVENTORY

ACCOUNT

• Purchases (CASH)DR PurchasesCR BankTransaction recorded in CPJ @ COST

• Purchases (CREDIT)DR PurchasesCR M. Maartens AND Creditors ControlRecorded in Purchases Journal @ COST

• Returning Credit PurchaseDR M. Maartens AND Creditors ControlCR Purchases RETURNSPurchases Returns Journal @Cost Price

• Sales (CASH)DR BankCR SalesRecorded in CRJ @ Selling Price

• Sales (CREDIT)DR A.Ahmed AND Debtors control CR SalesRecorded in Sales Journal @ Selling Price

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http://wikistudent.ws/Unisa• Sales returned (CREDIT)DR “Sales Returns” The Sales must be decreased, and equity is decreases as any profit made ontransaction is now lost) SELLING PRICE AMOUNTCR A. Ahmed AND Debtors ControlRecorded in SALES RETURNS JOURNAL

• Sales Returns (CASH)DR “Sales Returns” The Sales must be decreased, and equity is decreases as any profit made ontransaction is now lost) SELLING PRICE AMOUNTCR BankRecorded in CASH PAYMENTS JOURNAL

• Physical Inventory Count at END of financial Year (This is subtracted from the combined total ofopening 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) 10 000PLUS Purchases (Cost) 90 000Inventory available for Sale (Cost) 100 000LESS Closing inventory (Cost) 20 000Cost Of Sales 80 000GROSS PROFIT* (BALANCING FIGURE) 20 000Sales 100 000

CLOSING OFF NOMINAL ACCOUNTSAt 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 AMOUNTCR Profit & Loss with GROSS PROFIT AMOUNT

DR All Incomes (or any Nominal A/C with a CR Balance) CR Profit & LossSimilarlyDR Profit & LossCR 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 , whichis then:DR Capital (If it’s a Profit, do the converse if it’s a loss)CR Profit & Loss

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http://wikistudent.ws/UnisaTHE TRADING ACCOUNT

To calculate Gross Profit:

1. Calculate COST OF GOODS SOLD:Opening Inventory + Purchases (@Cost) – Closing Inventory (@Cost)

= COST PRICE of goods sold during the financial period.2. GROSS PROFIT:

Sales – Cost of Goods Sold= Gross Profit

CLOSING INVENTORYDR Inventory A/c with amount physically countedCR Trading A/c with same amount.

CLOSING JOURNAL ENTRIES: Closing transfers to TRADING ACCOUNT. P 160Closing 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: P164Closing transfers for Nominal Accounts

All the NOMINAL ACCOUNTS are closed off to the PROFIT & LOSS ACCOUNT.DR All IncomesCR All Expenses,DR Trading A/C (Gross Profit Amount)CR Profit and Loss (Gross Profit amount)

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• CLOSING PROFIT AND LOSS TO CAPITAL ACCOUNT

DR Profit and Loss (NET Profit amount)CR Capital A/c (NET Profit Amount)

• CLOSING DRAWINGS DR CapitalCR 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 GROSSAND NET PROFIT, AND THEREFORE DO NOT FORM PART OF T HE POST CLOSING TRIALBALANCE.

POST CLOSING TRIAL BALANCE AT 31 JAN 20.1

FOL DR CR

CAPITALBANKINVENTORYVEHICLES AT COSTEQUIPMENT AT COSTDEBTORS CONTROLCREDITORS CONTROL

B1B3B4B5B6B7B8

4 250 8 000 91 000 19 500 10 100

118 150

14 700

132 850 132 850

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FINANCIAL STATEMENTS P165 The financial statements are prepared separately from the accounting records. The accountingrecords = ledger accounts & journals.

1. INCOME STATEMENT: FINANCIAL RESULT (Trading Account & Profit & Loss)

VICIOUS CIRCLE RECORDSINCOME STATEMENT FOR THE YEAR ENDED 31 JAN 20.1

Notes RIncome 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

76 000 (47 000) 5 000 50 000 55 000 (8 000)

29 000 850 600 250

29 850

(12 100) 150 10 550 950 150

17 750

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STATEMENT OF CHANGES IN EQUITY

(This is prepared from the information in the CAPITAL ACCOUNT, its purpose is to report torelevant parties – IE those who do not see the ledger accounts – what has happened to the capitalaccount during the course of the year.)

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VICIOUS CIRCLE RECORDS

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JANUARY 20.1R

Capital:Balance at the beginning of the yearNet ProfitDrawings

Balance at the end of the year

103 400 17 750 (3 000)

118 150

THE BALANCE SHEETAssets, Equities and Liabilities (A= E + L) are reflected in the Balance Sheet. These accounts havebalances that must be carried over to the next financial year. All the nominal accounts are closed andhave been reflected in the INCOME STATEMENT .The balance sheet shows the financial position on a specific date, not for a period ended. (It is aSTOCK, not flow, VARIABLE)

ASSETS NOTE R

Non Current / Fixed AssetsProperty, plant and Equipment

Current AssetsInventoriesTrade and other receivables DebtorsCash and Cash Equivalents

Total Assets

EQUITY AND LIABILITIESCapital and ReservesCapital

Current LiabilitiesTrade and Other Liabilities Creditors

Total Equity and Liabilities

3 110 500 110 500

22 350 8 000 10 100 10 100 4 250 132 850

118 150118 150

14 700 14 700 14 700

132 850

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http://wikistudent.ws/UnisaNOTES TO THE FINANCIAL SYSTEMS

1. Accounting Policy: The annual financial statements have been prepared on the historical costbasis and comply with generally accepted accounting practice.

2. Income represents net sales to third parties3.

Property, Plant and Equipment Equipment FurnitureTOTAL

Carrying amount: Beginning of month Cost Accumulated depreciationAdditionsDepreciation Carrying amount: End of month Cost Accumulated Depreciation

R19 50019 500

------------

R91 00091 000

--------

R110 500110 500

--------

19 50019 500

(-)

91 00091 000

(-)

110 500110 500

(-)

No Depreciation was written off during the financial year

GROSS PROFIT PERCENTAGE

Gross profit is calculated separately because it gives an indication of how much profit was madefrom selling goods.The Gross profit is normally expressed as a percentage of either the selling price or the cost price ofgoods sold.

EG:

Gross profit x 100 = 29 000 x 100 Selling Price 1 76 000 1

= 38,2%or

Gross profit x 100 = 29 000 x 100 Cost Price 1 47 000 1

= 61,7%

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PERPETUAL PERIODIC

• Stock purchased entered into INVENTORY A/C

• Carriage on Purchases and Railage DR intoINVENTORY A/C

• Cost of sales can be determined at any period.

• Stock purchased entered into PURCHASES A/C

• Railage / Carriage on Purchases entered into

separate RAILAGE / CARRIAGE ONPURCHASES 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 yearLESS Closing Inventory (as per stock take)= Cost of Goods Sold

SALE OF STOCK:

� Dr Bank (Cash sale) or Debtors (Credit Sale)

Cr Sales SALE PRICE

� Dr Cost of Sales Cr Inventory COST PRICE

SALE OF STOCK:

� DR Bank / or debtors CR Sales SALE PRICE � Stock is balanced at end of financial period.

DONATIONS OF STOCK

�DR Donations (Donations, an expense, increases)

CR Inventory (Stock, an Asset, decreases)

DONATIONS OF STOCK

�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)

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STUDY UNIT 8: ADJUSTMENTS p189

SHORT TERM ADJUSTMENTS

1. Prepaid Expenses An expense that has been paid in the current finacial period that is in fact for the followingfinancial period. Example: Insurance for the year.The insurance for current period is an EXPENSE –>PROFIT AND LOSSThe prepaid amount is a CURRENT ASSET –> BALANCE SHEETIn order to remove the prepaid amount (eg R2 000 0f R2 400):

DR Prepaid Expense (An asset that increases) R2 000CR 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 mustbe 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 BALANCESHEET, by adding it to CURRENT ASSETS

2. ACCRUED EXPENSES An expense that relayed to the current finacial period that has not been paid – is currentlyoutstanding.

3.

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accounting 1 - gimmenotes.co.za...c. canon = + 6 000 = + 6 000 •expenditure: credit fix n mat...

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