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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”
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Forms Of Ownership:
1.
2.
3.
4.
5.
Sole Trader / Proprietor
Close Corporation
Company
Partnership
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 MacroEconomic planning
5. MANAGEMENT:
In order to plan and set new goals for future economic growth
FIELDS OF ACCOUNTING:
Financial Accounting
VS
• 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
Management Accounting
• Provides financial information for specific
purposes
• 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 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.
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According to GAAP there are two main
statements:
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underlying assumptions with regards to financial
1. The Accrual Basis*
2. The Going Concern *
The four main qualitive characteristics are:
1.
2.
3.
4.
Understandability
Relevance
Reliability
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 p.21
THE FINANCIAL POSITION: The Assets & Interests of the entity at a GIVEN TIME
(BALANCE SHEET)
ASSETS = INTEREST
1. EQUITY +
“Owners financial interest”
.:.
2. LIABILITIES
“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”)
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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
+
(Capital + Income – Expenditure)
LIABILITIES
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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 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
ASSETS
Bank
+130 000
•
LIABILITIES
=
=
=
EQUITY
Capital
+
+
+
LIABILITIES
Loan: ABC Bank
+25 000
Equipment
+100 000
=
=
=
EQUITY
Capital
+
+
LIABILITIES
Loan: ABC Bank
Buying goods on credit:
Fix N Mat bought furniture on Credit from Joc Limited, R2000
ASSETS
Bank
•
+
Purchase of Assets for Cash:
Fix N Mat bought Equipment from XY Furnishers for R100 000, paid by cheque
ASSETS
Bank
-100 000
•
EQUITY
Capital
+130 000
Acquisition of Loans:
Fix N Mat obtains a loan from ABC Bank for R25 000
ASSETS
Bank
+25 000
•
=
=
=
Furniture
+2 000
=
=
=
EQUITY
Capital
Payments to Creditors:
Fix N Mat paid Joc Ltd ‘s account of R2 000
ASSETS
=
EQUITY
Bank
Furniture
=
Capital
-2 000
=
+
+
LIABILITIES
(Loan: ABC Bank
+
+
LIABILITIES
(Loan: ABC Bank
+ Joc Ltd)
+2 000
+ Joc Ltd)
-2 000
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TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46
•
Income: CASH
Fix N Mat provided services for client S. Silver and received cash cheque of R1 000
ASSETS
Bank
+ 1 000
•
Furniture
EQUITY
+
LIABILITIES
(Income / Expenditures)
+ 1 000
Income: CREDIT
Fix N Mat provided services worth R6 000 to C.Canon on credit
ASSETS
Debtors Control
C. Canon
+ 6 000
•
=
=
=
=
=
=
=
EQUITY
+
LIABILITIES
(Income / Expenditures)
+ 6 000
Expenditure: CASH
Fix N Mat provided services worth R6 000 to C.Canon on credit
ASSETS
Debtors Control
C. Canon
+ 6 000
•
=
=
=
=
EQUITY
+
LIABILITIES
(Income / Expenditures)
+ 6 000
Expenditure: CREDIT
Fix N Mat placed an advert in the paper R200, payment due in 30 days
ASSETS
Debtors Control
•
=
=
=
=
EQUITY
+
(Income/ Expenditures) +
Advertising
- 200
+
LIABILITIES
Creditors
Cape Ads
+200
Payments received from Debtors
C. Canon settled his account in part, R2 000
ASSETS
(Bank
+ 2 000
+ Debtors)
C.Canon
- 2000
=
=
EQUITY
+
(Income/ Expenditures) +
LIABILITIES
Creditors
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BASIC FORM OF A BALANCE SHEET p50
FIX N MAT
BALANCE SHEET AT 28 FEB 20.1
ASSETS
R
Fixed Assets
Equipment
Furniture
R
Equity
100 000
2 000
Current Assets
Debtors
Bank
INTERESTS
Capital
Net profit
Withdrawals
Fixed Liabilities
Loan: ABC Bank
4 000
54 200
160 200
Current Liabilities
Creditors
130 000
6 000
(1 000)
135 000
25 000
200
160 200
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STUDY UNIT 6:
THE ACCOUNTING PROCESS p.59
The basic form of a T- Account:
DR
DATE
DETAILS
NAME OF ACCOUNT
FOL
AMOUNT
DATE
DETAILS
CR
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
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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)
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FINANCIAL STATEMENTS (p71)
FIX N MAT
INCOME STATEMENT FOR MONTH ENDED 28 FEB 20.1
NOTE
Revenue
Administrative and General Expenses
R
2
7 000
(1 000)
Wages
Advertising
8 00
2 00
Net Profit for Month
•
•
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)
FIX N MAT
STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED
28 FEB 20.1
CAPITAL:
R
Balance at the beginning of the month
130 000
Net Profit for the month
6 000
Drawings
(1 000)
Balance at the end of the month
135 000
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THE BALANCE SHEET (P74
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FIX N MAT
BALANCE SHEET AT 28 FEB 20.1
ASSETS
R
102 000
102 000
NOTE
Fixed Assets
Property, Plant & Equipment
3
Current Assets
Trade and other receivables
Debtors
Cash and cash equivalents
58 000
4 000
4 000
54 200
Total Assets
160 200
EQUITY AND LIABILITIES
Capital and Reserves
Capital
135 000
135 000
Fixed Liabilities
Interest bearing borrowings
Loan
25 000
25 000
25 000
Current Liabilities
Trade and other payables
Creditors
200
200
200
160 200
Total Equity and Liabilities
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
Carrying amount: Beginning of month
Cost
Accumulated depreciation
Additions
Depreciation
Carrying amount: End of month
Cost
Accumulated Depreciation
Equipment Furniture
TOTAL
R
R
---------100 000
--100 000
R
---------2 000
---2 000
---------102 000
---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 which
ledger entries are extracted.
1. CASH JOURNALS
•
A: Cash Receipts Journal:
Doc
No
Day
Rec
CRR 1
1
2
Details
T.Tom
Service
Fee /
Sales
Analysis
Of
Receipts
130 000
1 000
Bank
130 000
1 000
Sundry Accounts
Current
Income Amount Fol Details
130 000
Capital
1 000
131 000
1 000
(Amount banked for day)
•
B4
130 000
B: Cash Payments Journal
Cheque
No
Day
1
2
6
8
Details
XY Furniture’s
Cash
Bank
Wages
Sundry Accounts
Amount
100 000
100 000
1 000
1 000
101 000
1 000
Fol
B1
Details
Equipment
100 000
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.
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CREDIT JOURNALS
•
PURCHASES JOURNAL
ABC DEALERS
PURCHASES JOURNAL – MAY 20.3
Invoice No Day Details
Fol
1534
CL2
•
3
Grand Wholesalers
PJ5
Purchases Creditors
1258
1258
1258
1258
PURCHASES RETURNS JOURNAL
ABC DEALERS
PURCHASES RETURNS JOURNAL – MAY 20.3
Credit note Day Details
Fol
No
1534
3
Grand Wholesalers
CL2
•
PRJ5
Purchases Creditors
158
158
158
158
SALES JOURNAL (p104)
ABC DEALERS
SALES JOURNAL – MAY 20.3
Invoice No Day Details
Fol
1534
DL2
•
3
Jason 47
SJ5
Sales
169
169
Debtors
169
169
SALES RETURNS JOURNAL (p105)
ABC DEALERS
SALES RETURNS JOURNAL – MAY 20.3
Credit Note Day Details
No
D223
3
Jason 47
Fol
DL2
Sales
69
69
SRJ5
Debtors
69
69
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GENERAL JOURNAL (p107)
ABC DEALERS
General journal – May 20.3
DATE Particulars
5
16
18
Fol
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
Bad Debts
F Field
F Fields balance written off as irrecoverable
Debit
R
43 000
Credit
R
43 000
430
430
84
84
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 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
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)
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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)
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. 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)
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
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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
• PERIODIC
Inventory
Inventory
DR Carriage on Purchases A/c
CR Bank
Drawings
Purchases
Donations
Purchases
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 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.
2.
3.
4.
Opening Balance of INVENTORY ACCOUNT (Asset from physical stock take) is held all year
Inventory Purchased is DR @ Cost in PURCHASES A/C and CR Bank / Creditor.
When goods are sold CR SALES and DR Bank / debtor
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
ACCOUNT
• Purchases (CASH)
DR Purchases
CR Bank
Transaction recorded in CPJ @ COST
• Purchases (CREDIT)
DR Purchases
CR M. Maartens AND Creditors Control
Recorded in Purchases Journal @ COST
• Returning Credit Purchase
DR M. Maartens AND Creditors Control
CR Purchases RETURNS
Purchases Returns Journal @Cost Price
• Sales (CASH)
DR Bank
CR Sales
Recorded in CRJ @ Selling Price
• Sales (CREDIT)
DR A.Ahmed AND Debtors control
CR Sales
Recorded in Sales Journal @ Selling Price
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• 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)
10 000
PLUS Purchases (Cost)
90 000
Inventory available for Sale (Cost) 100 000
LESS Closing inventory (Cost)
20 000
Cost Of Sales
80 000
GROSS PROFIT* (BALANCING FIGURE) 20 000
Sales
100 000
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
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THE TRADING ACCOUNT
23
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 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)
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•
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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 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
CAPITAL
BANK
INVENTORY
VEHICLES AT COST
EQUIPMENT AT COST
DEBTORS CONTROL
CREDITORS CONTROL
FOL DR
CR
B1
B3
B4
B5
B6
B7
B8
118 150
4 250
8 000
91 000
19 500
10 100
14 700
132 850
132 850
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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
Cost Of Sales
Opening Inventory
Net Purchases
Closing Inventory
Gross Profit
Other Operating Income:
Rent Income
Discount Received
2
R
76 000
(47 000)
5 000
50 000
55 000
(8 000)
29 000
850
600
250
29 850
Selling, Administrative & General Expenses
Stationery
Wages
Water & Electricity
Bad Debts
Discount Allowed
(12 100)
Net Profit for Year
17 750
150
10 550
950
150
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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.)
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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
103 400
17 750
(3 000)
Balance at the end of the year
118 150
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
Non Current / Fixed Assets
Property, plant and Equipment
Current Assets
Inventories
Trade and other receivables
Debtors
Cash and Cash Equivalents
NOTE
3
R
110 500
110 500
22 350
8 000
10 100
10 100
4 250
Total Assets
132 850
EQUITY AND LIABILITIES
Capital and Reserves
Capital
118 150
118 150
Current Liabilities
Trade and Other Liabilities
Creditors
Total Equity and Liabilities
14 700
14 700
14 700
132 850
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NOTES TO THE FINANCIAL SYSTEMS
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1. 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
R
19 500
19 500
---------19 500
19 500
(-)
R
91 000
91 000
-------
R
110 500
110 500
-------
91 000
91 000
(-)
110 500
110 500
(-)
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 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 = 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
•
•
•
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:
DR Bank / or debtors
CR Sales
Dr Bank (Cash sale) or
Debtors (Credit Sale)
Cr Sales
Dr Cost of Sales
Cr Inventory
SALE OF STOCK:
SALE PRICE
SALE PRICE
Stock is balanced at end of financial period.
COST PRICE
DONATIONS OF STOCK
DONATIONS OF STOCK
DR Donations (Donations, an expense, increases) DR Donations (Donations, an expense, increases)
CR Inventory (Stock, an Asset, decreases)
DRAWING OF STOCK
DR Drawings
CR Inventory (Stock, an Asset, decreases)
CR Purchases (Stock, an EXPENSE, 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 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 R2 000 0f 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.