Accounting
Definitions
 Asset  possessions/resources used by the business to create income for the business
o Current = < 12 months
o Non-current/fixed/tangible = > 12 months
o Financial = Shares, fixed deposits, investments & unit trusts
 Liability  amount owed by the business to other business/institutions
o Current = < 12 months
o Non-current = > 12 months
 Capital  How much the owner has invested in the business (resources/monetary)
 Drawings  How much the owner has taken out of the business (resources/monetary)
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Income  amount earned/received by the business
o Main income in trading business = Sales
o Main income in service business = Fee income/Service fees/Current income
Expense  cost incurred by the business
o Main expense in trading business = Cost of sales
Balance sheet
accounts
(Folio = B)
Must balance
Nominal accounts
(Folio = N)
Must total
Accounting Equation
A = O/E + L
A = (Capital – Drawings + I – E) + L
A+D+E=C+I+L
Dr = Cr
DEAD CLIC
General Ledger
☼ Double-entry rule = every Dr must have a Cr
Dr
Y&M
Name of Account (Fol)
Day
Details
Fol Amount
How to complete a GL transaction:
1. Read Transaction
2. Identify Accounts
3. Classify Accounts (A/L/I/C/E/D)
4. Determine which account to Dr and Cr (DEAD CLIC)
Cr
Boys Swim to Cape Town
Dolphins Swim in Cape Town
Dirty Dogs in Cape Town
Adjustments for expenses at end of recording period
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If we over pay an expense for the year then the portion that we have over paid will be credited from the
expense account and debited to prepaid expense
If we under pay an expense for the year then we need to debit our expense of that amount and credit
accrued expense
Prepaid expense = ASSET
Accrued expense = LIABILITY
Adjustments made at end of recording period
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Prepaid expense accounts will be posted as follows:
o DR: Prepaid expense account (A)
o CR: Expense account
Accrued expense accounts will be posted as follows:
o DR: Expense account
o CR: Accrued expense account (L)
Accrued income accounts will be posted as follows:
o DR: Accrued income account (A)
o CR: Income account
Income received in advance accounts will be posted as follows:
o DR: Income account
o CR: Income received in advance account
Office Supplies on Hand
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Only the part used in this period should be treated as an expense
Office supplies purchased for 2020 = R100 000. Office supplies still on hand at 31 December 2020 is R55000
2020
Dr
Cr
Dec 31
Office supplies on hand
55 000
Office supplies expense
55 000
Employee benefits:
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salaries
other cash benefits, such as housing allowance,
employer’s contributions to the employee’s medical aid fund premiums
the employer’s contributions to a retirement or pension fund for the employees
this is how employee benefits are journalised:
Bad Debts
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When an entity is unable to receive money from a debtor as the debtor has disappeared or becomes
insolvent.
DR: Bad debts
CR: Trade Receivable
Bad Debts recovered
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Sometimes a debtor’s debt is written off, but then they decide to pay us the debt this is known as bad debts
recovered
DR: Bank
CR: Bad debts
Allowances for doubtful debts
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The percentage of trade receivable that are expected to be uncollectible.
Allowances for doubtful debts: CONTRA ASSET
To record allowance for bad debts, you will be given a percentage
Take this percentage and multiply it by the trade receivables.
Take this amount and compare it to the previous allowances for doubtful debts amount.
o If the previous > current: DR: Allowances for doubtful debts
CR: Bad debts
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If the previous < current: DR: Bad debts
CR: Allowances for doubtful debts
Cash and Credit Sales
 DR: Receivable/Bank
 CR: Sales
as well as
 DR: Cost of sales
 CR: Trade inventories
Term Deposit Adjustments
On 1 January 2020, R200 000 was invested in a term deposit earning an interest of 10% p.a. The interest income
still needs to be accounted for.
2020
Dr
Dec 31
Term Deposit (R200 000 X 10%)
Cr
20 000
Interest Income (R200 000 X 10%)
20 000
Depreciation
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An asset has a cost price of R500 000. Depreciation on this asset is calculated at 10% each year.
2020
Dr
Dec 31
Depreciation
Cr
50 000
Accumulated Depreciation (R500 000 X 10%)
50 000
Stock Shortages – Trade inventory Deficit
 Physical stock < Stock on system
 Inventory shortages recognized as an expense in the current period
 Initial recognition:
Dr Loss with inventory shortage
Cr Trade Inventories
Write down of inventories to NRV
 Initial recognition of inventories at cost
 End of year inventory must be recognized at Lower of Cost or NRV
 Write down to NRV is recognized as an expense in the period in which the loss occurred.
 Recognition of write-down NRV?
Dr Loss with write down of inventories to net realizable value
Cr Trade inventories
 On 31 December 2020 the inventory system indicated that certain inventory items had a cost of R50 000
and a net realisable value of R40 000.
2020
Dr
Cr
Dec 31
Loss due to write-down to NRV
Trade inventories
10 000
10 000