ACCOUNTING CONCEPTS Topic 5
SOLE TRADER
❖A business that is OWNED and managed by ONE person.
❖RESPONSIBLE for all debt.
❖Entitled to all the PROFITS.
❖SERVICE BUSINESS – Renders a service to earn an income, ex. hair salon.
❖TRADING BUSINESS – Buys and sells goods and services for a profit, example Checkers
TRANSACTIONS
❖Every time MONEY EXCHANGES HANDS between the business and someone else.
❖FIRST STEP in accounting cycle.
❖All transactions must be recorded on a SOURCE DOCUMENT.
SOURCE DOCUMENT
❖FIRST RECORD of every transaction.
Used DAILY to RECORD transactions in the books of the business.
❖SECOND STEP in the accounting cycle.
❖Receipt, Cash register roll, Cash invoice,
❖Deposit slip, Electronic funds transfer (EFT), Bank statement
Render a service: Cash register roll (CRR)
Receive money: Receipt
Pay money: EFT
RECEIPTS AND PAYMENTS
CASH RECEIPTS
❖All amounts of money RECEIVED by the business and DEPOSITED in the bank account.
❖Recorded in the CASH RECEIPTS JOURNAL
CASH PAYMENTS
❖All amounts of money PAID by the business and DEDUCTED from the bank account.
❖ Recorded in the CASH PAYMENTS JOURNAL
SUBSIDIARY JOURNALS
❖JOURNALS where all transactions are recorded MONTHLY.
❖RECORD of all transactions.
❖THIRD STEP in accounting cycle.
❖Cash Receipts Journal (CRJ)
❖Cash Payments Journall (CPJ)
CAPITAL
❖Money invested to START THE BUSINESS.
❖Get capital from:
- LOAN
- FAMILY / FRIENDS
- OWN money.
❖Recorded in CRJ.
❖INCREASE OWNERS EQUITY.
DRAWINGS
❖Money taken by the owner for his OWN PERSONAL USE.
❖Ex. pay the owners personal telephone account, R500.
❖Recorded in CPJ.
❖DECREASE OWNERS EQUITY.
INCOME
❖Money RECEIVED by the business.
❖INCREASE OWNERS EQUITY.
❖CURRENT INCOME – Money received for SERVICES RENDERED.
❖RENT INCOME – Money received for RENTING OUT property/BUILDING.
❖Recorded in CRJ.
EXPENSES
❖Money PAID by the business for goods and services for the business.
❖DECREASE OWNERS EQUITY.
❖Recorded in CPJ.
❖RENT EXPENSE– Money paid for the rent of a building.
❖TRADING LICENSE – Permission to render a service or sell products.
❖SALARIES – Pay monthly to workers/employees
❖WAGES – Pay weekly to workers/employees
❖MATERIAL COSTS/CONSUMABLE GOODS – Things used to render a service.
❖STATIONERY – Paper, Ink, Pens.
❖TELEPHONE – Only for the business.
❖WATER AND ELECTRICITY – Only for the business.
❖ADVERTISEMENTS – Marketing for the business.
❖INSURANCE – Assets insured for any incident.
OWNERS EQUITY
❖Total capital contribution that the owner made toward the business.
= Capital + Income – Expenses - Drawings
PROFIT AND LOSS
❖PROFIT INCENTIVE – Every business’ goal is to make a profit.
❖PROFIT – When the income exceeds (is more than) the expenses.
= (INCOME – EXPENSES)
❖LOSS – When the expenses is more than the income.
❖NET PROFIT = Income - Expenses
❖GROSS PROFIT = Sales – Cost of sales
ASSETS
❖Items bought and paid for by the business that can be used for a LONG TIME, longer than
a year.
❖Helps the business to make a PROFIT, used to render a service.
❖Even though we pay for it, it is NOT AN EXPENSE, because it adds value to the business.
❖It is NOT QUICKLY USED UP; it is used over and over.
❖Different types of assets.
NON-CURRENT ASSETS
❖LONG TERM - Owned for longer than 12 months
FIXED ASSETS
❖LAND AND BUILDINGS – Land OR buildings owned by business.
❖VEHICLES – Cars, trucks, delivery vehicles.
❖EQUIPMENT – Use to run business.
FINANCIAL ASSETS
❖Fixed Deposit - Investment
Current Assets
❖COVERTED into cash quite easily.
❖SHORT PERIOD – Within 12 months.
❖CASH – Money in the business’s BANK ACCOUNT, CASH FLOAT AND PETTY CASH.
❖DEBTORS – Clients who owe the business money. OWE
DEBIT AND CREDIT
❖DOUBLE ENTRY PRINCIPLE – Every transaction will have a debit and credit entry.
❖Each transaction has 2 accounts INVOLVED.
❖If there is a debit entry then there must be credit entry as well.
❖One account will have a debit entry – DEBIT.
❖The other will have a credit entry - CREDIT.
Summary
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A sole trader is a form of business where only one person owns and usually runs the business.
A debit is entered on the left of a ledger account, and a credit is entered on the right of a ledger
account.
Capital is the money you need to start up a business.
The owner's equity is the total capital contribution the owner has made to the business.
Income is money (receipts) that increases the owner's equiry in the business.
An expense is a payment made for goods or services you need to run your business on a day-to-day
basis. Expenses decrease the value of the owner's equity.
The profit is the difference between the money received (income) and the payments made
(expenses) when the income is more than the expenses.
If the income is less than the expenses, the business will make a loss.
A transaction takes place every time money exchanges hands between the business and another
party.
If you borrow money for your business, the money you owe will be a liability to your business until
it is paid off in full.
Long-term or non-current liabilities have to be paid back over a period longer than 12 months.
Short-term or current liabilities have to be repaid within 12 months or less.
Assets are items bought by the business that can be used over a long time and will help make a
profit for a business.
Fixed assets are assets with a long life expectancy.
Current assets are assets that can be converted into cash quite easily, usually within a short period
(one year).
Banking offers many services that are useful to a business and is not only about depositing and
withdrawing money from a bank account.
Every time you sell a good or service for cash, you receive cash or payment by debit card, credit
card or EFT. These are called your cash receipts.
Every time you buy a good or service for cash, you pay in cash or via an EFT. These are called your
cash payments.
Subsidiary journals are journals where all the different transactions are recorded before they are
entered in the General Ledger.
The accounting equation is recorded as: Assets (A) = Owner's equity (OE) + Liabilities (L).
Therefore like in maths Owner’s equity = Assets – Liabilities
Liabilities = Assets – Owner’s Equity
Do activities 5.1 to 5.9 Below memo’s are not the exact amounts but will help you.