Accounting Notes Acc 101 M

1ACCOUNTING Notes ACN-101-M CHAPTER 1

Contents

Contents .............................................................................................................................1 ANSWERs to questions asked:...........................................................................................13 SPECIAL PROBLEMS / ODD / ILLOGICAL METHODS + SOLUTIONS IN ACCOUNTING.........14 LIST OF ACCOUNTS...........................................................................................................14 INCOMPLETE RECORDS:CHAPTER 18.............................................................................14 Theory of VAT................................................................................................................15 Notes to especially remember/work through:...................................................................21 Short Notes on each subject :...........................................................................................21 Chapter 15:Mortgage..................................................................................................21 Ch 15: Debentures......................................................................................................21 ALL FINANCIAL STATEMENTS:shortened notes..................................................................23 1- INCOME STATEMENT.....................................................................................................23 -2- BALANCE SHEET..........................................................................................................24 -3- STATEMENT OF CHANGES IN EQUITY...........................................................................26 -4- NOTES TO THE STATEMENTS:......................................................................................28 -5- TRIAL BALANCE............................................................................................................29 -6- JOURNALS:...................................................................................................................30 -6.1-Cash Receipts Journal.............................................................................................30 -6.2-Cash Payments Journal...........................................................................................31 -6.3-Sales Journal...........................................................................................................31 -6.4-Purchases Journal...................................................................................................32 -6.5-Sales Returns Journal..............................................................................................32 -6.6-Purchases Returns Journal......................................................................................33 -6.7-General Journal......................................................................................................33 -6.7-Petty Cash Journal..................................................................................................34 -7-Ledger :The 5 different types of balancing:..................................................................35 -7-Bank Reconcilliation Statement....................................................................................36 ..........................................................................................................................................36 -8-Reconcilliation of Debtors /OR/ Creditors Control with the Debtors/Creditors Ledger Accounts...........................................................................................................................36 -9-Reconcilliation of Inventory/Purchases/Cost of sales/Income Statement......................37 .........................................................................................................................................38 ..........................................................................................................................................38 ACN-101-M

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2ACCOUNTING Notes ACN-101-M CHAPTER 1 -10- Asset & depreciation Register:.................................................................................38 11-Asset & depreciation Schedule:...................................................................................39 12- NON-PROFIT ORGANISATIONS Receipts & Payments Statement:...............................40 1- NON-PROFIT ORGANISATIONS:Income & Expenditure Statement................................40 13- NON-PROFIT ORGANISATIONS: Trading Statement.....................................................40 14- NON-PROFIT ORGANISATIONS:Statement of Changes in Equity.................................40 15- NON-PROFIT ORGANISATIONS:Membership Fees Account:(+mem.fees paid in advance + m.f.accrued accounts as well )........................................................................40 16- NON-PROFIT ORGANISATIONS:Special : Non-Expendable :XYZ Funds Account..........40 17 NON-PROFIT ORGANISATIONS: Special : Expendable :

ABC Funds Account..........40

18 NON-PROFIT ORGANISATIONS :Accumulated Funds Account.......................................40 19-NON-PROFIT ORGANISATIONS :Property Plant & Equipment Note:..............................40 Chapter :1

HEADING :..................................................................................................42

CHAPTER 1: The Basic Principles and Spheres of Accounting...........................................42 Study Unit 1.1.t,s: The Basic Principles and Spheres of Accounting: .............................42 .............42 Study Unit 1.2.t,s DEFINITION OF ACCOUNTING&BOOKKEEPING:...................................42 Study Unit 1.3t,1.2.t Knowledge of Acc. needed by/ & Obtaining Acc.Qual.....................43 Study Unit 1.2t,1.2.1St HISTORY OF ACCOUNTING:........................................................43 Study Unit 1.2.2s; 1.8+1.9tThe Nature of Accounting is:.................................................43 Study Unit 1.5t GENERALLY ACCEPTED ACCOUNTING PRACTICE(G.A.A.P)......................43 Iasb/Apb/Saica...............................................................................................................44 Purpose of Framework...................................................................................................44 ........................................................................................................................................44 AC100: Preface to Statements of GAAP........................................................................44 LAW:...............................................................................................................................44 Study Unit 1.5.1t, 1.6.2s

APPROACH to setting Accounting Standards.....................44

Study Unit 1.5.2 t,1.6.2 s

AC100.07 Fair Presentation ...............................................44

Study Unit 1.53T,1.62S

The Application of statements of GAAP.................................44

Compliance with Legal Requirements............................................................................45 The FUNCTION of accounting is:1.6t pg8..........................................................................45 Study Unit 1-4s,1-7t. THE ENTITY CONCEPT....................................................................45 TYPES OF DIFFERENT ENTITIES.:...................................................................................45 Study Unit 1.22S,1.8t The PURPOSE STATUS and SCOPE of the accounting "FRAMEWORK"..................................................................................................................46 IAS 1.1(AC.101.1)-The PURPOSE OF FRAMEWORK is to assist.......................................46 ACN-101-M

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3ACCOUNTING Notes ACN-101-M CHAPTER 1 IAS

??(AC101).5??The SCOPE OF FRAMEWORK is :.....................................................46

THE NATURE OF AND NEED FOR FIN INFORMATION..........................................................46 NATURE of FIN. INFORMATION..........................................................................................46 NEED for ie:function of Fin.Info is :...............................................................................46 PLANNING DECISIONS:...................................................................................................46 CONTROL DECISIONS.....................................................................................................47 eg:satisfied or need corrective steps.............................................................................47 THE NATURE OF ACCOUNTING:.........................................................................................47 Study Unit 1.5, t1.10 USERS.............................................................................................47 Study Unit 1.5.sPg6,1.11tPg13 :The OBJECTIVES of FINANCIAL STATEMENTS:................47 IAS 1(AC101).12:............................................................................................................47 IAS1(AC101).13..............................................................................................................47 IAS(AC101).14................................................................................................................47 STUDY UNIT 1.5 pg 6 ,1.12t pg 13 FINANCIAL STATEMENTS:...........................................47 FINANCIAL PERFORMANCE,FINANCIAL POSITION,CHANGES IN EQUITY,AND CASH FLOW STATEMENTS.....................................................................................................................47 FINANCIAL PERFORMANCE:............................................................................................48 CHANGES IN EQUITY(p15 t)...............................................................................................48 3 FINANCIAL POSITION pg15t............................................................................................48 Two main types of SOURCES of FINANCE are distinguished :Equity and Liabilities......49 CASH FLOW STATEMENTS 1.12.4t pg 17,..........................................................................49 THE ACCOUNTING PROCESS:1.S,1.13T.............................................................................50 The DOMAINS of Accounting:............................................................................................50 FINANCIAL AND MANAGEMENT ACCOUNTING:S1.6.2,T1.14:.............................................50 INTERNAL USERS : MANAGEMENT ACCOUNTING :.........................................................50 EXTERNAL USERS : FINANCIAL ACCOUNTING :..............................................................50 UNIVERSAL ACCOUNTING DENOMINATOR:1.3S................................................................50 GOLDEN RULE # 3............................................................................................................50 SUMMARY:.........................................................................................................................50 Chapter :2

HEADING :..................................................................................................52

CHAPTER 2: The Nature of Accounting Theory..................................................................52 Chapter :3

HEADING :..................................................................................................53

CHAPTER 3: The Financial Position....................................................................................53 3.1S INTRODUCTION.........................................................................................................53 3.2S ACCOUNTING ENTITY................................................................................................53 3.2T THE FINANCIAL PERIOD.............................................................................................53 ACN-101-M

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4ACCOUNTING Notes ACN-101-M CHAPTER 1 3.3S.3.3T THE FINANCIAL POSITION..................................................................................53 ASSETS..........................................................................................................................53 NON-CURRENT ASSETS:..............................................................................................53 CURRENT ASSETS.......................................................................................................54 LIABILITIES:....................................................................................................................54 CURRENT LIABILITIES..................................................................................................54 NON-CURRENT LIABILITIES..........................................................................................54 3.3.3. EQUITY.pg40t.......................................................................................................54 3.4t MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTSpg41..............................54 3.4s NET ASSET VALUE or(Net Worth)pg15......................................................................54 3.6t,3.5s BAE pg41t,pg15s................................................................................................55 3.6s DOUBLE ENTRY PRINCIPLE:pg17...............................................................................55 3.7t THE BALANCE SHEET OR FINANCIAL POSITION..........................................................56 Chapter :4

...................................................................................................................63

HEADING :.........................................................................................................................63 CHAPTER 4: THE FINANCIAL PERFORMANCE.....................................................................63 OR

INCOME STATEMENT................................................................................................63

AND STATEMENT OF CHANGES IN EQUITY.......................................................................63 Study Unit 4.1 Introduction...............................................................................................63 4.2t Elements of the Income Statement pg49t.................................................................63 INCOME .........................................................................................................................63 REVENUE........................................................................................................................63 GAINS.............................................................................................................................63 EXPENSES......................................................................................................................63 NORMAL EXPENSES....................................................................................................64 LOSSES.......................................................................................................................64 INFLUENCE OF PROFIT/LOSS ON EQUITY.pg51t..........................................................64 INCOME STATEMENT:or FINANCIAL RESULT......................................................................64 OR FINANCIAL PERFORMANCE..........................................................................................64 REASONS FOR INCOME STATEMENTS. .17 of framework...............................................67 STATEMENT OF CHANGES IN EQUITY.pg 53 t....................................................................68 IAS1(AC101)...................................................................................................................68 4.6ACCOUNTING POLICIES AND EXPLANATORY NOTES....................................................70 Chapter :5

HEADING :..................................................................................................72

CHAPTER 5: THE RECORDING OF FINANCIAL TRANSACTIONS..........................................72 ACN-101-M

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5ACCOUNTING Notes ACN-101-M CHAPTER 1 STUDY UNIT 5.1: INTRODUCTION:.....................................................................................72 THE DOUBLE ENTRY SYSTEM............................................................................................72 ASSETS = INTERESTS...............................................................................................72 5.3 s The effect of transactions on the BAE......................................................................72 5.4 Transactions which affect only: Assets or Equities or Liabilities.................................73 .........................................................................................................................................73 equities -........................................................................................................................73 creditor +.......................................................................................................................73 5.5s Transactions affecting Income +Expenditure accounts.pg30,s..............................73 5.7s BASIC form of a Balance Sheet..................................................................................74 5.9s;5.3t pg65 THE GENERAL LEDGER ACCOUNT.............................................................74 Account types:A or E or L +i and e................................................................................76 5.4t p72,5.10s p38 Balancing an Account.........................................................................77 5.5 p75t;5.14 p45sTHE Trial balance................................................................................78 5.5.1t Errors not revealed by a trial balance................................................................79 Errors which will be revealed by a trial balance.............................................................80 5.5.1t p77 Tracing errors in a trial balance...................................................................80 5.6t pg78Preparing financial statements.........................................................................80 5.5.4 p80t;5.6p49s NOTES TO THE FIN.STATEMENTS....................................................82 CheckSpecial notes for the following:...............................................................................83 Chapter :6

HEADING :PROCESSING ACCOUNTING DATA..............................................84

6.2s p62 THE ACCOUNTING CYCLE...................................................................................84 6.1-6.2p83t 6.1-6.5s p62/63 JOURNALS............................................................................84 6.3 p84 t 6.5.1s p63 THE DIFFERENT JOURNALS............................................................85 CASH JOURNALS..........................................................................................................85 CREDIT JOURNALS AND THE GENERAL JOURNAL........................................................85 CASH RECEIPTS JOURNALS :.......................................................................................85 6.3.2.P89 t P 64 s CASH PAYMENTS JOURNAL.............................................................87 6.3.3 p95t Credit Journals and the General Journal........................................................89 6.3.3.1 p96 6.3.3 p70s PURCHASES JOURNAL............................................................90 p97t PURCHASES RETURNS JOURNAL.........................................................................91 p98/99t 6.3.3.3 p72 6.6.4s SALES AND SALES RETURNS JOURNAL...........................92 p99 SALES RETURNS JOURNALS.................................................................................94 Debtors & Creditors ledger.........................................................................................94 6.3.3.5 General Journal p74 s.....................................................................................95 ACN-101-M

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6ACCOUNTING Notes ACN-101-M CHAPTER 1 VALUE ADDED TAX t p102 6.9s p83..................................................................................96 SARS rules:.................................................................................................................96 Theory of VAT................................................................................................................97 Payment basis/Accounting basis:...................................................................................99 Accounts to be used:.....................................................................................................99 Example of Vat accounts.............................................................................................101 Chapter :7

HEADING :ADJUSTMENTS..........................................................................104

ADJUSTMENTS P99s,p115t..............................................................................................104 Introduction:................................................................................................................104 Source Documents of Adjustments:.............................................................................104 Journal:.........................................................................................................................104 Characteristics of Adjustments:...................................................................................104 ----5----Steps to take when doing Adjustments:...........................................................105 -1- Special Notes: Adjustments : ACCRUED EXPENSES(accrued means arrears)...........106 SHORT TERM ADJUSTMENTS:.......................................................................................107 1 -ACCRUED EXPENSES.=(liability)..............................................................................107 a......................................................................................................................................107 -2- Special Notes: Adjustments : PREPAID EXPENSES...................................................107 SHORT TERM ADJUSTMENTS:.......................................................................................108 2 -PREPAID EXPENSES.=(Asset - normally Current OR -Non-Current- )......................108 a......................................................................................................................................108 -3- Special Notes:Adjustments :Accrued Income(accrued means arrears)......................108 SHORT TERM ADJUSTMENTS:.......................................................................................109 3 -ACCRUED INCOME=(Asset -Current)(accrued means arrears :owed but not yet recorded) ....................................................................................................................109 Special Notes: Adjustments :Income Received in Advance(PrePaid...............................109 SHORT TERM ADJUSTMENTS:.......................................................................................109 4 -INCOME RECEIVED IN ADVANCE( PREPAID INCOME)=(Liability - normally Current) 109 Special Notes: Adjustments :Bad Debts:........................................................................110 SHORT TERM ADJUSTMENTS:.......................................................................................110 5 –BAD DEBTS = (is an Expense Account)...................................................................110 Special Notes: Adjustments:CONSUMABLE INVENTORY ADJUSTMT................................111 SHORT TERM ADJUSTMENTS:.......................................................................................111 6 - CONSUMABLE INVENTORY ADJUSTMENTS =(Assets-Current).................................111 Special Notes: Adjustments: DEPRECIATION ADJUSTMENTS..........................................112 LONG TERM ADJUSTMENTS:.........................................................................................112 ACN-101-M

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7ACCOUNTING Notes ACN-101-M CHAPTER 1 7 – Depreciation adjustments =(Assets-Non-Current & Expense)...............................112 9 –term Pre-Adjustment Trial Balance..........................................................................113 10-term Post Adjustment Trial Balance........................................................................113 11-term Post Closing Trial Balance..............................................................................113 Chapter :8 HEADING :The Closing –off Procedure ,determining Profits and Preparing Financial Statements.......................................................................................................115 Introduction:The Accounting Cycle:................................................................................115 The Closing Off Procedure: .............................................................................................115 The Closing Off Procedure: of a Service Entity:135t,119S..............................................118 STEP:(1)-Closing off NOMINAL ACCOUNTS to the PROFIT & LOSS ACCOUNT:.............119 STEP:(2)Closing off the DRAWINGS ACCOUNT and the PROFIT & LOSS ACCOUNT to the CAPITAL ACCOUNT.......................................................................................................120 Income Statement:......................................................................................................121 Statement of Changes in equity..................................................................................121 Balance Sheet..............................................................................................................121 Notes to the Statements:.............................................................................................121 The Closing off Procedure of a Trading Entity:p139t.......................................................121 Closing off Procedure for a TRADING ENTITY...............................................................121 Cost of Sales : p140....................................................................................................121 The Perpetual and Periodic Inventory System................................................................122 DRAWINGS and DONATIONS of inventory.................................................................122 The Perpetual Inventory System:.................................................................................123 The Periodic Inventory System:...................................................................................127 The Financial Statements of a Trading Entity.................................................................129 Chapter :9

HEADING :Cash &Cash Equivalents..........................................................131

9.1- The Nature of Cash and Cash Equivalents...............................................................132 9.2- Internal Controls over Cash:....................................................................................132 9-The use of a BANK Account.:.......................................................................................132 Depositing of money:...................................................................................................133 Issuing of Cheques:......................................................................................................133 The Bank Statement:...................................................................................................133 Debit & Credit Memos..................................................................................................133 9.3- Bank Reconcilliation Statement:..............................................................................133 Following are most common causes of differences:.................................................133 Reconcilliation Procedure.........................................................................................133

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8ACCOUNTING Notes ACN-101-M CHAPTER 1 SHORT SUMMARY before Full Main Explanation of: METHOD of the BANK RECONCILLIATION PROCEDURE:..................................................................................134 FULL METHOD FOR BANK RECON & ALL OTHER STEPS INVOLVED IN PROCESS.:.......134 To remember:add this: check for following odd/special difficult cases.....................137 Petty Cash Journal:..........................................................................................................138 Chapter :10

HEADING :Trade & Other Receivables....................................................141

Introduction:....................................................................................................................141 Discount Allowed:............................................................................................................141 Discount terms:............................................................................................................141 Discount & Vat Reversing............................................................................................141 Interest Charged:............................................................................................................142 BAD DEBTS and PROVISION FOR BAD BEBTS..................................................................142 Bad Debts writing off of:..............................................................................................142 PROVIDING for DOUBTFUL DEBTS:...............................................................................143 Estimating doubtful debts:........................................................................................143 Provision for Doubtful Debts:....................................................................................144 Financial Statements: ..............................................................................................144 Increasing/Decreasing the Provision for Doubtful Debts:.........................................144 Recovery of Bad Debts written off:..............................................................................145 VAT,Bad Debts & Bad Debts Recovered. 10.4.7S........................................................145 VAT And Bad Debts...................................................................................................145 VAT and Bad Debts Recovered.................................................................................145 Debtors With Credit balances ie: Cr:...............................................................................145 Credit Cards Sales & Charges:........................................................................................145 Debtors Control Account:................................................................................................146 Disclosure of Debtors& Bills receivable in the Financial Statements:.............................147 -1-Disclosure................................................................................................................147 -a-Balance Sheet ..................................................................................................147 -c-Notes to Financial Statements:..........................................................................148 -2-Debtors With Credit balances ie: Cr:........................................................................148 Bills Receivable:..............................................................................................................148 Recording of Bills Rec...............................................................................................148 Payment of a Bill on Due Date:.................................................................................148 Dishonouring a Bill....................................................................................................148 Discounting a Bill......................................................................................................149 Dishonouring a Discounted Bill.................................................................................149 ACN-101-M

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9ACCOUNTING Notes ACN-101-M CHAPTER 1 Chapter :11

HEADING :Inventory...............................................................................151

Introduction:....................................................................................................................151 The Importance of Correct Inventory Evaluation:CORRECTING MISTAKES And RESULTS of Incorrect Evaluation:.......................................................................................................151 Correcting Inventory Mistakes in the Income Statement etc.:.....................................151 Valuation of Inventory at Historical Cost:........................................................................152 NOTES TO The FINANCIAL STATEMENTS: ....................................................................152 Methods of Estimating Inventory:...................................................................................153 11.5 The Consistensy in the Application of Procedures..................................................154 11.6 Disclosure of Inventory in the Financial Statements:..............................................154 Chapter :12

HEADING :.Property Plant & Equipment.................................................155

Introduction:....................................................................................................................156 The Classification of Non-Current Assets........................................................................156 Determining the Historic Cost Price of Non–Current Assets:...........................................156 LAND:........................................................................................................................156 All Manufactured & Self erected Assets....................................................................156 Natural resources:....................................................................................................157 Intangible Assets:.....................................................................................................157 Safeguarding & Control of Property Plant & Equipment..................................................157 Recording the Purchase At Initial Aquisition. .................................................................157 ASSET/Machinary/Equipment/Vehicles ACCOUNT:.......................................................157 Re-Evaluation:.................................................................................................................158 Depreciation:...................................................................................................................158 General:.......................................................................................................................158 'Depreciation :Expense' Account.................................................................................158 "Accumulated Depreciation Account:..........................................................................158 Methods for Depreciation calculation:.........................................................................158 Straight Line Method: (or Fixed Installment Method)................................................159 Diminishing balance method (or Accellerated Method)............................................160 Production Method:...................................................................................................160 Reviewing depreciation rates:.....................................................................................160 The Treatment of Land & Buildings:............................................................................160 Property plant & equipment Aquired/Disposed During the financial year....................160 Disposal of Property Plant & Equipment.........................................................................160 Summary (copied from study guide)...........................................................................163 Presentation In the Financial Statements:......................................................................164 ACN-101-M

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10ACCOUNTING Notes ACN-101-M CHAPTER 1 Chapter :13

HEADING :Other Non-Current Assets......................................................165

Introduction:....................................................................................................................165 Intangible Assets:............................................................................................................165 AMORTISATION: of Intangible assets...........................................................................165 Other Financial Assets:....................................................................................................165 Cost Price of other Financial Assets:...............................................................................166 Classification of Other Assets:.........................................................................................166 Recording & disclosure of other financial assets............................................................166 Cash Investments:....................................................................................................166 Loans Granted:.........................................................................................................167 Investments in Shares:.............................................................................................168 Disclosure in Fin.Stat. of shares and all Other Financial investments......................168 Chapter :14

HEADING :Current Liabilities..................................................................170

-14.1 Introduction:..........................................................................................................170 -14.2 Trade Creditors:.....................................................................................................170 -14.3Bills Payable............................................................................................................170 Sundry current Liabilities:...............................................................................................171 Internal Control measures regarding creditors:..............................................................171 Balance Sheet disclosure:...............................................................................................171 Creditors Control and Creditors Ledger Reconcilliation...................................................172 Chapter :15

HEADING :Non-Current Liabilities...........................................................176

-15.1 Introduction:..........................................................................................................177 -15.2 Recording a Non-Current liability in the Books and Financial Statments..............177 -i-Long term loans & Mortgage Bonds:.......................................................................177 -a-Mortgage bond:....................................................................................................177 Debentures:....................................................................................................................178 Method:.....................................................................................................................178 Chapter :16

HEADING : Financial statements of a Sole Proprietor:............................180

Introduction:....................................................................................................................180 Overall Considerations....................................................................................................181 Establishment of a Sole Proprietorship:..........................................................................181 Drawings :.......................................................................................................................182 Owners Equity:................................................................................................................183 Balance sheet:................................................................................................................183 Notes to the statements:................................................................................................183 ACN-101-M

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11ACCOUNTING Notes ACN-101-M CHAPTER 1 CHAPTER 17 STUDY GUIDEp 328 | Chapter 17 Textbook p 333......................................184 Chapter :17

HEADING : Non-Profit Organisations:......................................................184

Introduction:....................................................................................................................185 Organisational & Control Characteristics.:......................................................................185 Sources of finance for :...................................................................................................185 Accounting records:........................................................................................................185 Entrance fees:...........................................................................................................186 Membership fees: ....................................................................................................186 Income from Bar,Tuck Shop,Restaurant:..................................................................186 Donations and Bequests:..........................................................................................187 Receipts & Payments Statement:....................................................................................187 Income and Expenditure Statement:.............................................................................187 Trading Statement:.........................................................................................................188 Accumulated Fund Account ............................................................................................189 Special Funds..................................................................................................................189 EXAMPLE OF: A NON-EXPENDABLE SPECIAL FUND ACCOUNT:.................................190 EXAMPLE OF: An EXPENDABLE SPECIAL FUND ACCOUNT:........................................191 FINANCIAL STATEMENTS -for SPECIALFUNDS...............................................................191 Statement of changes in Equity:...............................................................................191 Balance Sheet...........................................................................................................191 Notes to the statements;..........................................................................................192 IF INTEREST FROM A NON-EXPENDABLE FUND – MAY BE USED FOR GENERAL EXPENSES:show like this:..........................................................................................192 TO REMEMBER:IN GENERAL:........................................................................................192 CHAPTER 18 STUDY GUIDEp 356 | Chapter 18 Textbook p 361......................................194 Chapter :18

HEADING : INCOMPLETE RECORDS:.......................................................194

18.1 Introduction:............................................................................................................194 18.2 Disadvantages of using incomplete records:..........................................................195 18.3 Calculation of Profits / Loss from incomplete records............................................195 18.4 Conversion from a Single Entry into a Double Entry System.................................197 18.4.1 Where subsidiary journals are kept..................................................................197 18.4.2 Where minimal records are kept.......................................................................198 TO REMEMBER:.........................................................................................................199 SHORTENED Notes:ch 18................................................................................................200 18.3 Calculation of Profits / Loss from incomplete records............................................200 18.4 Conversion from a Single Entry into a Double Entry System.................................201 ACN-101-M

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12ACCOUNTING Notes ACN-101-M CHAPTER 1 18.4.1 Where subsidiary journals are kept..................................................................201 18.4.2 Where minimal records are kept.......................................................................201 ch 9 Closing off procedures.............................................................................................205 Notes to remember:..................................................................................................206 Perpetual inventory system:.....................................................................................206 Periodic inventory system.........................................................................................207 Chapter:9-Bank Recons & Petty cash.............................................................................207 SHORT SUMMARY before Full Main Explanation of: METHOD of the BANK RECONCILLIATION PROCEDURE:..................................................................................207 To remember:add this: check for following odd/special difficult cases.....................208 Chapter 10:cash + cash equivalents:.............................................................................210 Bad debts:....................................................................................................................210 Debtors reconcilliation.................................................................................................210 Bills receivable:............................................................................................................210 Chapter 11......................................................................................................................211 INVENTORY:.................................................................................................................211 Estimating inventory: damaged fire/ check count is accurate/quaterly no stocktake. 211 chapter 12 :property plant & equipment:.......................................................................211 Depreciation:...............................................................................................................211 Scrapping/selling/trading in an asset:..........................................................................211 To remember:..............................................................................................................212 chapter 13 :other non-current assets:investments& loans.............................................212 Investments:................................................................................................................212 LOANS:.........................................................................................................................213 dividends& shares:......................................................................................................213 Chapter 14......................................................................................................................213 Bills payable:................................................................................................................213 loans:...........................................................................................................................213 creditors control reconcilliation:...................................................................................213 chapter 15:n-c liabilities:debentures/loans..................................................................213 mortgage bonds:..........................................................................................................213 chapter 16 fin. statements fo a sole proprietor...............................................................214 chapter 17- non-profit organisations...............................................................................214 Entrance fees:...........................................................................................................215 Membership fees: ....................................................................................................215 receipts & payments statement:..............................................................................215 ACN-101-M

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13ACCOUNTING Notes ACN-101-M CHAPTER 1 special funds account...............................................................................................215 18.3 Calculation of Profits / Loss from incomplete records............................................215 18.4 Conversion from a Single Entry into a Double Entry System.................................216 18.4.2 Where minimal records are kept.......................................................................216 to remember:.................................................................................................................217 CHECK at end written notes chapter 1 for all terms/notes/PLANS etc. Special notes :make a 'dont forget to " list of eg:go back and put folio number in journal of corresponding ledger account after transferring to ledger from journals. 1.1. All discount received in CPJ or CRJ whether in sundries or own column must be in (BRACKETS) for (minusing from) 1.2. The (discount )and (vat output)corrections in brackets (all the figures for these)must be in brackets,must be added to bank account Total to balance cpj/crj,-ie:they were a discount ! 1.3. introduction to accounting

ANSWERs to questions asked: 1) transfer still-Vat –control does get wroked out every month-not just on alternate months-but it can also be left out as a shortcut on alternate mnths-but not very good. 2) transfer still-vat control does allways get worked out before financial statements-YOU NEVER use the vat input/output individually in the fin statements( balance sheet) ever-ONLY the vat control amount. 3) transfer still-Accumulated depreciation gets one separate account per class of assets: eg vehicles one , machines one, etc.NOT one accumulated depreciation for all –nor 1 for each machine –only or all machines together. 4) transfer still: Asset realisation should have 1 separate account for each separate transaction taken place, eg: "Asset Realisation: Gucci Machine" Account -in exams to keep everything clear and easy- BUT in real life all transfers can go through just 1 realisation account,but separately each profit/loss transfer just after corrresponding entry-to be able to match up and trace it later.,and balance account at end of each month only-should allways be = 0. 5) transfer still : "Profit/loss on sales of assets" account –can have just 1 for whole yearat end of year just use the balancing total for income statement. 6)

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14ACCOUNTING Notes ACN-101-M CHAPTER 1

SPECIAL CHAPTER ADDED: SPECIAL PROBLEMS / ODD / ILLOGICAL METHODS + SOLUTIONS IN ACCOUNTING. LIST OF ACCOUNTS INCOMPLETE RECORDS:CHAPTER 18

1.

Creditors control:SPECIAL PROBLEM (basicly problem is about:-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side) a. Discount Received (SPECIAL PROBLEM)(ONLY funny -odd side = TO DR side - NOT cr) i. goes to Debit Side to end up showing up in Cr side "purchases" worked out total later when it is calculated : ( to get "total purchases amount" –ie :IT WAS deducted-Now add it to total ON Dr SIDE TO GET the increase in the "original" PURCHASES total on the CR side you are looking for ,since discount was only received when the payment was made to creditors weeks later,not at date of PURCHASES when you work it out later- YOU ADD IT TO DR TO GET CR PURCHASES TOTAL-NOT TO CR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD –IT WILL APPEAR NOW ON CR SIDE BY ITSELF )-Although it also still goes to income statement as a "Other Income" b. Bills Payable : i. Include all "paid" bills payable as Dr (like any payment of creditors) ii. Include all normal bills (still) payable as creditors-no separation yet! c. Refunds from creditors in respect of overpayments -already received: SPECIAL PROBLEM : i. Goes to Cr side to reduce "purchases worked out afterwards balancing figure" before it is/gets calculated. d. 'Interest income' paid on creditors accounts- SPECIAL PROBLEM : 1. Put on Cr side to reflect as a part of total creditors-ie it also reduces "purchases" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total creditors and total payment payed or one of the two} since it was recorded earlier. (included as paid out! –now we must reduce "purchases" balance ) 2. If interest income is still to be added to "creditors "-ie completely left out till now somehow-see no.(f) below-last no. this part. e. If ANYTHING is still to be added to "creditors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE CR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'creditors') and below(as balance :b/d total) to achieve correct "Total Purchases Amount " etc. 2. Debtors Control: SPECIAL PROBLEM (Some points below)(basicly:problem is about-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side) i. Dishonoured Bills receivable + Noting charges: 1. To Dr side as a normal re-addition to debtors control after a 'dishonouring' ii. R/D cheques 1. To Dr side as a re-addition to the debtors control( again added due to r/d) iii. 'Interest income' collected on debtors accounts- SPECIAL PROBLEM : 1. Put on Dr side to reflect as a part of total debtors-ie it also reduces "sales" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total debtors and totall payment received or one of the two} since it was recorded earlier.charged out! 2. If interest income is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts to achieve correct "Total Sales Amount " etc. iv. Bill receivable discounted: 1. To Cr side as a "payment already received " v. Discount ALLOWED (ONLY funny -odd side=TO Opposite side=CR side - NOT dr) vi. goes to Credit Side to end up showing up in Dr side "sales" worked out total later when it is calculated : ( to get "total sales amount" –ie :IT WAS deducted-Now add it to total ON Cr SIDE TO GET the increase in the "original" SALES total on the DR side you are looking for ,since discount was only allowed when the payment was received from debtors weeks later,not at date of SALES when you work it out later- YOU ADD IT TO CR TO GET DR SALES TOTAL-NOT TO DR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD have–IT WILL

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15ACCOUNTING Notes ACN-101-M CHAPTER 1

Theory of VAT.

APPEAR NOW ON CR SIDE BY ITSELF by 'mathematical cancellation' Special trick to get itto work out like this –could also have been added straight to dr side and ALSO to worked out at end balancing figure then to then all = "Sales" ,this is easier way!!! )-Although it also still goes to Income statement as a "Distribution and Other Expenses" vii. If ANYTHING : 1. is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'debtors') and below(as balance :b/d total) to achieve correct "Total Sales Amount " etc. viii. Bad Debts:SPECIAL PROBLEM 1. Bad debts go to CR side to "mathematicly increase" Dr side "Sales total" when one calculates it later.

to be noted specially:

• •

Note contra account for discount reversal in CPJ /crj is Debtors/Creditors not bank(all others as per logical exept this one) also note 2 diifferent methods of reversing vat –see vat chapter.

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16ACCOUNTING Notes ACN-101-M CHAPTER 1

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17ACCOUNTING Notes ACN-101-M CHAPTER 1

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18ACCOUNTING Notes ACN-101-M CHAPTER 1

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19ACCOUNTING Notes ACN-101-M CHAPTER 1

+ check all adjustments for current/non-current +headings/names/bal.sheet/inc.stat.-see notes-example of bal/inc stat for each type of adjustment +up to Ch 7 for ACCOUNT NAMES Sales

Fin stat --Electricity deposit account= Current assetsbalance sheet

Sales Returns

Account Electricity deposit account adjustment Prepaid expenses

Inventory:trading

ADJustmentaccrued expenses

Purchases

adjustment accrued income

Purchases Returns

adjustment income received in advance

VAT Input VAT Output

ADJustmentdepreciation

VAT Control

adjustment bad debts

Bank

adjustment consumable inventory on hand

Debtors Control bank&discount-(contra account heading for a ledger pg 94 stud Bad Debts Recovered Petty Cash Account Provision for Bad debts account For:Income Statement: Finance costs:

ACN-101-M

bal.sheet/income current assets balance sheet Balance sheetunder Current assets-called "PREPAYMENTS'as heading Balance sheetCurrent liabilitiesTrade &other Payables-Accrued Expenses assets-current assets-trade and other receivables bal. sheetliabilities-current liabilities-trade and other payables. bal sheet-non current assetsproperty plant &equipmentdoes not go in bal sheet-goes in income stat.only bal.sheet-Current assets-inventoriesthen stationary as last sub heading below this.

separate to dist,admin&other expense-see page 138

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20ACCOUNTING Notes ACN-101-M CHAPTER 1

Quetions to PHONE lecturer: 1. do you put column headings at beginning of each account for ledger.-HOW do this? 2. How use paper given in exam-do you use centre page line(between 2 pages double line there) as centre of a ledger account or not-+ how else supposed to use it-only journals?(as with assignment paper) 3.

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21ACCOUNTING Notes ACN-101-M CHAPTER 1 Notes to especially remember/work through: 1. 2. 3. 4. 5.

1) 2)

Expenses= Dr -Debit side/Left side Income =Cr –Credit side/Right side Equity =Cr +Plus Credit Side ,and, Dr –Minus Debit Side Asset =Dr+ Liability =Cr+

c/d comes first top means going to new balance line.

b/d comes second bottom means coming from the last balance to a final balance. c/d is on OPPOSITE side to b/d-dont put them below each other again. 'gross profit' allways ONLY means it comes from the 'Trading account ' final total for transfer.! bank-is contra for petty cash account in ledger-not cheque or something all cheques older than 6 months get reversed-allways immediately. get the bank account total from the old recon-if not available elsewhere only bank total goes in recon on OWN-FIRMS BOOK's –side-all rest ONLY go on 'banks books side' wrong amounts/errors etc. as well can show on bnk statement but not on journal along with -1- bank charges etc,so check here too for recon. enties-ie:as well as what is not ticked in cash books to go to recon. 10) ????FOR A DISCOUNT REVERSAL in a Sales /Purchases Returns Journala) it has 4 legs: b) &you must have 3 columns in the journal(or a sundries for some) c) SalesReturns –CONTRA- -1-Discount -2-Vat Output -3- Debtors Control ?????? 11) see other discount reversals too!!!!!!!!!!!!!!!!!!.......................................... a) 'debtors& cr ledger' accounts posted daily-not monthly ever in theory-exams ???. 12) Perpetual:has got a sales returns account,but hasnt got a purchases returns account.Sales returns JOURNAL has 4+ 1 + sundries columns:inventory,cost of sales,Sales returns& Debtors +VatInput + Sudries for discount allowed reversal.Purchase returns journal has 2+1 + sundries:Inventory,+ Creditors +Vat Output+sundries for discount received. 13) Put in CRJ/CPJ WITH DISCOUNT AND 1 OF THE 2 VATS : HAVE TOTALS IN BRACKETS!!!!!! 14) debtors& cr ledger' accounts posted daily-not monthly ever in theory-exams ???.thus the folio cloumn in journals 15)for the debtors/creditors ledger reconcilliation-remember a wrong side cr =less 2 times the value-1 * FOR CR +1* FOR THE Dr. 3) 4) 5) 6) 7) 8) 9)

1-Income Statement 2-Balance Sheet 3-Statement of changes in Equity 4-Notes to the Financial Statements 5-Trial Balance 6-Journals -Put a 'many journal entries in one ' for a 'profit & loss account ' transfer. 6.1-cash receipts 6.2-cash payments journal. 7-Ledger 8-Bank Reconcilliation 9-Debtors & Creditors Reconcilliation 10-Inventory Reconcilliation. 11-Asset register 12-

Short Notes on each subject : Chapter 15:Mortgage 1. 2.

3.

Cr"Bank"(for all self cash paid) & Cr "Mortgage :XY Bank " (for mortgage portion paid) –CONTRA- Dr :'Land' (for Asset Account)with both totals separately-one after the next ONLY- not 1 amount! Each payment of capital back(not interest-interest separate) is bank Cr. & mortgage dr(less in this creditors acc.) Interest separate completely- Dr "interest:mortgage :expense" Cr 'bank' or 'creditors cntrl' or accrued expenses

Ch 15: Debentures 200 mar 0 31

details

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Debentures GL55 12345678 11 5 912

gl55 11

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22ACCOUNTING Notes ACN-101-M CHAPTER 1

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23ACCOUNTING Notes ACN-101-M CHAPTER 1

NOTES TO STILL GET RIGHT/CHECK UP/ETC:

15) ????FOR A DISCOUNT REVERSAL in a Sales /Purchases Returns Journala) it has 4 legs: b) &you must have 3 columns in the journal(or a sundries for some) c) SalesReturns –CONTRA- -1-Discount -2-Vat Output -3- Debtors Control ?????? 16) Get a debtors ledger in BOTH formats for notes next 17) Itemise all internal controls-1 cash & cash equivaloents-2-debtors 3-Non current assets.-4-Non-current assets. ' ALL JOURNALS & LEDGER &Other BOOKS :shortened notes

ALL FINANCIAL STATEMENTS:shortened notes. 1- INCOME STATEMENT :redo:inventory recon&asset register +debtors list//////Exercise 8.9.8 pg 164 s NAME OF BUSINESS : XYZ Traders INCOME STATEMENT for The YEAR ended 28 Feb 2007 (over a specific period) SEE PAGE 140 S NOTES R REVENUE 2 TOTAL Cost of Sales (xxxxxx) opening inventory xxxxxx purchases xxxxxx freight in Costs xxxxxx sub-total closing inventory 9 (xxxxxxx) Gross Profit TOTAL Other Income TOTAL Profit/Loss on Sales of Assets 3 xxxxx Investments: 8 xxxxx Interest Income 8 xxxxx Fixed deposits:income 8 xxxxx Loans :Income 8 xxxxx Dividend Income: 8 xxxxx Bad Debts Recovered xxxxx Discount received xxxxx Rent or(next line)Comisssion/etc. income xxxxx TOT. ALL Income Distribution Administration and other Expenses. (BRACKETS) Discount Allowed xxxxxx Depreciation 1.2+3 Carriage on "Sales" (not purchases ! ) xxxxxx Packaging (also not in purchases ! ) Advertisements Wages and salaries Water and lights Finance Costs Interest on Long term Loan: MUST apart Interest on Bank Overdraft: Must apart Interest on Debentures Profit (for the year)

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8 8 8

xxxxxx xxxxxx xxxxxxx xxxxxxx (BRACKETS) xxxxxxx xxxxxxx xxxxxxx TOTAL

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24ACCOUNTING Notes ACN-101-M CHAPTER 1

-2- BALANCE SHEET • • •

Cash & cash equival. can also be called:deposits on demand,bank balances and cash,deposits on short notice.to ch 4/5 transfer. In cases where an entity has a +balance in 1bank account & a overdraft in another bank account –both balance should be shown separately.as -1-ASSets & -2-Liabilities Must show on balance sheet for this module: o Property plant & equipment o intangible assets o investments o trade & other receivables

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25ACCOUNTING Notes ACN-101-M CHAPTER 1 o cash & cash equivalents o trade & other payables o provisions NAME OF BUSINESS BALANCE SHEET AS AT (specific point in time) 31 March 2007 ASSETS PAGE 44tsee-own notebook1-end ch3-format-dissertation. Non-Current Assets ?????+ Provisions+????bad debts /guarantee + warrantee's. Property Plant and Equipment Investments (at cost)( shares-unlisted + listed + fixed deposits+ loans-put as sub-headings below) Intangible assets Current Assets Trade and other Receivables Cash and Cash Equivalents Inventories Prepaid Expenses ( should go in Trade & other Receivables) Total Assets

NOTES

R TOTAL

3 8

xxxxxxxx xxxxxxxx TOTAL xxxxxxxx xxxxxxxx xxxxxxxx xxxxxxxx TOTAL

EQUITY AND LIABILITIES Total Equity TOTAL Capital xxxxxxxxx Total Liabilities TOTAL Non-Current Liabilities-remember to put in increasing order of TOTAL liquidity:check chapter 15-payable last first ,those payable first go last!!! Interest bearing Borrowings: total Long Term Loans.(over 20 years at 12% pa ) 8 xxxxxxx Mortgage Bonds (over 20 years at 10% pa ) 8 xxxxxxx Debentures: 8 Current Liabilites(in incresing order of liquidity remember:payable TOTAL last first) see page 291 t :chapter 14 : "current liabilities" Trade and other Payables xxxxx Bank Overdraft 7 xxxxxx Current portion of Interest bearing borrowings 8 xxxxx Vat Payable to SARS. (Creditors:Interest or accrued interest on debentures) trade& other payables 8 xxxxx actually (Creditors:Interest/ or accrued interest on interest Bearing borrowings)trade& 8 xxxxxx other payables actually Total Equity and Liabilities TOTAL Note as to Revenue-if from sales OR service fees. Note as to (1)Trade other receivables & (2)Trade and other payables :what composes it :bills-rec+ Debtors moved to creditors because of a cr balance etc :Goes very last in the notes.

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26ACCOUNTING Notes ACN-101-M CHAPTER 1

-3- STATEMENT OF CHANGES IN EQUITY NAME OF BUSINESS: xyz Traders Statement of Changes in Equity for the (year/month/etc) ended 31 Dec. 2005 (over a period) Capital: Balance at beginning of year/mnth etc. Net Profit/Loss for the year/mnth (etc) Contributions Drawings

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Notes

Rands xxxxxx profit/(loss) xxxxxx (brackets)

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27ACCOUNTING Notes ACN-101-M CHAPTER 1 Capital: Balance at end of year/mnth etc.

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Notes

Rands TOTAL

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28ACCOUNTING Notes ACN-101-M CHAPTER 1 -4- NOTES TO THE STATEMENTS: PETER PUMPKIN Traders NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1 (1):Accounting Policy (1.1):Financial Statements have been prepared on the Historical cost basis in accordance with Generally Accepted Accounting Practice. (1.2) Property plant & Equipment: Property plant & Equipment are shown at valuation on receipt of goods where cost price is not available. Depreciation(OR/AND amortisation) has been calc. at 10 % of cost price of Assets using the straight line method.(or . .. .... written off over 20 years for intangible assets –straight line method-) Land and buildings have been classified as investment properties and have not been depreciated (1.3)provision for bad debts has been provided for at 5% of debtors. (1.4)Inventories are valued at historical cost. + research & development costs + provisions + employee benefit cost + definition of cash & cash equivalents (1.5) Changes in accounting policy disclosure. (2): Revenue is Recognised as Net Sales to customers/OR Fees charged for services rendered.

(3) (3.1) Land & buildings consist of erf 1,miemville,with buildings ,purchased at R 150 000. :subject to a MORTGAGE BOND in favour of xxx Bank . (4) Trade and other Receivables consist of : 1:Debtors:starting balance less provision for bad debt less debtors with cedit balance total:XXXXXXXX 2:Bills receivable 3:Vat control account (5) Trade and other Payables consist of : 1:Creditors:starting balance less creditors with debit balance total:XXXXXXXX 3:Vat control account (6) Inventories/y consists of: (1)stationary (2)unfinished goods (3)merchandise for sale TOTAL:XXXXXXX (7)Investments consist of: (7.1)Unlisted Shares at cost: (7.1.1) 150 shares in XYZ Company bought for R3,00 per share(market value R3000)( put current value here, if different to cost price it only goes here ,the cost price is what shows on the balance sheeteg:MARKET VALUE: R5000)

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29ACCOUNTING Notes ACN-101-M CHAPTER 1 (7,1,2) 100 shares in abc Enterprise at cost price R5,00 per share(market value 1000) (7.2)Listed Shares at cost: (7.2.1) 1500 shares in TS Stores bought for R4,00 per share(DIRECTORS VALUATION R7000) (3)Loans granted: (3.1) loan granted to xyz Company (pty)ltd at 10% pa repayable in 4 years on 31 Jan 2005 secured by fixed property:erf 15 tekkiesville,valued at R100000. (7.4)Fixed deposits: (7.4.1) fixed deposit of R5000 over 5 years at xyz bank @ 5% interest p/a payable at end of term. (8)Interest Bearing borrowings: (8.1)Mortgage bonds consist of: The long term loan secured by first mortgage :(Refer to note 3 .for details:) The mortgage bond is for 500 000 repayable over a period of 4 years in installments of R128 000 per annum., Interest at 4 % per annum is levied on Outstanding capital and is also payable annually in addition to installment. Outstanding liability = 500 000. Less: Transferred to Current Liabilities: =128 000 384 000 (8.2) Debentures: 1500 Debentures at R100 are redeemable on 2 JAN 2008 to creditors. Interest @ 10% p/a is payable each year . The debentures are secured by a mortgage bond over land & buildings(refer to note xxx) in favour of the trustees.

Property Plant & Equipment:

Land&Buildin Vehicles gs

Carrying amount: Beginning of the year: ( cost – acc.depreciation) Cost Accumulated depreciation ------------------Depreciation (One Year's including Pro rata for Disposals --------------+Additions) Additions (include all costs of : installation etc as COST price!) Re-Evaluations. --------------Disposals (Cost price – Accumulated depreciation ONLY ) (Brackets) Cost --------------Accumulated Depreciation(remember to add all up extra mnths ------------------to date sold Carrying Amount: End of year: ( cost – acc.depreciation) Cost Accumulated Depreciation ( top : Accumulated. Depreciation ------------------at beginning of Year + PLUS +-middle : Depreciation –MINUSDisposals : their Accumulated Depreciation =EQUALS= THIS AMOUNT.)

a.

Machinary

TOTAL

(Brackets) (Brackets)

(Brackets) (Brackets)

(Brackets) (Brackets)

(Brackets) (Brackets) (Brackets)

-----------(Brackets) (Brackets)

----------(Brackets) (Brackets)

(Brackets)

(Brackets)

(Brackets)

Accounting policy i. Appears in Gaap-& ALSO based on entities own policies 1. Must At least:Measurement basis used to compile the Fin .Statments. 2. And :Whether prepared according to GAAP or not.(both 1& 2 in same sentence!!!!!!) 3. Recognition of income(revenue is recognised as net sales/service fees etc) 4. Recognition of depreciation/amortisation of tangible & intangible assets. 5. research & development costs 6. provisions 7. employee benefit cost 8. definition of cash & cash equivalents

-5- TRIAL BALANCE • • •

pre-adjustment,post- adjustment,post-closing errors not revealed by trial balance where : o errors of omission, errors of principle, post to wrong account , compensating errors. /2- ,can be Dr on Cr side

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30ACCOUNTING Notes ACN-101-M CHAPTER 1 •

• •

100,100,10,1,0.1 0.01 etc difference –can be casting error /9-(only 9 –not 99 etc) eg 63 is written 36 – quotient is difference (6-3) /9 or /99 or /999 (9 or 99 –all) can all be shift in comma:if 9-one column shift-if 99 2 column etc.

-6- JOURNALS:

-6.1-Cash Receipts Journal

•

For Perpetual Inventory System:ADD 2 columns o Cost of Sales Journal o minus(Inventory Column)minus o

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31ACCOUNTING Notes ACN-101-M CHAPTER 1

-6.2-Cash Payments Journal

•

Perpetual System :add 1 columns: o Cost of Sales????????? o Inventory

-6.3-Sales Journal •

For Perpetual Inventory System:ADD 2 columns o Cost of Sales Journal o minus(Inventory Column)minus.

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32ACCOUNTING Notes ACN-101-M CHAPTER 1

-6.4-Purchases Journal •

For Perpetual Inventory System:ADD 2 columns o Cost of Sales Journal o minus(Inventory Column)minus

-6.5-Sales Returns Journal 18) Perpetual:has got a sales returns account,but hasnt got a purchases returns account.Sales returns JOURNAL has 4+ 1 + sundries columns:inventory,cost of sales,Sales returns& Debtors +VatInput + Sudries for discount allowed reversal.Purchase returns journal has 2+1 + sundries:Inventory,+ Creditors +Vat Output+sundries for discount received.

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33ACCOUNTING Notes ACN-101-M CHAPTER 1 -6.6-Purchases Returns Journal

19)

Perpetual:has got a sales returns account,but hasnt got a purchases returns account(but does have a Purch. Returns Journal.Sales returns JOURNAL has 4+ 1 + sundries columns:inventory,cost of sales,????Sales returns????? & Debtors +VatInput + Sudries for discount allowed reversal.Purchase returns journal has 2+1 + sundries:Inventory,+ Creditors +???Vat Output????+?????sundries for discount received.???????

-6.7-General Journal

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34ACCOUNTING Notes ACN-101-M CHAPTER 1 -6.7-Petty Cash Journal

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35ACCOUNTING Notes ACN-101-M CHAPTER 1 -7-Ledger :The 5 different types of balancing: -7.1-single entry.

-7.2-many -7.2entries on one only side. (no line drawn underneath the 90000 at all!!!!-only 1 of above it )

-7.3-entries both side –Both EQUAL- (Double Underline to show it ha been balanced)

-7.4-entries both side unequal

7.5:Only one figure on both sides: (same figure both sides)put one line under each side-no totals or anything else(I think)But rather double underline both sides and bd/cd the zero balance

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36ACCOUNTING Notes ACN-101-M CHAPTER 1 -7-Bank Reconcilliation Statement.

The Bank Statement from the Bank:

-8-Reconcilliation of Debtors /OR/ Creditors Control with the Debtors/Creditors Ledger Accounts. FIRST MAKE a Debtors/Creditors list: Creditors List at 30 April 2005

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37ACCOUNTING Notes ACN-101-M CHAPTER 1 Folio No DL 5 DL 8

Debtor xxxxx xxxxxxx

Amount : R xxxx xxxxx TOTAL

-9-Reconcilliation of Inventory/Purchases/Cost of sales/Income Statement. i. Rem: cost of sales * (100 + % : 'GrPr. on cost') =Sales ii.

so cost of sales =SALES * 100/(100+%)

•

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38ACCOUNTING Notes ACN-101-M CHAPTER 1

-10- Asset & depreciation Register: ACN-101-M

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39ACCOUNTING Notes ACN-101-M CHAPTER 1 Asset Register and Depreciation Report Item: General Ledger Account:eg:GL7 Identification number: Purchased from: Estimated Lifespan: Estimated Scrap value: Depreciation per annum:

Date

Details

Folio

FOLIO 5

Asset record Dr

Cr

Depreciation record Balance

Dr

Cr

Balance

11-Asset & depreciation Schedule:

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40ACCOUNTING Notes ACN-101-M CHAPTER 1 12- NON-PROFIT ORGANISATIONS Receipts & Payments Statement: 1- NON-PROFIT ORGANISATIONS:Income & Expenditure Statement 13- NON-PROFIT ORGANISATIONS: Trading Statement 14- NON-PROFIT ORGANISATIONS:Statement of Changes in Equity 15- NON-PROFIT ORGANISATIONS:Membership Fees Account:(+mem.fees paid in advance + m.f.accrued accounts as well ) 16- NON-PROFIT ORGANISATIONS:Special : Non-Expendable :XYZ Funds Account 17 NON-PROFIT ORGANISATIONS: Special : Expendable : ABC Funds Account 18 NON-PROFIT ORGANISATIONS :Accumulated Funds Account 19-NON-PROFIT ORGANISATIONS :Property Plant & Equipment Note: Incomplete records:Statement of Assets & Liabilities: Incomplete records: Plain list of assets & liabilities Incomplete records :Plain list of Bank amounts. NON-PROFIT ORGANISATIONS NON-PROFIT ORGANISATIONS

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41ACCOUNTING Notes ACN-101-M CHAPTER 1

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42ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 1 STUDY GUIDE | Chapter 1 Textbook

Chapter :1

HEADING :

CHAPTER 1: The Basic Principles and Spheres of Accounting KEY CONCEPTS . Financial information . Decision making . The nature of accounting . Unit of measurement . Forms of ownership . Generally accepted accounting practice . The fields of accounting

Study Unit

1.1.t,s: The Basic Principles and Spheres of Accounting:

Why is it necessary to Study accounting? : Answer :ALSO To ACCOUNT for Income and Expenditure and Liabilities. •

• •

•

Accounting is a means of communication. Conceptual framework: means—Eg in maths you learn conceptual: counting-- before subtract/divide. Conceptual framework is: Laid down by S.A.I.C.A ---South African Institute of Chartered Accountants After the rules approved by A.P.B ---Accounting Practices Board And having adopted the FPPFS---Framework for the Preparation and Presentation of Financial Statements. Issued by the I.A.S.B.---International accounting Standards Board. GOLDEN RULE #1 Accounting cannot just READ/MEMORY but PRACTICE

Study Unit 1.2.t,s DEFINITION OF ACCOUNTING&BOOKKEEPING: DEFINITION OF ACCOUNTING: ACCOUNTANCY can be defined as : The Orderly and Systematic IDENTIFICATION AND RECORDING of the MONETARY VALUES of FINANCIAL TRANSACTIONS of an (or economic transactions) INDIVIDUAL OR INSTITUTION and the REPORTING on the RESULTS of these TRANSACTIONS and the PROVISION of the INFORMATION in FINANCIAL STATEMENTS which INFORMATION is used in DECISION MAKING . DEFINITION OF BOOKKEEPING: BOOKKEEPING can be defined as : The Orderly and Systematic IDENTIFICATION AND RECORDING of the ( or here just “ECONOMIC EVENTS”. Finished) MONETARY VALUES of

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43ACCOUNTING Notes ACN-101-M CHAPTER 1 FINANCIAL TRANSACTIONS of an (or economic transactions) INDIVIDUAL OR INSTITUTION. Identity is important also orderly and systematic AND recording implies Chronological diary of measured events Also Classified and Summarized

Study Unit 1.3t,1.2.t Knowledge of Acc. needed by/ & Obtaining Acc.Qual. Knowledge of Accounting needed by: 1)Users : More insight-greater Personal/ Business difficulty level ability. 2)Preparers :responsibility design,processing+prepare,interpret report/profound knowledge needed. Obtaining Acc.Qualification : 1)insight for entry into business world 2)Public practice: a)management consult b)auditing consult. c)tax consult. d)account. services 3)or Fin.Manager or general manager e)trade and industry :fin acc,mngt acc.,int. audit. f)Public sector :govmt.,Auditor,mgnt fin,int. audit g)academic spheres:research ,education

Study Unit 1.2t,1.2.1St HISTORY OF ACCOUNTING: • • •

Accounting developed over centuries-The need to account for assets-Entrusted Early days by hand, last century type /print replaced hand written Computers lately ,few decades,Must Understand accounting method/not computers job/to understand business process

• • •

6000 years ago business transactions recorded.

• •

Professional Accounting Societies –Middle 19th century start ,purpose to recommend acc.uniformity.

• •

• •

Benedetto Cortugli 1458 Chapter Bookkeeping in commercial function book-first acc.textbook. FIRST Double Entry –Luca Pacioli’s “Summa” 1494 published Venice section on double entry. 300yrs Pacioli’s Summa to more scientific 19 th century Accounting was refining of bookkeeping time Development of Bookkeeping 3 phases; 1)110 yrs 1450 to 1560 –bookkeeping practice more sophisticated than textbooks. 2)1560 to 1800 major improvements and research on theory incl. emergence of Fin.Statements +entity separate to owner. 3)after 1800 :Manufacture,operations,Income tax,and emerging profession stimulants to development of accounting ZAR -1894-Inst. Of Acc. Today various per Province/Nationals ,most important SAICA 1951 Public Accountants and Auditors act promulgated : controls practicing section of accounting profession. This 1951 legislation created the Public Accountants and Auditors Board ,functions include Public Practice Registration Acc’s and Audt’s and Discipline, and Training.

1.2 GOLDEN RULE Accounting records transactions to provide useful information for decision making.

Study Unit 1.2.2s; 1.8+1.9tThe Nature of Accounting is: 1. 2.

Accounting is a Specialized Language (and Specialized means of Communication using words andfigures )used to covey specialized Financial information. –which users should understand.(of Entity.) (The Meaning of accounting is –Also concepts principles and procedures)

Study Unit 1.5t 1. 2.

GENERALLY ACCEPTED ACCOUNTING PRACTICE(G.A.A.P)

GAAP is for Financial Accounting-internal use-NOT Management Accounting-external use. –Financial statements different countries differ because of 1-social 2-legal 3-economic 4-needs.

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44ACCOUNTING Notes ACN-101-M CHAPTER 1 Iasb/Apb/Saica 3. 4.

5.

I.A.S.B. :International Accounting Standards Board. A.P.B. :Accounting Practices Board. -Standard setting body R.S.A.-1-Establish 2-Recognise 3-Accept GAAP. -Consists of representatives of several Institutes and Organizations -See company law –gazetted body into being. S.A.I.C.A. :South African Institute of Chartered Accountants. -Issues GAAP and several Statements Of GAAP

Purpose of Framework

6. 6.Purpose of “THE FRAMEWORK” :Assist 1-National standard setting bodies 2-Auditors 3-Users 4-Preparers of financial statements In Prepering and Presenting Fin. Statements. 7. I.A.S.B.- prefix- :IAS 1.1 S.A.I.C.A- prefix- :A.C.101.1 :IAS1(AC101).55 is Paragraph 55 of Either one.

AC100: Preface to Statements of GAAP. Purpose To:Explain Scope and Authoritity of Statements of GAAP And Objectives of Standard setting Process. -All statements of GAAP should be red and applied in Context of Preface 1. Paragraph .02 of AC100 :all statements of GAAP are approved by APB after process of drafting and exposure by SAICA. 2. AC100.03:APB consists of representatives of several INSTITUTES AND ORGANIZATIONS AC101(IAS 1) deals with Presentation of Statements

LAW: • •

RSA.:Companies Act 61 of 1973 section 286(3): (also AC100.04): “annual financial statements of a company shall ,in conformity with GAAP FAIRLY PRESENT the state of affairs …and the profit or loss” This act prescribes that the APB must prescribe in ‘Statements of GAAP’ the Info to be disclosed in financial statements–for the act-

GOLDEN RULE Financial statements must reveal a fair presentation of the financial position, financial performance and cash flow of an entity.

Study Unit 1.5.1t, 1.6.2s •

AC100.07 -- GAAP not inflexible for all circumstances BUT Standards for as general application as possible and eliminate undesirable alternatives.

Study Unit 1.5.2 t,1.6.2 s • • • • • • • •

APPROACH to setting Accounting Standards.

AC100.07 Fair Presentation

Most important part of Companies Act is FAIR PRESENTATION. Compliance with Gaap does not auto. guarantee fair Presentation in Fin.Stat. Standards achieve:1-Comparability 2-help fair presentation Departures must be disclosed in Explanatory Notes. AC100.08 –Compliance with Gaap may be misleading AC100.09 –not necessarily cater for Specialized Activities (more a general standard) Ac100.09 –1-Specialized +2_unusual transactions add in Notes to Clarify if any deviation in standards. Implies only in exceptional cases are deviations permitted

Study Unit 1.53T,1.62S

The Application of statements of GAAP

Spirit not Letter if problems. AC100.10 :The application of statements of gaap:APB says 1. Spirit not letter of Fin. Statements if problems with application

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45ACCOUNTING Notes ACN-101-M CHAPTER 1 2. To remember fair presentation Substance-form/&Materiality. AC100.11 :Two considerations affect Application 1. Substance over form –facts over GAAP form 2. Materiality-all matters in financial transactions which can affect the understanding and decisions of users must be recorded.

Compliance with Legal Requirements. AC100.12 Companies act schedule 4 This act and schedule 4 is adhered to in preparation of Gaap Non incorporated or non-companies and business entities who fall under other legislation than Companies Act +Schedule 4 of it must still work in accordance to statements of GAAP -even though this act and not another was taken into account in the statements preparation.

The FUNCTION of accounting is:1.6t pg8 :Is to provide Info. on the results of Economic Activities of a person or institution. 1. 2. 3.

Most fin.info. in monetary terms. Economic Activity include that use or consume resources to create new value. Fin. Results :of economic activities have 2 aspects: i)Value Added To Net Worth over particular period. ii)Accumulated Net Worth. 4. IAS 1(AC101).8 –says a set of financial statements must consist of i)balance sheet ii)income statement iii)A statement of changes in equity iv)a cash flow statement v)Notes :a)summary of significant accounting policies b)Other explanatory Notes 5. IAS19AC101).20 _says i)before fin.statments can be completed whole acc.process must be completed. ii)Interrelated and each adds info. where any one would not be enough. 6. IAS1(AC101).21 Notes and Schedules : Include:1)Risks and uncertianities 2)Insurance claims by or against company not disclosed in balance sheet as resources or obligations. -as well as other notes eg depreciation etc.

Study Unit 1-4s,1-7t. 1. 2. 3. 4. 5.

6. 7.

THE ENTITY CONCEPT

an Entity is an economic unit whose Financial results are Determined on it's own Accounting reports on the financial results and position of an entity. Accounting entity unit INDEPENDANT from OWNERS and treated that way.ie:own fin. statements. Most entities defined legally by statute eg:companies-companies act Close corporations-close corporations act By common law certain others In terms of the Companies act an incorporated registered company is a legal person and therefore an independant entity Companies act requires separate fin. statments for every company.,also C.C's as per CC act. Accounting entity not necessarily a separate legal entity.Can be any.

TYPES OF DIFFERENT ENTITIES.: A:PRIVATE SECTOR :Individual entities WITH PROFIT. 1. Sole proprietor 2. company 3. Close Corporation 4. Partnerships B:PRIVATE SECTOR :Individual entities WITHOUT PROFIT. 1. Clubs

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46ACCOUNTING Notes ACN-101-M CHAPTER 1 2. 3. 4. 5. 6.

Education Institutions Assosiations Trusts Churches Charities

C:PUBLIC SECTOR: 1. THE STATE or INDIV.GOV.ESTABLISHMENTS. 2. PROVINCES 3. STATE DEPTS. 4. MUNCIPALITIES 5. BOARDS 6. COMMISSIONS. 8-The form of a business is determined by a)Way business owned and managed b)how original funds started business up c)How profits,losses and risks divided.

Study Unit 1.22S,1.8t The PURPOSE STATUS and SCOPE of the accounting "FRAMEWORK" The Framework sets out the DIRECTIVES and CONCEPTS that underlie the preparation and presentation of Financial Statements .

IAS 1.1(AC.101.1)-The PURPOSE OF FRAMEWORK is to assist 1. 2.

IAS

3. 4. 5. 6.

development of future and review existing acc.standards. harmonising of regulations,acc.standards and procedures relating to the presentation of financial statements by reducing No. of alternative treatments. National standard setting bodies in develop national acc. standards. Preparers of fin. statments in applying fin standards Auditors to form opinion of fin.stat in line with acc.stds. users of fin stats.in interpreting +evaluating the information in them.

??(AC101).5??The SCOPE OF FRAMEWORK is :

(Answer-Basicly theObjective/Usefulness) 1. The objective of Fin. Stats. 2. The qualitative characteristics that determine the usefulness of info. in fin.Stats. 3. The definition,recognition and measurement of elements from which fin.stats.are constructed. 4. Concepts of capital and capital maintenance. IAS (AC 101).6 • -Generalizing info contained to suit all users ie.is concerned only with general purpose fin.statem.,not specialised extras needed. IAS(AC101).7

•

Fin.Statements do include Notes to etc.,but not:Annual/financial report or stuff like directors reports,chairmans report,management discussions etc. IAS(AC101).08 • The Framework applies to all fin.statments of non-profit ,business,commercial,private or public sector. • A reporting entity is entity with users who rely on fin.states. as thei major source of info on entity.

THE NATURE OF AND NEED FOR FIN INFORMATION. NATURE of FIN. INFORMATION. 1.

Accounting is a SPECIALISED Language used to convey Fin.Info.

NEED for ie:function of Fin.Info is :

TO Support decision making with 1-PLANNING or 2-CONTROL .

PLANNING DECISIONS: •

determine future action ,historical info.used some simple routine,some complex like following year fin. strategy.

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47ACCOUNTING Notes ACN-101-M CHAPTER 1 CONTROL DECISIONS eg:satisfied or need corrective steps

• • •

The most important control functions of financial information is the provision of accountability and stewardship. Financial accountabilityy is the responsibility of someone to whom assets have been entrusted. ie:control through the enforcement of accountability

DECISIONS ARE MADE BY ALL USERS OF Fin STATEMENTS according to IASB: 1) sell/buy investment- Decide hold/buy sell equity investment

2) 3) 4) 5)

stewardship-Assess Stewardship and Accountability management salaries-Assess ability entity pay + provide benefits to it's employees collateral-Assess security of amounts lent to entity.

tax-Determine taxation policies. 6) profits-Determine distributable profits and dividends. 7) national statistics-Preparation and use of the national income statistics. 8) control-Regulate activities of entities.

THE NATURE OF ACCOUNTING: • • •

ACCOUNTING is a SPECIALIZED LANGUAGED used to convey SPECIALIZED INFO. to users. Uses words and figures. Used for making decisions:a)Control. b)Planning.

Study Unit 1.5, t1.10 USERS 1.

Most common Users of FIN. Info.: 1.1. Investors -used for :buy/sell/risk

1.2. 1.3.

Creditors

-get paid

Employees –get paid +employment opportunities 1.4. Government –allocate resources and tax,regulations and statistics 1.5. Management –Control THEY ANALYSE INFO. FOR VARIOUS DECISION MAKING PROCESSES 2. IAS(AC101).9:The above users + public +customers; 2.6)Public -employ people,support local suppliers. 2.7)Customers -can entity continue,dependant involved long. 2.8)Lenders -loans and interest will be paid 3. IAS(AC101).11 • :Primarily responsibility of maagement to prepare +present statements(financial). • Management can make up and format extra Fin.Info. and has access to other Info.

Study Unit 1.5.sPg6,1.11tPg13 :The OBJECTIVES of FINANCIAL STATEMENTS: IAS 1(AC101).12:

The OBJECTIVES of fin.Stat. is to Provide information on Financial Performance,Financial Position,Changes in Equity and Cash Flow Statements for users to make Decisions with.

IAS1(AC101).13

-Fin.Stat will not meet needs of most users -Do—not-- provide all the info users need to make decisions -They provide Fin.Info NOT non Fin.Info.

IAS(AC101).14

-Fin Stat. show results of STEWARDSHIP of management. -Users can decide to----1-Replace Management 2-Hold or sell investments in equity.

STUDY UNIT 1.5 pg 6 ,1.12t pg 13 FINANCIAL STATEMENTS: FINANCIAL PERFORMANCE,FINANCIAL POSITION,CHANGES IN EQUITY,AND CASH FLOW STATEMENTS. -Discussed in .15 to paragraph -21 of Framework -IAS(AC)101).15 TO .21

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48ACCOUNTING Notes ACN-101-M CHAPTER 1 FINANCIAL PERFORMANCE:

1.

Financial outcome measured in two ways: 1)Financial Performance- Over a period -Income Statement 2)Financial Position - At a point in time-Balance Sheet

2. 3. 4.

Financial performance reflects the profit or loss of an Entity over a period of time. Financial performance reported in an Income Statement. Income Statement reports the TWO ELEMENTS of Fin.Performance:ie: a. Revenue and b. Expenses Paragraph 17 of framework reflects /explains Necessity of Fin. Performance info a. Asses potential changes in the economic resources that the entity may control in the future. b. Useful in predicting the capacity of the entity to generate cash flows from it's existing resourses. c. help asses effectiveness whith which new resources will be managed.

5.

CHANGES IN EQUITY(p15 t)

Statement of changes in equity: 1. Forms a LINK between income statement and balance sheet. 2. In simplest form starts with balance of capital at beginning of financial period and ends with balance of capital at end financial period. 3. Paragraph .8(3) states that information regarding any changes in the equity of an entity must be reported in a statement particularly formatted to show the changes in equity of an entity.

3 FINANCIAL POSITION pg15t

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49ACCOUNTING Notes ACN-101-M CHAPTER 1

1. 2. 3.

Usually determined after financial performance at the end of period. Reflects NET-WORTH of entity at a point in time. The POSITION is DETERMINED in terms of ASSETS and against that the interests of the various parties that FUNDED the ASSETS.

Two main types of SOURCES of FINANCE are distinguished :Equity and Liabilities. 4. 5. 6. 7.

Equity:Interests of owners in Assets of Entity Liabilities:Are the amounts owing to creditors ,reflect the claims of the creditors against the Assets of Entity. ASSETS =EQUITY +LIABILITIES BALANCE SHEET is Paragraph .16 of the framework states that the Economic Position of an Entity is affected by a. The Economic Resources it controls. b. it's financial structure c. it's liquidity d. it's solvency it's capacity to adapt to changes in the environment in which it operates.

CASH FLOW STATEMENTS 1.12.4t pg 17, (NEXT SEMESTER-) 1. Economic decisions taken by Users of financial info. require: a. Evaluation of ability to generate cash and cash equivalents and the timing of their generation. b. Needs of entity to use these cash flows. c. Assesing of 1)Investing 2)Financing 3)Operating activities. over the financial period. 2. The cash flow statement reflects inflows and outflows of cash during the financial period. 3. In order to prepare the financial statements at the end of the period,the accounting Process must be exercised throughout the period 1. Cash equivalents are short term investments which can be easily withdrawn without meaningful change in value. 2. Framework .15: Need for Cash Flow + Financial Position and Performance statements. 3. Framework .18 deals with the Info.on cash flow of an entity ,(see page 17t) (NEXT SEMESTER)

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50ACCOUNTING Notes ACN-101-M CHAPTER 1 THE ACCOUNTING PROCESS:1.S,1.13T 1.

2.

The accounting process comprises the : Methods and procedures for the identification and recognition, measurement and recording of finanancial transactions and events. -Identification :Which events have an impact on financial transactions. -Recognition :Valid and should be included in accounts. -Measurement :What monetary amounts -Recorded :Design of,collecting ,sorting,summarizing. This includes the processing ,presentstion,interpretation and use of the information supplied.

The DOMAINS of Accounting: FINANCIAL AND MANAGEMENT ACCOUNTING:S1.6.2,T1.14: (called The DOMAINS of Accounting)

INTERNAL USERS : MANAGEMENT ACCOUNTING : 2.1. USERS = eg: 2.1.1. Management 2.1.2. Employees 2.2. Need wide variety of fin. info. to run entity on a day to day basis. 2.3. Specific aspects according to Users needs – Reports on only Specific Aspects as an aid to Management , not for statutory needs , not on Entity as a whole. 2.4. Not necessarily according to GAAP-private accounts of management-.

EXTERNAL USERS : FINANCIAL ACCOUNTING :

2.5. Fin. Acc. deals Primarily with External users(users outside entity not involved day to day activities of entity). 2.6. USERS = eg: 2.6.1. owners 2.6.2. employees 2.6.3. investors 2.6.4. creditors 2.6.5. government 2.6.6. lenders 2.6.7. customers 2.6.8. public 2.7. Financial Accounting according to GAAP-only-. 2.8. COMPARABILITY:According to External standards:GAAP,ensure comparability of. 2.9. Fin.Acc .produces the formal financial statements(4+notes to).-Fin. Info. entity as a "whole"-

UNIVERSAL ACCOUNTING DENOMINATOR:1.3S 1. 2. 3. 4.

The common unit of measurement in Acc. is money. In RSA is the Rand and Cents. All transactions are converted to monetary values before being processed. LIMITATIONS: 4.1. Not all events can be converted to monetary terms. 4.2. Value of money unstable-influenced by many economic factors:eg-inflation.

GOLDEN RULE # 3 Financial Statements must reveal a Fair Presentation of the financial position ,financial performance and cash flow of an entity,(and statement of equity-not in study guide but should be)

SUMMARY: 1.

2. 3. 4. 5. 6. 7. 8.

Function Nature of-specialized language-specialized message-must be understandable-uses words and figures. Different Users Common unit/denominator in Acc. 4 main forms of ownership(+other types) Objective of Fin. Stat. framework for the Preparation and Presentation of Fin.Stat.=(own abr.=FPPFS) GAAPIAS 1=AC 101 {eg: IAC1(AC 101).08}

9. 10. 11.

IAS=int.acc.stds.Board AC=SAICA

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51ACCOUNTING Notes ACN-101-M CHAPTER 1 12. 13. 14.

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52ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 2 STUDY GUIDE | Chapter 2 Textbook

Chapter :2

HEADING :

CHAPTER 2: The Nature of Accounting Theory. KEY CONCEPTS . Accounting principles . Generally accepted accounting practice . Accounting statements . Accounting policy . Going concern . Qualitative characteristics . Elements of financial statements SEE first blank page in text book in beginning of chapter 2-pencil notes scribbled in show the only headings (each5-10 lines worth only) in other technicon accounting book. read to check before typing out.

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53ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 1 STUDY GUIDE | Chapter 1 Textbook

Chapter :3

HEADING :

CHAPTER 3: The Financial Position. KEY CONCEPTS . Accounting principles . Generally accepted accounting practice . Accounting statements . Accounting policy . Going concern . Qualitative characteristics . Elements of financial statements

3.1S INTRODUCTION •

PRIMARY PURPOSE OR GOAL OF ACC. IS TO GIVE INFO ON FIN.POSITION. AND FIN.RESULT/PERFORMANCE for wide range of users.

• FPPFS gives guidelines for the preparation of the FIN.STAT. 3.2S ACCOUNTING ENTITY •

Extremely important deal with business as separare accounting entity because must be dealt with from point of view of –ENTITY- not equity holders.

• DEFINITION:Any Enterprise or individual for whom Separate Financial Records are kept. 3.2T THE FINANCIAL PERIOD. 1. 2.

3.

Fin period is time between last/next dates of fin.stat. Annually compiled2.1. same date each year. 2.2. usually 31 Dec/ 30Jun /28,29Feb to coincide with tax year of most individuals. 2.3. Annual must by law be compiled for Companies and Close Corporations. 6mnth,quaterly or even monthly –only internal use by management etc for control/planning.

3.3S.3.3T THE FINANCIAL POSITION. • • • • •

THE ELEMENTS OF FIN. POSITION ARE : A=E+L Balance Sheet measured at a point in time A=(EQUITY or NET ASSET VALUE )+L

ASSETS

3.3.1.1. DEFINITION: A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity 3.3.1.2. Assets do not have to be OWNED only CONTROLLED. 3.3.1.3. Definition:Future Economic benefits:Directly or Indirectly provide inflow of cash or cash equivalents. 3.3.1.4. TANGIBLE: eg Buildings,land &buildings ,plant &machinary,furniture&fittings,office equipment,motor vehicles, 3.3.1.5. INTANGIBLE: eg Patents,goodwill,development costs,trademarks 3.3.1.6. Inventories:raw materials,cosumables,work in progress,finished goods, 3.3.1.7. receivables:trade customers,related parties,prepayments

NON-CURRENT ASSETS:

1. 2. 3. 4. 5.

ACN-101-M

Must be listed first in balance sheet Were NOT aquired for the main purpose of resale Are to be used in the business Lifespan of LONGER THAN 12 MONTHS. eg:Land &buildings,furniture&equipment,investments,vehicles.

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54ACCOUNTING Notes ACN-101-M CHAPTER 1 CURRENT ASSETS • • 1. 2. 3. 4. 5. 6.

Must be listed second under assets in balance sheet. ANY ONE of the FOLLOWING CRITERIA must be satisfied: It is expected to be realised in ,or is intended for sale or consumption in ,the entity's NORMAL OPERATING CYCLE. It is held primarily for the purpose of being TRADED. It is expected to be realised within 12 months after the balance sheet date. It is a cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months from the balance sheet date. ALL OTHER ASSETS SHALL BE CLASSIFIED AS NON-CURRENT. eg:Inventories,debtors,bills receivable,cash at bank.

LIABILITIES:

Definition: Liabitities are present obligations of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. 1. Must be a present obligation from a past event eg:to act in some way(Service) or (Pay) or - (Goods).

2.

Future possible commitments cannot be recognised as liabilities. Liability-Must first (1)Receive an asset for (2)OR Irrevocable agreement entered into first. Settle by:Service/Goods/Money/Other In many cases Settlement of Obligations enforced by Contractual or other Statuatory or other Authoritive agreements.

3. 4. 5. 6. 5.2. 5.3. 5.4.

- or

borrowing-entity borrows from financial institution bank overdraft-current account overdraft facility payables-owing by entity for goods and services bought on credit. liabilities can be legal obligations of an enterprise to pay fixed ammounts at fixed points to in time to 'Payables.'

CURRENT LIABILITIES.

If liability satisfy ANY ONE of the following CRITERIA it is classified as a current liability – ANY OTHER liability is a noncurrent liability.(framework IAS1(AC101) 1. It is expected to be settled in the entities normal operating cycle. 2. It is held primarily for the purpose of being traded. 3. It is due to be settled within 12 months of the balance sheet date. eg:creditors,bank overdraft

NON-CURRENT LIABILITIES.

1.Are long term debts ,which have to be settled AFTER one year of the balance sheet date. -LONGER THAN ONE YEAR-

3.3.3. EQUITY.pg40t 1. 2. 3. 4. 5.

6. 7. 8. 9.

The amount the owner/s own,"THE AMOUNT THE ENTITY OWES OWNER" Residual interest in assets of entity after deducting all it's liabilities. Interest of owner/s in NET ASSETS of an entity. Equity from A-profit or B-owner contributions. Equity contributed by owner in: 5.1. SOLE PROPRIETER = CAPITAL. 5.2. COMPANY =SHARE CAPITAL. 5.3. CLOSE CORPORATIONS =MEMBERS INTEREST. EQUITY-entity owns it's owners. Equity is an obligation that does not have to be settled ,whereas liability is an obligation that must be settled. E=A-L or A =E+L

3.4t MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTSpg41 • •

Monetary amount see chapter 2 for measurement.

3.4s NET ASSET VALUE or(Net Worth)pg15 1. E=A-L=Net Asset Value. 2.

Net asset value called Equity or Net Worth –residue after all liabilities deducted.

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55ACCOUNTING Notes ACN-101-M CHAPTER 1 3.6t,3.5s BAE pg41t,pg15s 1. 2. 3.

4. 5. 6. 7. 8. 9. 10.

11.

BASIC ACCOUNTING EQUATION(called the BAE for short.)=A=E-L (ONLY) All entities Assets =OWED= to either owner or creditors. Assets=What entity owes(all and all of). From transaction-a)owner paid Capital get profit and creditors paid entity. –What entity owns =what entity owes- from Double entry principle. therefore assets =equity +liabilities. By using this equation any unknown elements can be calculated. "BAE"="A=E+L"-actually -and not any other way around. OR ASSETS =(WHAT OWE OWNER +WHAT OWE CREDITOR) WORK FROM ABOVE:A=E+L A(-E)=(E+L)-E A-E=L THEREFORE L=A-E OR :A=E-L A-L=E+L(-L) A-L=E E=A-L

3.6s DOUBLE ENTRY PRINCIPLE:pg17

There are allways two sides to a TRANSACTION

•

The double entry system is based on the fact that every transaction has an influence on two or more items in the BAE.

THE DUAL EFFECT EACH TRANSACTION HAS ON THE ELEMENTS OF THE "BAE" IS THE FUNDAMENTAL PRINCIPLE ON WHICH ALL ENTRIES IN AN ACCOUNTING SYSTEM IS BASED

-

AND after each transaction has been recorded the Equation MUST still balance

Every TRANSACTION affects two or more ELEMENTS in the BAE

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56ACCOUNTING Notes ACN-101-M CHAPTER 1 BAE : A=E+L

Because IN Accountancy you get : A or E or L and Every transaction must have at least 2 on opposite sides,or more involved.

3.7t THE BALANCE SHEET OR FINANCIAL POSITION. 3.1 GOLDEN RULE The headings of all balance sheets in this study guide and in the prescribed book, can also be: ``BALANCE SHEET AS AT . . .'' FOR EXAMPLE:

•

A balance sheet is NOT part of the double entry system BUT a St atement of balances. No entries are made in the accounts when compiling a balance sheet. Usually at end fin.Period but can be compiled at any time for management purposes. Reflects NET WORTH/NET ASSET VALUE (=A – L)

•

Financial Position is DETERMINED IN TERMS OF ASSETS AND AGAINST THAT THE INTERESTS OF THE VARIOUS PARTIES THAT FUNDED THE ASSETS. the two main types of sources of finance are distinguished,they are 1. Creditors/Liabilities 2. Equity

• • •

•

• • • 1.

The Financial Position changes with each transaction or economic event,thus it is presented at a specific point in time. REFLECTS the financial position of an Entity in terms of the BAE MUST HAVE:

Must have a HEADING indicating 1.1. NAME of ENTITY .

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57ACCOUNTING Notes ACN-101-M CHAPTER 1 1.2. DATE on which measured. Reporting CURRENCY must be indicated –in RSA-Rands. 3. (in the BAE- if side by side preparation just for show then Assets shown on left,first non current then current and the source of the funds on the right. Equities must be first on right and liabilities second-with first non-current liabilities then current liabilities under that (pg 43 t).) 4. Must be prepared in narrative form-that is vertically-according to GAAP. 5. Assets firstNon-Current assets first on left,then Current assets and each type under it's own heading.Assets shown on left,first non current then current and Equities must be next below that liabilities second-with first non-current liabilities then current liabilities under that. (pg 43 t).) 6. IAS 1(AC1101).68 STATES: At a MINIMUM the FACE of the BALANCE SHEET shall INCLUDE line items that represent the - - following amounts: ASSETS: 6.1. Property plant and equipment. 6.2. Investment property. 6.3. Intangible assets. 6.4. Financial assets.(excl 5,8,9) 6.5. investments accounted for using the equity method. 6.6. biological assets. 6.7. inventories. 6.8. trade and other receivables. 6.9. cash and cash equivalents . LIABILITIES 6.10. trade and other payables. 6.11. provisions. 6.12. financial liabilities.(excl 10+11) 6.13. liabilities and assets for current tax,as defined in IAS12 -Income taxes 6.14. deferred tax assets and liabilities as defined in IAS12. EQUITY 6.15. Minority interest ,presented within equity. 6.16. Issued capital and reserves attributable to equity holders of the parent. 2.

NAME OF BUSINESS BALANCE SHEET AS AT (specific point in time) ASSETS PAGE 44tsee-own notebook1-end ch3-format-dissertation. Non-Current Assets Property plant and equipment

ACN-101-M

NOTES

R xxxxxxxxx xxxxxxxx

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58ACCOUNTING Notes ACN-101-M CHAPTER 1 ASSETS PAGE 44tsee-own notebook1-end ch3-format-dissertation. investments at cost

NOTES

R xxxxxxxx

Current Assets Trade and other receivables Cash and cash equivalents Inventories Prepaid Expenses

xxxxxxxxx xxxxxxxx xxxxxxxx xxxxxxxx xxxxxxxx

Total assets

xxxxxxxxxxx

EQUITY AND LIABILITIES Total equity Capital

xxxxxxxxx xxxxxxxxx

Total liabilities Non-current liabilities Long Term Loan.-Interest bearing borrowings:secured by

xxxxxxx xxxxxxx

Current liabilites Bank overdraft Trade and other payables Current portion of mortgage loan

xxxxxxx xxxxx xxxxxx xxxxx

Total equity and liabilities

xxxxxxxxxx

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59ACCOUNTING Notes ACN-101-M CHAPTER 1

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60ACCOUNTING Notes ACN-101-M CHAPTER 1

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61ACCOUNTING Notes ACN-101-M CHAPTER 1

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62ACCOUNTING Notes ACN-101-M CHAPTER 1

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63ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 4 STUDY GUIDE | Chapter 4 Textbook

Chapter :4 HEADING : CHAPTER 4: THE FINANCIAL PERFORMANCE. OR INCOME STATEMENT AND STATEMENT OF CHANGES IN EQUITY.

Study Unit 4.1 Introduction. 1. 2. 3. 4. 5.

???? Y/N Financial performance /income statement only comes from EQUITY ACCOUNTS:BAE—A=E+L.???? Second component of Primary Goal/Purpose of accounting = Income Statement.—(primary goal purpose of accounting=Financial results=F.Pos.+F.Per.) HEADING MUST STATE "for the period ended" Financial period =time over which income statement is measured. Financial Performance=INCOME-EXPENSES.=Income Statement=Profit/Loss over period.

4.2t Elements of the Income Statement pg49t 1. 2. 3.

Financial performance measure over financial period(normally 1 year) Net Profit = owners reward for 2.1. Entrepeneurial spirit. 2.2. Capital he/she invested. Therefore Net profit increses EQUITY.

INCOME .

4.2.1.1 Definition: Income is: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions of equity participants. 4.2.1.1.1 The objective of every Enterprise is to earn as large an income as possible (Rational).

REVENUE. 4.2.1.2 4.2.1.3

GAINS.

4.2.1.4 4.2.1.5 4.2.1.6

4.2.1.7 EXPENSES. 4.2.1.8

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Revenue is earned from entities ORDINARY ACTIVITIES. eg:Fees earned,Sales,Interest income,Dividend income,Rent Income,Discount reveived,comission income,bad debts recovered. Gains are increases in economic benefits which DO NOT arise from normal economic activities of entity. eg:Profit from sale of Non-Current assets. Can be from profit on NON SALES- liability settlement deal. When size of gains is determined,expenses are deducted before disclosing gains.

DEFINITION: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets and incurrences of liabilities that result in decreases in equity

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64ACCOUNTING Notes ACN-101-M CHAPTER 1 other than those relating to distribution to equity participants. Expenditure is incurred to generate income.

4.2.1.9

NORMAL EXPENSES 4.2.1.9.1 4.2.1.9.2

Incurred in the normal course of business activity. Arise from generation of income.

4.2.1.9.3

Eg:(?Purchase of inventory?),Customs and excise duty,Carriage on purchases(to warehouse/shopnot to customer),carriage on sales,Rent expense,Salaries and wages,Cost of raw materials,Depreciation,Administrative expenses,Water and electricity,Advertising,Interest expense,Bank charges,Bad debts,Discount allowed,Insurance.

LOSSES 4.2.1.9.4

4.2.1.9.5

Losses are decreases in economic benefit which do not arise from the normal operating activities of the entity,for example ,damage caused by fire and loss on the sale of a non-current asset. (???????Losses "often"disclosed net of related income.???????????Losses disclosed separately from expenses in income statement.?????????)

INFLUENCE OF PROFIT/LOSS ON EQUITY.pg51t 4.2.2 4.2.3 4.2.4

EQUITY = CAPITAL + NET PROFIT/-NET LOSS EQUITY =CAPITAL + INCOME-EXPENSES. Use this:EQUITY=capital+income –expenses.

INCOME STATEMENT:or FINANCIAL RESULT OR FINANCIAL PERFORMANCE. DEFINITION OF INCOME STATEMENT: Income statement is to reflect the financial performance for a financial period. -Also called financial result(not with 's) Extra notes in later weeks; 1. When a deduction from a list of addings for a heading is made,first make a total then put (minus) in brackets below-no further totals needed below as end total is next to heading. 2.

3.

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65ACCOUNTING Notes ACN-101-M CHAPTER 1

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66ACCOUNTING Notes ACN-101-M CHAPTER 1

INCOME STATEMENT FOR THE PERIODIC SYSTEM:FOR A TRADING CONCERN: See cost of sales breakdown below-only in periodic-NOT in perpetual.

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67ACCOUNTING Notes ACN-101-M CHAPTER 1

MUST HAVE: 1. Name of business Must be shown. 2. In heading:INCOME STATEMENT FOR THE PERIOD ENDED. 3. Period of Income statement must be shown. 4. Monetary currency used(rand) At a minimum the face of the INCOME STATEMENT SHALL INCLUDE LINE ITEMS THAT PRESENT the following amounts for the period. INCOME: 1. Revenue INCOME/EXPENSE: 2. Finance costs 3. Share of the profit or loss of associates or joint ventures accounted for using the equity method.

4. 5. 6.

Pre-tax gain or loss recognised on the disposal of assets or settlements of liabilities attributable to discontinuing operations. Tax expense. Profit or loss.

REASONS FOR INCOME STATEMENTS. .17 of framework. 1. 2.

3.

Assess potential changes in the economic resources that the entity may control in the future. Useful in predicting the capacity of the enterprise to generate cash flows from it's existing enterprises. Help assess effectiveness with which new resources will be managed. EXAMPLE:

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68ACCOUNTING Notes ACN-101-M CHAPTER 1

EXAMPLES OF ITEMS: REVENUE

OTHER INCOME

Fees earned

Bad debts recovered

Disribution,administrative and other expenses. Advertising

Net sales

Commission income

Bad debts

Discount received

Bank charges

Dividend income

Carriage on sales

FINANCE COSTS. Interest on bank overdraft Interest on mortgage loan Interest on long term loan Interest paid on capital/savings accounts in a partnership.

Interest income Profit on sale of asset Rent income

•

Delivery expenses Depreciation Discount allowed Insurance Postage Rent expense Repairs Salaries Stationary consumed Telephone expense Water and Electricity 'Finance Costs 'is a separate heading toDist,admin,and other expenses in State.

STATEMENT OF CHANGES IN EQUITY.pg 53 t 1. 2. 3. 4. 5. 6.

Stat. of changes in equity calculated only from equity accounts like income statement too. forms a LINK between Income state. and Balance sheet. Simplest form start balance capital beginning financial period +end balance capital end financial period. BALANCE at end of statement of ch. in Equity must be same as CAPITAL in equity in balance sheet. Must state in heading:STATEMENT of CH. in EQUITY. 'for period ended':(like income stat.) Must :Name of Business in heading.

IAS1(AC101)

An Entity shall ,present a statement of changes of changes in equity showing on the face of the statement 1. profit or loss for the period. 2. each item of income of or expense for the period ,that ,as required by other standards or by interpretations, is recognised directly in equity,and the total of these items. 3. total income and expense for the period(calculated as sum of a +b)showing separately the total amounts attributable to equity holders of the parent and to minority interest. 4. For each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8 5. An Entity shall also present ,either on the face of the statement of changes in equity OR in the NOTES: 6. The amounts of transactions of equity holders acting in their capacity as equity holders,showing separately distributions to equity holders.

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69ACCOUNTING Notes ACN-101-M CHAPTER 1 7. 8.

1. 2.

the balance of retained earnings at the beginning of the period and at the balance sheet date,and the changes during the period. A reconcilliation between the carrying amount of each class of contributed equity and each reserve at the beginning and end of the period,separately disclosing each change. NOTES FROM TEXTBOOK. The profit / loss from Income statement is added/subtracted from the equity. Additional capital withdrawals/contributions will also affect the equity.

-In this statement the balance at beginning is reconciled with the balance at end of the period.

Method: 1. First capital b/d 2. Second All: i. Additions of capital ii. Additions of Profit 3. Third all subtractions of capital.(DRAWINGS) 4. Fourth :New balance as at:Total double underline 5. NOTES: i. If new Business –not "Balance as at" for beginning but 'capital contribution by owner " or such like. ii. First all additions ,Lastly all subtractions.(eg:Drawings) iii. Headings:see :1-Capital 2-Notes 3-R (in table) iv. Closing balance at end of period ---NOT beginning of next. v. For Profit /Loss state:"for month /year/period after "Profit /loss".

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70ACCOUNTING Notes ACN-101-M CHAPTER 1

4.6ACCOUNTING POLICIES AND EXPLANATORY NOTES. • •

Is prepared to give additional information on items appearing in the financial statements. Usually shown after the cash flow statement.

1.

Accounting Policy Note:This note must state that the financial statements comply with GAAP,and the bases of measurement and other policies must be disclosed. Additional information on items in the fin.stat.: 1. There must be a note disclosing the source of revenue. 2. Anoter important note:Property Plant and Equipment which reconciles the carrying amount of these assets at the beginning of the period with the carrying amount at the end of the period. 3. Other disclosures:Eg:contingencies

2.

Eg:

(1) Name: XYZ Entity NAME (2)Heading: Notes to the financial statements at(DATE) 2007/05/05 For No : 1-(a)The annual financial statements have been prepared on the historical cost basis

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71ACCOUNTING Notes ACN-101-M CHAPTER 1 (b)and comply with G.A.A.P. For No : 2-Revenue represents fees earned for services rendered to clients. 3-Depreciation, property plant and equipment: 1) Name: XYZ Entity NAME 2)Heading: Notes to the financial statements at(DATE) 2007/05/05

__________ (1)START Amount :___ (2)Periods happenings_ (3)END Amount: __________

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72ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 5 STUDY GUIDE | Chapter 5 Textbook

Chapter :5

HEADING :

CHAPTER 5: THE RECORDING OF FINANCIAL TRANSACTIONS. KEY CONCEPTS . Debit and credit . Ledger . Transactions . Contra account . Effect on financial position . Folio number . T-account . Trial balance

STUDY UNIT 5.1: INTRODUCTION: 1. 2. 3. 4. 5. 6.

Each transaction affects 2 or more elements of the BAE---Fundamental Aspect of all entries. BAE :A =E+L Fundamental aspects of all accounting entries is:each transaction affects 2 or more elements of the BAE. BAE must allways balance after each recording of a transaction. To make a double entry correctly you need : a. A GOOD WORKING KNOWLEDGE of THE APPROPRIATE NAMES of DIFFERENT THINGS in ACCOUNTING. b. PARTICULARLY the CONCEPTS of DEBIT and CREDIT. Assets = Interests A=E+L

THE DOUBLE ENTRY SYSTEM. ASSETS = INTERESTS 1. 2.

3.

BAE does not form part of the formal accounting system but it is based on the BAE. A CONTRA LEDGER ACCOUNT is the other on involved in Transaction The one account refers to the other. TO MAKE A DOUBLE ENTRY YOU MUST :assets=interests a. Decide effect of transaction on BAE or "financial position of enterprise". b. Identify the components or accounts involved,which will have the desired effects on the equation :ie:What is A,What is E,What is L,eg :Name of eg:SALES etc in A=E+L c. Determine which accounts to debit./credit d. Be sure amounts debited= amounts credited. e. Able indicate date of the transaction. f. Indicate name of Contra ledger account in account in which you are doing the entry. g. Indicate the folio No. of the Subsidiary journal.

5.3 s The effect of transactions on the BAE. •

• • • • • •

Transaction: DEFINITION:A transaction is an agreed upon transfer of value from one party to another which affects (changes )the amount ,nature,or composition,of an enterprises assets,liabilities,or equity./Affects the BAE. Enter into transaction –if measurable monetarily. Affect BAE ASSETS =INTERESTS Gives rise to the completion of a source document. Generates Income or Expenditure if you enter into a transaction,and/or affects A=E+L A TRANSACTION DOES ONE OF 5 THINGS:Affest A/E/L/I/Exp. A=E+L There are 4 ways in which the equation can change but still remain in balance. A = E +L A

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=

E+L

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73ACCOUNTING Notes ACN-101-M CHAPTER 1 1 + 2 3 4

= = = =

+

-

+/-

• •

A Transaction can affect only A/E/L/Income/Expense-5 DIFFERENT Things. or A= E{expense/income} +L

•

or A= E-[OTHER /CAPITAL{expense/income}] +L Because income/expense is part of equity.

•

5.4 Transactions which affect only: Assets or Equities or Liabilities. REMEMBER

ASSETS=INTERESTS

1.

Transactions which affect only ASSETS. 1.1. Where one asset is being replaced by another. One asset will increase and the other decrease by the same amount. A E+L asset + AND -

2.

Transactions which affect both ASSETS and LIABILITIES(3 of) 2.1. BUY ASSET ON CREDIT A E+L asset + creditor + 2.2. PAYMENT TO CREDITOR A E+L asset(bank) creditor 2.3. AQUISITION OF LOAN A E+L asset(bank) + creditor + Transactions which affect both ASSETS and EQUITY 3.1. CAPITAL CONTRIBUTIONS A E+L asset(bank) + equity + 3.2. WITHDRAWALS BY OWNER A E+L asset equity -

3.

3.3.

SOME INCOME AND EXPENSE TRANSACTIONS(3 of 4 types) CASH INCOME A E+L asset(bank) + equity + 3.3.2. CREDIT INCOME A E+L asset(debtors) + equity + 3.3.3. CASH EXPENSES A E+L asset(bank) equity Transactions which affect both equities and liabilities. 4.1. CREDIT EXPENSE A E+L 3.3.1.

4.

equities creditor + 5.5s Transactions affecting Income +Expenditure accounts.pg30,s 1.

Example for only Income +Expense transactions: ASSETS A

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= E

INTERESTS +

L

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74ACCOUNTING Notes ACN-101-M CHAPTER 1

Income Cash

+ Bank ASSETS

L

•

Income Credit Expense Cash Expense Credit Payment from debtor Pay creditor SOME EXTRA NOTES:

• •

Investment of capital usually the first transaction.(even "furniture " could be capital contributed) Balances from before are BROUGHT DOWN ,"present state" balances are CARRIED DOWN.

• •

Asset Exchange/one asset exchanged for another is when only assets are involved in a transaction.

•

+Debtors - Bank

incomeexpense + = E + incomeexpense + -

- Debtors + Bank - Bank

+

none

none

none

none

none

- creditor

Realisation principle applies for when: Income is recorded when a debtor starts owing money(at time of transaction) and not only when you get paid. Accrual principle applies when YOUR 'creditors' get recorded on transaction date and Not only on the date you pay .

5.7s BASIC form of a Balance Sheet. 1. 2.

3.

A balance sheet is a report and in essence is a FORMAL PRESENTATION of the ELEMENTS of the BAE. Withdrawals are NOT an expenditure item. Reflects the Financial Position.

5.9s;5.3t pg65 THE GENERAL LEDGER ACCOUNT. 9) {P.S. NOTE:notice,remember on the whole :, just like for any other Contra's with multiple accounts-eg bank –you just write "payments" or receipts if their are too many contra's,down to where there are 3-eg:Debtors Vs Bank + Discount + Vat:you just say 'bank' as contra and leave other 2 out-or just bank & discount-and leave out vat etc etc}

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75ACCOUNTING Notes ACN-101-M CHAPTER 1

1. 2. 3. 4. 5. 6.

The first name or two names must allways refer to CONTRA account in "details" anywhere.Can be as descriptive as you wish –no special format required. An account is opened in the general ledger for every Asset,Equity or Liability item. Each account given own number-folio number. An account is an accounting record in which all transactions relating to a specific item are recorded. Nominal accounts ('N' in trial balance)are Income and Expense accounts. ACCOUNTING PROCESS: 6.1. Transaction takes place 6.2. Recorded on a source document 6.2.1. Information in a source document: 6.2.1.1. date 6.2.1.2. amount 6.2.1.3. type of transaction 6.2.1.4. person /entity witth whom transaction taken place 6.2.2. Examples of source documents 6.2.2.1. invoices credit transactions 6.2.2.2. receipts cash transactions 6.2.2.3. cheque counterfoils cash payments 6.2.2.4. cash slips cash purchases or sales 6.2.2.5. petty cash voucher proof of small cash payment 6.2.2.6. debit and credit notes goods returned 6.3. Journal(subsidiary) 6.4. ledger accounts(general & subsidiary) 6.5. Trial balance 6.6. Financial statements

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76ACCOUNTING Notes ACN-101-M CHAPTER 1 7. 8. 9. 10.

Ledger account is also referred to as a "T" account.(capital T) A ledger account is an individual record of a specific item. Left hand side of T is debit side and right is credit side. Dr and Cr refer to side of account-NOT to whether Account decreases or increases. - dr & cr refer to whether assets of entity itself increase or decrease. 11. Each transaction affects at least two accounts –one must be debited and one credited.—amount debited to accounts must equal amount credited to other. 12. The above No 5 and No 7 below are the No 2 basis or the double entry account system after BAE base – 'Assets = Interests'. 13. After all dr & cr are added the DR Total must = Cr Total 14. Cross reference account is contra account.details and Folio in each entry refer to this account. 15. FORMAT of LEDGER ACCOUNT: 15.1. Account name must be on top. 15.2. balances in accounts start at 0 15.3. contra account is opposite cross reference account 15.4. If total out by + or – watch out for amount DOUBLE to be taken off /add 15.5. DR side:1-Month/2-Day/3-Details/4-folio/5-Amount/double line then same on CR side.

Account types:A or E or L +i and e. 1.

2.

3 main groups of accounts: 1.1. ASSET accounts 1.2. Liability accounts 1.3. Owners equity accounts. 1.3.1. Income accounts 1.3.2. Expense accounts All Main or other groups are only part of A/E/L. 2.1. ASSET ACCOUNTS increase on LEFT side of account on LEFT side of BAE In BAE dr has +; cr has – In ledger account cr has + cr has +(both) 2.2. LIABILITY ACCOUNTS increase on right side of account on right side of BAE 2.3. EQUITY ACCOUNTS increase on right side of account on right side of BAE 2.3.1. INCOME

INCREASE( (-) DECREASE +) 4. RULE:(own rule-figured out) The Assets or Net worth or "Whats there /plus to "the entity is allways a DR. What "takes from an entity is allways a CR. eg:E = cr :entity owes-cr-(take from entity/is owed entitys worth by the entity).

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77ACCOUNTING Notes ACN-101-M CHAPTER 1 A =dr :entity got -dr-Increase entity's worth L =cr ;entity owes –cr-takes from entity/is owed by entity,is a 'Minus' from assets of entity. EXEPT:where an account is PART of another account ,then it has the same balance as the "SIDE ie:DR/ or/ CR " of the account it falls under in the Account it is part of ,although the above rule still holds. 5. 5.1 GOLDEN RULE Assets eg(bank)increase on the (Dr)side and decrease on the (Cr)side of the account. 5.2 GOLDEN RULE Equity (eg Capital) and Liabilities (eg Creditors) increase on the credit (Cr) side and decrease on the debit (Dr) side of the account. 5.3 GOLDEN RULE Income (eg sales) increases equity and are credited (Cr) to the particular income account. 5.4 GOLDEN RULE Expenses (eg wages) decreases equity and are debited (Dr) to the particular expense account. 6. 7. 8.

9.

Nominal accounts are:Income and Expenditure Balance sheet accounts (in trial balance folio)are A/E/L accounts only-not expense or income. folio numbers of accounts can be either of :GL1/GL2 for general ledger or B1/N1 for balance sheet /nominal .(at top of account) folio numbers in details are only Journal page numbers,not the above ie:not ledger account/contra account numbers.

5.4t p72,5.10s p38 Balancing an Account

1.

As accounts have entries on Dr and Cr sides ,a calculation must be done to balance them/determine the balance. A Balance:Definition: The difference between total Dr and CR in an Account. BALANCING different TYPES of entries in ACCOUNTS. 1.1. ONLY ONE ENTRY IN ACCOUNT: If only one entry leave as is –this is the balance. If more than one entry one side ;see below 3.2

1.2. MORE THAN ONE ENTRY ONE SIDE OF ACCOUNT Add the amounts on single side and write total in next line UNDER a line drawn to indicate end of entries and Total of side.(only one line on top of total/below list of figures added-NOT a double line under total which would indicate that it has been balanced and closed off with an opposite side-see next point)

1.3. THE SAME AMOUNT ENTERED ON BOTH SIDES OF ACCOUNT: A double line is drawn under amount on either side to indicate that account has been closed off-nothing else done ,that's it.-no c/d or b/d. necccessary. 1.4. UNEQUAL ENTRY ON BOTH SIDES OF ACCOUNT or MORE THAN ONE ENTRY ON BOTH SIDES OF ACCOUNT : 1.4.1. Add Dr side –Enter Total in pencil. 1.4.2. Add Cr side –enter total in pencil. 1.4.3. Subtract smaller total from larger total.The difference is the 'BALANCE' of that account. 1.4.4. c/d means carried down TO new side etc,,While b/d means broght down FROM the previous month .

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78ACCOUNTING Notes ACN-101-M CHAPTER 1 1.4.5.

Enter difference on smaller side with DETIALS:BALANCE and FOLIO:c/d in PEN- before drawing any lines and immediately after last entry on either side/any of two sides even if you must miss a few empty spaces on the smaller side.must be at bottom,bottom ,bottom.– as the c/d or carried down total(before "closing off and it,s corresponding line,then total,then double line.) =before closing off = c/d and after closing off /ie after the double lines= b/d. 1.4.6. The totals of both sides will now be the same and can be entered in pen.Drew single line under balanced totals to indicate a :TOTAL and a Double line drawn under totals balanced to indicate a "CLOSING OFF of ACCOUNT. and that the account has been balanced." 1.4.7. Last step is to carry the opening balance of account for next period over to the opposite side of account –REMEMBER TO PUT 1st DATE of following Month- and enter it under the total(so account is still showing extra on the side it came from-not on any other carried over/balanced side.This is opening balance of account for next period and is called in DETAILS:BALANCE and in FOLIO:b/d. 1.4.8. c/d or b/d is written in lower case ,not upper case.

5.5 p75t;5.14 p45sTHE Trial balance.

1. 2. 3.

A trial balance does not give undisputable proof of Zero error.(errors could have occured in the records) A Trial Balance is a list of all the dr and cr balances in the ledger b/d brought down on a specific date. A trial balance is compiled for : 3.1. To test mathematical correctness of entries in the ledger.(if all a= e+l) 3.2. To test whether double entries have been entered correctly.

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79ACCOUNTING Notes ACN-101-M CHAPTER 1

4. 5. 6. 7. 8.

3.3. To serve as a basis for preparing the income statement,statement of changes in equity and balance sheet. 3.4. To test if all the balances in ledger correct usually before financial statements prepared and after all transactions have been recorded in the ledger. All balances are :'brought down' on side ledger balance appears. ON a particular date.written "as at " like balance sheet-like a picture of the finances at a point-not over a period like income statement. Recorded in order they appear in ledger. Trial balance MUST: 8.1. (b/d) on side amount appears in ledger. 8.2. Name of business on top. 8.3. Date "as at" . 8.4. Double line at bottom of totals. 8.5. Monetary currency at top of columns. 8.6. debit and credit at to[p of columns.

9.

5.5.1t Errors not revealed by a trial balance.

1.

Errors of omission.(transaction omitted completely ,neither dr nor cr entered.

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80ACCOUNTING Notes ACN-101-M CHAPTER 1 2. 3. 4.

Post to wrong account,but on the right side.( of the account on dr or cr side.-usually a once off error,especially if in same category eg:water + lights to telephone.) Compensating errors.(Co-incidentally the same error occours on both sides ) Where the error of principle occours.(principle is wrong eg;motor account debited with repair account figures.)-(usually often repeatedly recorded incorrectly,not once off)

Errors which will be revealed by a trial balance.

1. 2.

3. 4. 5.

Trial balance cast incorrectly(amount or side) Error transferring ledger balance to trial balance.eg:(just a few examples) 2.1. eg :Incorrect amount to correct side 2.2. eg :Dr balances transferred to Cr side of trial balance. 2.3. eg :balance in ledger entirely omitted from trial b. 2.4. eg :balance from ledger entered twice in trial b. Dr and/or Cr balances of one or more journal entries may be incorrect. Balances of ledger incorrectly calculated.eg:(a few examples) 4.1. Dr or Cr or both added incorrectly. 4.2. Dr and Cr balances correctly added but but difference incorrectly calculated. Posting from journal to ledger incorrect.

5.5.1t p77 Tracing errors in a trial balance. 1.

Discrepancies traced with greater ease if Trial balances drawn up on a monthly basis ie:any erreo only 1 month not many months. 2. Steps to be taken in Tracking errors down. General approach-work back from last step performed in the preparation of the trial balance. If there is a difference in the dr and cr balances of trial balance then; 2.1. Cast each column of the trial balance again. 2.2. Make sure all balances in Ledger have been transferred correctly and to correct side of trial balance. 2.3. Confirm the balances of the ledger accounts by recalculating all the balances. 2.4. Check the transfers from the journals to the ledger. 2.5. Check the accuracy of the ammounts :following guidelines. 2.5.1. If difference in the figures columns is 1000,100,10,1,0.1,0.01 :likely to be a CASTING error in trial balance ,ledger or journal. 2.5.2. A difference between the 2 columns that can be /2 could mean a debit balance equal to 1/2 the difference has been enterd as a credit balance or visa versa.ie:If a Dr balance is wrongly transferred to the cr side,the Dr balance will be minus the amount and the cr balance plus /extra the amount.Thus the total once difference between columns calc. should be 2 times amount wrongly transferred. 2.5.3. If the difference is divisable by 9 then 2 things could have happened:

2.5.3.1.

Transposition of numbers:ie: the digits do not appear in the correct order ,so 53 is written as 35 or 270 as 720.if difference divisable by 9 then quotient will represent difference between digits which have been reversed. eg:if 36 written as 63 then difference on Tr.balance=27 and quotient=27/9=3 this represents the difference between 6 and 3 in the transposed amount.=3 So search for No.with difference of 3 between figures. If Quotient is single digit = transposition occoured in units and 10's column. If Quotient is double digit = transposition occoured in 10's and 100's column.(eg 360 was written as 630 ... difference = 270 and quotient = 270/9=30 represents a transposition between 6 &3 in the 100's column. Unit/tens/ hundreds/transposition test works even if units&tens transposition in big no. eg :3445'45' written as 3445'54'-then search as in example 1 above for a units and tens transposition.this only works with 9-not 99 or 999 etc. 2.5.3.2. Alternatively ,if the difference is divisible by 9,it may be result of a one column shift.-a digit could have moved by one place to either right or left,not order of digits changed as above. eg: if 48,60 is written 4,86 difference in Tr.Bal. will be 43.74/9=4.86 as quotient. (if answer is negative-then seek for one column ahead of quotient in Tr.Bal. part. and answer in written from part-own workings out) Similarly,if a two column shift has occoured then the difference in trial balance will be divisable by 99,so that 48,60 has been written as 4860,and so forth.

5.6t pg78Preparing financial statements. 1.

From the information in the Trial balance the fin.State. can be prepared.

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81ACCOUNTING Notes ACN-101-M CHAPTER 1 2.

Income statement:prepared from trial balance eg:

3.

Balance sheet:

4. 5.

Statement of changes in equity:no example here. AND The Notes to the Statements: FIX n MAT Trading. Notes for the month ended 31 March 2001 1.Accounting Policy Basis of presentation The annual financial statements have been prepared on the historical cost basis and with GAAP. 2.Revenue represents fees earned for services rendered to clients

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.

comply

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82ACCOUNTING Notes ACN-101-M CHAPTER 1

6.

ACCOUNT NAMES: A/ E/ L

Bank Creditors(current) Debtors Petrol in car

Cash and Cash equivalents Trade an other payables Trade and other receivables Petrol account

A L A E

Advertising account

E

Debtor:B.Berry. Creditor:M.Mills Services rendered Equipment

A L E

pay creditors

Capital Bank(if from)

buy asset

bank- equipment

E A+ L A+ A

Advertising in paper. Debtors Creditors Services rendered Capital/Equipment given as capital

called

Ex/ Inc .

Non Curr / Curr c c c

Ex p Ex p c c/nc

Balance Sheet/ Income Statement St. of Ch. in Equity.

Ledger

ledger

ledger

ledger ledger ledger

ledger ledger ledger ledger

balance sheet???

ledger ledger ledger

5.5.4 p80t;5.6p49s NOTES TO THE FIN.STATEMENTS. 1. 2. 3. 4. 5.

Shown at end after cash flow statement. Note no.1 is used to reveal GAAP compliance(ie the accounting Policies of entity and 'cost basis') Property,plant,+equipment /depreciation breakdown statement in notes. Revenue'reveals' in Notes(no.2) Notes must: a. :name of entity

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83ACCOUNTING Notes ACN-101-M CHAPTER 1

6.

b. :'for the period ended' + 'date' +'notes' like income statement. c. monetary currency used in 'breakdown box'of depreciation. Can state if no depreciation was written off for a period in a separate sentence-(see pg80t)after the 'breakdown box' with all the figures in!!

CheckSpecial notes for the following: 1. 2. 3.

For period ended:income stat,notes to fin.stat, as at or on the :balance sheet,stat of changes in equity, cash flow stat????

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84ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 6 STUDY GUIDE | Chapter 6 Textbook

Chapter :6

HEADING :PROCESSING ACCOUNTING DATA

KEY CONCEPTS . Source documents . General ledger . Accounting cycle . Debtors ledger . Cash receipts journal . Creditors ledger . Cash payments journal . Comprehensive taxation . Purchases journal . Vendor . Purchases returns journal . Taxable supplies . Sales journal . Exempted supplies . Sales returns journal . Value added tax (VAT) . General journal . Input tax . Output tax

6.2s p62 THE ACCOUNTING CYCLE 1 Transactions taking place-------------------------------------2 Completion of source documents------DAILY 3 Recording of transactions in journals-DAILY

3

Posting to ledgers----------------------------------------------------DAILY-Journal Totals Monthly.

4 Balancing of Accounts and preparing a Trial balance----------MONTHLY 5 Adjustments of accounts and post adjustment Trial balance-ANNUALY 6 Closing of Nominal Accounts----------------------------------------ANNUALY

7

Preparing financial statements and reporting of results--------ANNUALY

8

Analysis and interpretation of financial statements---Management.

7 Decision making by the management------------------------8 BACK TO START

6.1-6.2p83t 6.1-6.5s p62/63 JOURNALS 1. 2. 3. 4. 5.

Journals overcome: 1-Ledgers too bulky 2-Only 1 person can work on books at a time Subsidiary journals-Group transaction together by Type of Transaction ,and classify by Date and/or Document sequence. BOOKS RULE : No transaction may be recorded in the Ledger before it has been recorded in the journals. Source document should i. Specially developed for particular transaction. ii. Clearly distinguish between cash and credit transactions. Source documents of same kind are grouped together and recorded in Journals .

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85ACCOUNTING Notes ACN-101-M CHAPTER 1 6. 7. 8. 9. 10.

Posting is transferring from Journals to Ledger. Journals purpose is to summarize information and reduce the no. of postings to the ledger. Every transaction Must first be recorded in a subsidiary journal before being posted to the ledger. Double Entry principle applied in ledger and not in journals. Source Documents ,Journals,+ledger designed to supply 'info'to the fin.reports taking the requirements of GAAP into account as well. 11. Journals also provide more info. than ledger accounts on the Items. 12. Must provide the serial no.s of Source Documents by :REC1/2/3/4/if none given.

6.3 p84 t 6.5.1s p63 THE DIFFERENT JOURNALS. 1. 2.

An Entity can decide what their needs are and what Journal they would use(allowed to design own types). THE NORMAL ONES ARE.:(following are not the only ones but used exclusively in this book) a. Cash receipts journal e.Purchases journal b. cash payments journal f.Purchases return journal c. Sales journal g.General journal d. Sales return journal

CASH JOURNALS 1. 2.

Cash receipts journal –all cash receipts Cash payments journal-all cash payments.

CREDIT JOURNALS AND THE GENERAL JOURNAL.

1.1. PURCHASE JOURNAL -all credit purchases 1.2. Purchase returns journal - all credit returns(purchases)

1.3. 1.4.

Sales journal

-All credit sales

Sales returns journal -all credit returns(sold) 1.5. General journal -bad debts,errors etc. 1.6. +add petty cash journal,creditors subsidiary journal,

CASH RECEIPTS JOURNALS :

1.1. remember discount &vat in Journals and mix up with (brackets) and Output/Input crossover Discount deductions. 1.2. Security purposes small amount cash on premises ,cash should be banked-preferably daily. 1.3. Must be proper internal control over cash :theft /fraud.

Source documents: 1.3.1. Cash register audit rollI. Amount per transaction,Totals for periods,or totals for different cashiers. II. Electronic or printed,often computerized –immediate recording III. Cheque-details in register,cashed cheque receipt for payer. 1.3.2. Electronic payment:Debtor account no.is reference to identity of payer.-customary to consult with bank first,then program computers to prompt for an account no.(if one is not given –transfer will be rejected)Bank statement serves as proof of payment. 1.3.3. Duplicate receipts. 1.3.4. Duplicate cash invoices 1.3.5. Duplicate bank deposit slips. GENERAL RULES FOR CRJ> 10. 1 book many columns for types 11. Must be processed in date order 12. In larger company/system:different cash receipts journals for each1-Account or 2-Type of receipt. 12.1. sundries columns are posted on the day the transaction occours in to general ledger. 12.2. The contra-account in 'bank' in ledger from CRJ [posting is 'receipts' or 'total cash receipts'. 12.3. Foilio no.s as follows:CRJ=CRJ 1/2/3 ,CPJ=CPJ1/2/ ,General ledger=GL5. (From study page 64s: ) 13. Cash receipts for month recorded and analysed in date order.

14.

Cash not banked immediately-record in analysis of receipts column and then –amount banked that day recorded in bank column.remember to put a folio no. on headingof ledger account above "fol" space. 15. Check the addition in the columns by cross-casting .In other words when the totals of the analysis columns are added ,they must equal total in bank column.

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86ACCOUNTING Notes ACN-101-M CHAPTER 1 16. Entries in sundries are posted individually to the ledger. 17. Discounts and Vat imput(DR) must be in brackets-items and totals –all of.(the above must be subtracted from the 'bank'when balancing CRJ before posting to ledger to because they were a discount ie:were not included in 'bank'money received. 18. EXAMPLE OF CRJ/TO/LEDGER

19. MUST PROVIDE: 19.1. Serial no. of source document 19.2. Date of csh receipt 19.3. Name of person from whom received. 19.4. Amount. 19.5. Date and amount of of all deposits into bank account. 19.6. Account or accounts to be credited. 19.7. NOTE: Analysis of Receipts column does not get posted or totaled.! Column headings of Cash Receips Journal. 19.8. Totals of Analysis of Reciepts Column NEVER to Drawn up-not month-each day-underline when posting to bank(in one total). 19.9. IF : Money received on regular basis for same purpose=MAKE A NEW COLUMN FOR IT. 19.10. Eg:services rendered--19.10.a. Debtors-(receive cash from)-every day to debtors subsidiary ledger. -end of month to debtors control account in general ledger. 19.10.b. Sundries column.posted individually to account,specified in details column,include date for each tansaction. 19.10.c. Analysis of receipts column:Underline column only when post to to bank(ie:was banked)then post only (1) total to bank-not individually. 19.10.d. Beore posting from journal to ledger,Journal's accounts must have cross-casting done on them.This means –total Dr must equal total Cr to be posted to general ledger. 19.10.e. NOTE:Analys 19.10.f. is of receipts column does not get a Column total or Get posted to General Ledger.-AT ALL –it only is used to cross check other columns.

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87ACCOUNTING Notes ACN-101-M CHAPTER 1 COLUMNS FOR NON-CASH TRANSACTIONS. I. ('Discount Allowed')-( for example)-Column in jornal for aleready completed entry in ledger.......... Amount paid will be less than amount charged unless 'discount allowed' is recorded . This discount is usually recorded separately to give effect to the discount and balance the recording(also the General Journal has something with this ). II. only 'discount allowed column ' on regular basis to use necessity in cpj otherwise put in ”General Journal" III. All amounts in CRJ and CPJ must be in (brackets) for any ("MINUSES") IV. If 'discount allowed in crj as a column 19.10.f.IV.1. NOT a cash tansaction 19.10.f.IV.2. Recorded and treated as an expense. 19.10.f.IV.3. Total is debited to discount allowed account.(equity expense account –NOT assets) 19.10.f.IV.3.1. For 'discount allowed' Entry in CRJ Bank. Cash payment - entered in CRJ –In(???) Column Discount allowed - entered in CRJ –'In Discount . .. allowed'(as an expense) column Total to have been paid- In column-In debtors column 19.10.f.IV.3.2. Bank column Total -Debited -Bank account(asset) Discount allowed columnTotal-Debited -(as expense )discount . . allowed account Debtors column -Credited -Debtors Account(Asset) CRJ – CR/DR-to LEDGER 19.10.f.IV.3.3. Other examples: 19.10.f.IV.3.3.1. COST OF SALES 19.10.f.IV.3.3.2. Reversal of Vat to discount. 19.10.g. When "cross-casting" is done before posting to ledger - Totals of Non-cash transactions should be I. Either deducted from analysis column total II. Or added to bank column(ie as an expense already) 19.11. (??????If one payment is made on credit for multiple accounts choose 'first date' to for account to debit /credit.??????) FOLIO COLUMNS 19.12. Reason for folio columns: 19.12.a. reference 19.12.b. proof of posting 19.13. First folio column is only for Source Document eg:invoice no. 19.14. When CRJ columns posted 19.14.a. Ledger Page entered in at bottom of column of CRJ as folio proof of posting and reference,also in each sundries column for each sundries posting (even if two entered next to each other.) 19.14.b. CRJ page entered in folio column of ledger as proof of posting +reference. 19.14.c. In CRJ first folio column used for page invoice no. ledger. AND OTHER for page . general ledger from 'sundry accounts' and is next to each sundry total the in the . CRJ. Folio no. of general ledger account for each Column total entered below total.

6.3.2.P89 t P 64 s CASH PAYMENTS JOURNAL 2. 3. 4. 5.

All cash Payments –that is (payments by cheque) are recorded in CPJ. At end of Month only 1 total is credited to 'bank' account. All other columns are Contra-accounts. Sundry transactions posted individually.

SOURCE DOCUMENTS FOR CPJ. 5.1. Cheque counter foils. 5.2. Debit Notes. 5.3. OR Bank Statement issued by the bank.-for debit order /stop order /internet payment (only Recorded on receipt of) 6. Entries recorded +processed in CPJ in same order as the CHEQUE NUMBERS. 7. 'Amount on cheque ' is amount recorded in 'bank column'. 8. More analysis Columns as required by organisation.

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88ACCOUNTING Notes ACN-101-M CHAPTER 1 9. 10.

11. 12. 13.

14.

15. 16. 17. 18.

If one Cash payment for Creditors Account for 1-Merchandise 2-Extras then choose by date which 1-/expense or 2-/purchases account. To have proper control over internal control over cash all cash payments exept petty cash shoulkd be made by cheque. 10.1. such payment should be authorised by senior person ,and –if possible 10.2. signed by 2 people. Cheques cancelled should be filed for reference and indicated in CPJ as 'CANCELLED' Bank reconcilliation (bank records )are an added measure of control over cash. Payments from a bank account can be made by 13.1. Cheque 13.2. Electronic transfer 13.3. stop order or debit order 13.4. direct debit by the bank CHEQUE QUALITIES: 14.1. detatchable 14.2. pre-numbered 14.3. printed corresponding serial no.s 14.4. counterfoil duplication 14.5. duplicate underneath (some )which serve as source document. payment usually made on receipt of source documents from 3rd party,payment should be supplemented by internal documents eg:signed delivery note or goods received note. bank statement of payee is source document for electronic cash transfers.(debit order/stop order) If salaries –electronic hard copy is supplied to bank to pay directly into accounts then-only total paid will show on bank statement-hard copy /list of payments (own one) will serve as source document for wages/salaries.Bank statement is source document for electronic payments-only recorded on Receipt of. A CASH PAYMENT JOURNAL MUST HAVE:Should provide for: 18.1. Serial no. of cheque or other payment voucher.(for first column in left edge or in details column BUT NEVER in folio columns-only for sundries or bottom of column ledger acc. no.) 18.2. Date of payment 18.3. name of beneficiary 18.4. Amount of cheque 18.5. Accounts to be debited or 18.6. accounts to be credited 18.7. Folio /1-Sundries 2-Column totals/ allways the general ledger-GL1/2/3/4 ones only. 18.8. If entity more than one bank account then separate Cash Payment Journal must be kept . for each account. 18.9. Sundries details are :Contra account name 18.10. If entity makes cash payments a petty cash journal must be kept. 18.11. Details of CPJ is either 1. Cash eg:for wages 2. or :Entity Paid eg:for Stationary creditors etc. 18.12. Discount received treated separately in CPJ like CRJ(total paid in separate 'bank' is='Creditors' or 'Sundries' etc. Amount owed Column –Minus Discount =bank amount 18.13. Folio no. in General ledger is allways CPJ1/2/3. 18.14. 'discount received' is an 'income account' (in/of equity accounts) and it's contra-account is 'Creditors control' account. 18.15. The double entry principle/BAE must balance:To check CPJ before posting you must work out (in workings )total DR=Total CR(remember to add/subtract)(eg;discount) 18.16. Remember to add discount received to Bank or Assets or to subtract from debits/contra accounts to bank ie:it is an 'income account.' 18.17. Total 'bank column ' is credited as payments or 'total payments ' to general ledger bank account. 18.18. CPJ does not have an "analyses of payments" column,only a bank column. 18.19. Amount comes before "details" in sundries column ie:1-amount2-folio3-details.(at end) 18.20. If on echeque is used to pay for 2/3 different things then it is all done in one line eg:1 cheque +many columns headings,payments = in one line /record per cheque eg1-stationary(consumables) and 2equipment(nc assets) if in one line (different columns) or put in rows beneath each other for multiple same column entries. 18.21. Dont forget to go back and fill in folio numbers after ledger accounts are written up/transferred. 18.22. In folio column of general ledger page no. of CPJ is given,not contra-ledger account number.(ie not top of ledger acc. no. for folio account.) 18.23. All discount received in CPJ or CRJ whether in sundries or own column must be in (BRACKETS) for (minusing from)

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89ACCOUNTING Notes ACN-101-M CHAPTER 1 18.24.

The (discount )and (vat output)corrections in brackets (all the figures for these)must be in brackets,must be added to bank account Total to balance cpj/crj,-ie:they were a discount ! 18.25. Folio no.s can be either :(B/N 1or 2or 3)- balance sheet or nominal accounts.or GL1or 2 or 3 for general ledger accounts. 18.26. EXAMPLE OF CPJ and BALANCE SHEET ENTRIES.(ALSO P 94 t)

6.3.3 p95t Credit Journals and the General Journal 1. 2. 3. 4.

The Transactions from activities are basis of design of journals and accounts.eg:1-Buy/Sell type journal design or 2Services type journal design. 'Debtors control' + 'creditors control' accounts are 'interim' accounts between sale and realisation of cash. Debtors /creditors accounts are 'control accounts' ,ie they are not :Creditor: P.Fitzpatric' etc. 'Creditors subsidiary journal';If an entity must record that credit purchases other than those for 'sales' purposes ie:'inventory for re-sale' as a normal part of the operations,then use this book –(not include in this module –only purchases and general for other things)

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90ACCOUNTING Notes ACN-101-M CHAPTER 1 5.

In column 1 of Credit journals put :source document no. ,or in details column if none available.,but never in folio column-only for General ledger transfer numberings. 6. Source documents for credit and general journals: 6.1 Cheque no. 6.2 credit note no. 6.3 copy of invoice no. 6.4 receipt no. (etc) p 95 t Inventory Systems 1. 'Periodic' -'purchases account' -Purchases column in journal 2. 'Perpetual' -'Inventory account' -Inventory column in journals -Cost of sales columns in-1 sales journals -2 cash receipts journals To update ?????what i dont know??? a. Cost of sales account:debit b. Inventory :credit the same as discount where single entry due to debtors has taken full figure into account.) 3.

(not

Periodic system: Cost of goods sold only determined at end of fin.period when inventory counted and 'inventory account updated then only. a. Practical because of 1-relative simplicity and 2- low cost of implementing,therefore used mostly by small entities(use this one most)

6.3.3.1 p96 6.3.3 p70s PURCHASES JOURNAL 1.

Source document no. in column or details ,nec=ver in folio column. Only for inventory/resale goods. 3. only for recording credit purchases 4. After necessary authorizations- merchandise is then ordered 5. Purchases = Equity/expense account and Inventory =Asset account. 6. invoice from supplier usually source document for buying –but cannot record without goods received note to state received goods (invoice anytime)although invoice is used to record from,just not without goods received note. 7. Invoices from sellers have untrustworthy numbering ,so they can be re-numbered consecutively or /and goods received notes can be consecutively numbered and these used as reference no.s. 8. A "trade discount' is not recorded separately in journals,(not for early payment)-not necessary because considered part of different purchasing price structure. 9. 'Discount received' is recorded separately in journals because amount originally recorded is to be adjusted /changed –thus it is recorded and balanced separately for early payment-thus cpj join. 10. Purchases recorded in date order. 11. Creditors ledger updated daily from purchases journal. 12. Columns totaled end of month. 13. Purchase account=Expense account 14. Inventory =Asset account 15. For 'Periodic Inventory System': the 'Purchases Account' Debited to ledger :Assets:'Purchases"at end of month only. 16. For 'Perpetual ' :'Inventory account' is used. 17. creditors name and amount must be clearly shown. 18. Creditors column total is credited to the creditors control account at end of month only. 19. Details column:Name of supplier (etc)-more Info than ledger. 20. Totals of creditors control must correspond with balance of creditors ledger. 21. folio number column in PJ used for creditors ledger daily entries. 22. For the 'CREDITORS LEDGER' three column is preferred over t account because balance can be calculated each time. 23. EXAMPLE OF PURCHASES JOURNAL.

2.

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91ACCOUNTING Notes ACN-101-M CHAPTER 1

p97t PURCHASES RETURNS JOURNAL. 1.

Credit note no.s in column 1,only folio of ledger in folio column. 2. Purchase returns is an income account –credit it. 3. Request for issue of credit notes for goods –incorrect,damaged/incorrect price. 4. Where returns are regular PRJ is used-see 8 below 5. Also credit notes on overcharges go in this book. 6. credit note should first be received from supplier before entry is entered in PRJ. 7. Source document no. in column 1 or with details./never in folio column-only for general ledger! 8. It is appropriate /berrer to record purchases returns separately to :Identify suppliers who consistently supply inferior goods. NOTES

1. 9.

You can issue a debit note or receive a credit note for purchases returns.,but should wait for the credit note more.

2. EXAMPLES OF PURCHASE RETURNS:

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92ACCOUNTING Notes ACN-101-M CHAPTER 1

p98/99t 6.3.3.3 p72 6.6.4s SALES AND SALES RETURNS JOURNAL P98 t p 72 s SALES JOURNAL 5. Objective of a sales system . 6. To accurately record any sales transaction. 7. Perpetual inventory –sales(cost of sales) –credited to inventory. 8. purchasing dept assisted by the above (inventory-perpetual) 9. credit to clients :BEFORE A TRANSACTION CAN BE RECORDED: 9.1.new clients: credit control dept determines credit rating of client –if approved conditions of credit finalised with client. 9.2.existing client:debtors account must be checked to confirm that client still conforms to the conditions;(credit rating perhaps as well) 10. Source document in column 1 or in details (if no details )never in folio column. Design of a sales journal. 1. Design procedure statrts after credit rating as above.

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93ACCOUNTING Notes ACN-101-M CHAPTER 1 2.

MINIMUM INFORMATION NECESSARY. 2.1. invoice no. 2.2. Date of transaction. 2.3. name and address of customer. 2.4. amount of invoice. 2.5. terms of settlement.

Sales journal 1. creditors updated every dayfrom sales journal(creditors ledger) 2. folio column in Sales Journal for Creditors ledger ="CL" 3. columns totaled end of month in SJ 4. folio at bottom of column 'GL' for general ledger. 5. perpetual inventory system: 5.1. must have "cost of sales" column in SJ 5.2. must debit cost of sales account in 'GL' 5.3. credit inventory account in GL from cost of sales column in SJ 5.4. Source document for sales journal is duplicate invoice. 5.5. EXAMPLE:

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94ACCOUNTING Notes ACN-101-M CHAPTER 1 p99 SALES RETURNS JOURNALS 1.

If inferior goods returned by buyer,seller will usually issue him with a credit note informing him his account has been reduced by amount.(He invoiced goods out at selling price first) 2. Uses of SRJ: 2.3 SRJ can be used where returns are regular. 2.4 also good /appropriate to use SRJ to identify reasons forreturns and identify suppliers of inferior quality.ie:better a separate record than a debit on the sales account 2.5 Overcharges-also credit notes from overcharges go in this book. 3. source document for SRJ is duplicate credit note 4. sales returns account is an 'expense(DR) account' or the returns side of 'sales(CR) account'. NOTES: 1. you can receive a debit note or issue a credit note for sales returns 2. 5. EXAMPLE:

Debtors & Creditors ledger 1. 2.

The invoice number etc. must go in the details column of debtors/creditors ledger. The Journal total of column gets posted to control accounts at end of month-not the debtors ledger at all-Just must make a calculation at end of list in debtors/creditors ledger to double check if totals match /balance with the debtors/creditors control

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95ACCOUNTING Notes ACN-101-M CHAPTER 1 3. 4. 5.

Pnly for bad debts reversals does 2 entries go in details and 2 in folios ie;one for debtors control and one for debtors Ledger,:eg:debtors control/debtors ledger:A.boeka----folioGL1/DL7 See example above(a copy of a debtors ledger is on previous page): for:the debtors ledger balance must correspond with debtors control account.(end of month)---also creditors ledger balance must correspond with Creditors control account. ???????????????????????????????????????????????????????/

6.3.3.5 General Journal p74 s 1. 2. 3.

4. 5.

Principle:every transaction can be recorded in the general journal as a book of first entry. If business notices recurring entries for any particular gen. journal entries they can design a separate journal for it. If no journal for specific transaction –then automaticly it goes to the general journal. For purposes of this module credit purchases & credit sales of goods exept for 'Merchandise 'go to general journal. Used normally for:eg Bad debts,adjustments, non-merchandise accounts's creditors/debtors.

Format of general journal: 6. The account to be DEBITED in GL is entered FIRST in GJ.

7. 8.

2 different accounts cango in one line---!! (eg :'Debtors ledger : name' + 'creditors control') written with 1 stripe between for 2 names in 1 line in GJ-----then also both folios are written next to each other in folio column for that entry:eg: 'DL 4/GL8' Narration at bottom is very important because:

8.1. 8.2.

Gives reason for the entry.(details)eg:delivery vehicle bought on credit.

Gives the name of the source document eg:(per) invoice 001 9. amount dr first in first of 2 columns(DR) 10. amount cr details indented (to right)and in column 2(cr) 11. folio only ledger reference eg:GL1 12. An 'Analysis General Journal" is if too many debtors and creditors in GJ , 2 extra columns can be added for posting to DR and CR Control accounts can be added. 13. GJ can have 2 entries in DR and 1 in CR eg;(cash sales) and (1-Vat and 2- Bank)

14.

GJ can have 2 entries in one line and 2 folio entries in one line: Both for eg bad debt adjustment -(eg :'Debtors ledger : name' + 'creditors control') written with 1 stripe between for 2 names in 1 line in GJ-----then also both folios are written next to each other in folio column for that entry:eg: 'DL 4/GL8'

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96ACCOUNTING Notes ACN-101-M CHAPTER 1 15. 16.

A General journal without debtors or creditors columns never gets balanced or totalled. EXAMPLE: general journal.:

17. 17.Example:general journal PREPARED WITH 2 Extra DEBTORS /CREDITORS COLUMNS FOR transfer to control accounts at month end if one has too many debtor and creditor postings.

GOLDEN RULE#1 ch6 The total of all the balances of the individual debtor acconts in die subsidiary debtors ledger MUST equal the balance of the debtors control account in the general ledger. GOLDEN RULE#2 ch6 The total of the individual creditor accounts in the subsidiary creditors ledger MUST equal the balance of the creditors control account in the general ledger. NOTES EXTRA: 1. Non Merchandise to General Journal-all merchandise to Sales.J or Purchases.J or EVEN Cash Receipts or Cash Payments Journals

VALUE ADDED TAX t p102 6.9s p83 SARS rules:

1)

Vat levied on each stage from raw materials to final customer. 2) Currently 14% in RSA 3) Certain terms are defined in the 'VAT Act'. i) Goods :Includes corporeal movable things as well as fixed property.

ii) Supply iii) Enterprise iv) A Vendor ACN-101-M

:includes all forms of supply ,irrespective of place.-any derivation of word. :Embraces various types of activities. :A person registered or required to be registered for VAT

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97ACCOUNTING Notes ACN-101-M CHAPTER 1 v)

Taxable Supplies:Is turnover of enterprise excluding amounts exempted from VAT.

4)

Level of turnover from which a vendor will be required to register for VAT is defined in VAT act. i) May register voluntarily. ii) If taxable supplies in previous 12 months or reasonable grounds for following 12 months more than 300 000 – excl. 1-Exempted Supplies,2-Tax,3-Abnormal receipts. iii) Within 21 days of becoming liable-onus is on business to then register. 5) If not registered cannot claim Vat. 6) Some submit 1 or 2 monthly,but SARS can allocate period of 6 months.(to submit claims) 6.4.3pg104 t Accounting Recording Vat: 7) Normally on a 2 month basis 8) Completed VAT 201 return must be : i) Submitted by 25th of month following tax period month,detailing output&input transfers. 9) Therefore necessary acc.records record vat input & vat output 10) To control:Vat input& output accnts. end Vat period transferred+closed off against Vat Control Account. 11) Vat levied on behalf of the Gov.-vat levied belongs to gov. does not form part of profit of Entity. Exempt and Taxable Supplies.: • Two types-Taxable at 14 % and zero rated 0%. 2) TAXABLE: i) Most Supplies 3) ZERO RATED:(a few examples only,not all of)

i)

Grade mielie meal for human consumption. Brown bread Goods used for agricultural purposes. Petrol and oil International flights-passengers +goods EXEMPTED GOODS: i) Supply educational services. ii) Transport passengers by road or rail. iii) Members contributions to trade union iv) Supply accomodation in dwelling v) Supply financial services. EXEMPT good differ from zero rated in that supplier is unable to claim any Input tax for vat paid by him in the manufacture &/supply of that exempted good,as well as no Output tax is charged. Vat IS charged on Services eg:1-Water&Lights,Telephone,Repairs.+Property Plant & equipment sell/buy eg:machines/vehicles Vat IS NOT CHARGED on Interest from a bank account or any other interest.,& Not on wages+salaries ii) iii) iv) v)

3) 4) 5)

Theory of VAT. to be noted specially:

•

1) 2) 3) 4) 5) 6) 7) 8)

Note contra account for discount reversal in CPJ /crj is Debtors/Creditors not bank(all others as per logical exept this one) • In Cash Paymn. and Cash Receipt Journals,if Vat from discounts must be deducted from old VAT INPUTS, New Vat Output column or Entry(sundries) and add to that to deduct discounts' Vat-Visa Versa for Old(from credit sales) Vat Output deductions —Add to Vat Input. • Note if Entity not registered for Vat then Vat is treated as just part of any purchase price. Every 2 months must submit to SARS:Unequal=(1)Jan,(3)Mar(5) OR Equal=(2)Feb,(4)April(6) INPUT Tax :Supplier of goods to you levies VAT on what you bought and charges you VAT on top of price. OUTPUT Tax :You levy Vat on what you sell and charge the customer this on top of normal price. VAT payable to SARS =Output tax–Input tax. 1) A Tax Invoice is issued by seller to Buyer so he can claim Vat back from Government Tax is only levied on Value Added because claim on input value can be claimed back.ie:Output Vat-Input Vat =Vat Added. Vat IS charged on Services eg:1-Water&Lights,Telephone,Repairs. Vat IS NOT CHARGED on Interest from a bank account or any other interest. THE TWO DIFFERENT TREATMENTS for VAT reversals: i) For discounts:

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98ACCOUNTING Notes ACN-101-M CHAPTER 1 (1)

ii) 9)

Dr input for 'opposite' delete from Output vat- for a discount on a Credit Sale for early payment(in Cash Receipts Journal now)-to delete from the output vat already recorded in Sales journal- just add to normal side (Dr) of Vat Input. (+visa versa for discounts on "purchases"){ because you probly already paid to /received from SARS the applicable vat by the time the discount happens so you claim it back/or pay it back –like this. (2) Also for bad debts:use same opposite entry:because you probly already paid SARS the applicable vat by the time the bad debt happens so you claim it back instead of "subtracting from Output vat".Thus one just puts it in Dr side of : " vat input " to reverse the original " Cr to vat output at time of sale". For Returns :Cr the VAT Input to delete from an Input vat for a purchase return (+visa versa for sales return)

ONLY 5 DIFFERENT Vat Methods in Module:

i)

Cash Sales/Purchase: Logical only-(A) 'Vat' to Vat accnt. in CPJ/CRJ, (B) 'Price –VAT' to "specific item" (C)Bank is Contra account for both of these. (even if no indication in contra-acc. of this one and if amounts do not equal-only for 'discount' itself and not 'Vat' are both contra's written in details column of single-todouble contra acc. situation—PS re-phrase this sentence when got time)

i)

Credit Sales/Purchase Logical only-(A) 'Vat' to Vat accnt. in PJ/SJ, (B) 'Price –VAT' to "Purchases"/"Sales" (C) "Creditors Control"/"Debtors Control" is Contra account for both of these. (even if no indication in contra-acc. of this one and if amounts do not equal-only for 'discount' itself and not 'Vat' are both contra's written in details column of single-to-double contra acc. situation—PS re-phrase this sentence when got time)

2)

3)

4)

Discounts: For Vat Deductions in CashPay.J or CashRec.J for Discounts

i)

CashPay.J For Discounts to You-(to be deleted from Vat Input by adding to Vat output)

(1)

= ( Discount Amount * 14parts/of 114 parts ) = amount already in Vat Input Account from "Credit Purchase Recording" that must be deleted--- to be added to 'vat outputs' with brackets (xxx ) to subtract it from what you want to claim from SARS..(the receivers part of discount)----(you didn't pay this Vat because you got discount later!!) (xxx brackets only show to subtract from all other accounts when balancing with bank for" "CPJ balancing" ONLY) (2) (The discount total amount) –(minus vat input part moved to vat output column) =amount that goes to discount column-also in Brackets(xxxxx)-to show a minus for Journal balancing. ie:DO NOT PUT total discount amount in discount column!!!!! ii) Contra Account For Vat(and 'Discount')here is Creditors Control.NOT Bank(In Ledger) (Note: even if no indication in contra-acc. of this one and if amounts do not equal-only for 'discount' itself and not 'Vat' are both contra's written in details column of single-to-double contra acc. situation—PS re-phrase this sentence when got time) (3) iii) Cash Receipts Journal - VISA VERSA (put in Input to deduct from Output). 5) VAT on PURCHASE or SALES RETURNS: i) Cr the VAT Input to delete from an Input vat for a purchase return (+visa versa for sales return ie Dr the Vat output to delete a Vat output entry from a sale) ii) subtract Vat from the 'Rand value of return' and the leftover goes to "Purchases Returns" iii) Contra account is CREDITORS/DEBTORS for both "Vat in/out" and "Purch/Sales Retrns"(even if no indication in contra-acc. of this one and if amounts do not equal-only for 'discount' itself and not 'Vat' are both contra's written in details column of single-to-double contra acc. situation—PS re-phrase this sentence when got time)

6)

{own practice: Vat on "Cash Product Returns" :In General journal} iv) for cash purchase return- Dr Bank- Cr Out Vat(creditor)- Cr Purchases Returns(income=cr) v) for cash sales return - Cr Bank- Dr In Vat(debtor) - Dr Sales Returns(expense=dr) GENERAL journal type :For 'Non-merchandise' Purchase or Sales on credit. i) Only in General Journal ii) Put all debits under each other,and all credits under each other.eg:Vat-Dr,Furniture-DR in 1 iii) P.S.For "debtors ledger"and "control account " entry in one-put names and folios next to each other in one line.

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99ACCOUNTING Notes ACN-101-M CHAPTER 1 iv) Works same as Sales/Purchases journal-exept "Purchases account"/"Sales account" is now item

v)

eg:"Furniture account"----the contra account for vat is also simply creditors. (even if no indication in contraacc. of this one and if amounts do not equal-only for 'discount' itself and not 'Vat' are both contra's written in details column of single-to-double contra acc. situation—PS re-phrase this sentence when got time) EG:Vat Input='Furniture Account'=DR////Vat Account=DR////Creditors account=CR

10)

You ONLY EVER Debit a vat input account as a debtor-for discounts or any thing EXEPT "Returns" where VAT Input is credited to remove vat from return,visa versa for Vat Output(Cr) 11) For Cash receipts journal –both (-inp-)+outp COLUMNS

12)

For Cash sales Journal--both inp+(-outp-) COLUMNS 13) For Purchases Returns Journal- Only Vat INPUT :for purchase returns.(right way around –input accnt.gets credited-{Rem.only the 'discount vat ' is wrong way around}) 14) For Sales Returns Journal- Only Vat OUTPUT :for sales returns. (right way around –output accnt.gets debited{Rem.only the 'discount vat ' is wrong way around}) 15) Contra-Accounts:

1) 2) 3) 4)

For Discount : In Cash Receipts/Payments Journal :Creditors/Debtors Only (for discount? too?) For Cash Purchase/Sales: Bank For Credit Purchase/Sales- Creditors/Debtors Control For Returns of Purchases/Sales- Creditors/Debtors control (not 'Purchase returns etc.'!)

Payment basis/Accounting basis:

1) 2)

Invoice Basis: Payment calculated on whichever comes first of: a) Issue of an invoice or b) Receipt of a payment. Payments basis: Vat is calculated only on payments actually received-this method only allowed if certain conditions can be met by Company- for SARS .

Accounts to be used: 1.

2.

VAT-INPUT: a. Debtors account-(asset)-current asset. b. Only Vat paid out to a supplier. c. crj,cpj,pj,prj,gj. d. for discount calculation to remove vat part. All (DR)in (CRJ)or (GJ)in brackets ie;(400)

e. f.

g. h. i. j. k.

You ONLY EVER Debit a vat input account as a debtor-for discounts or any thing EXEPT "Returns" where VAT Input is credited to remove vat from return THE TWO DIFFERENT TREATMENTS for VAT reversals: 1- For discounts: Dr input for 'opposite' delete from Output vat- for a discount on a Credit Sale for early payment (in Cash Receipts Journal now)-to delete from the output vat already recorded in Sales journal- just add to normal side of Vat Input. 2- For Returns :Cr input to delete from an input vat for a purchase return For Cash receipts journal –both (-inp-)+outp COLUMNS For Cash sales

12343.

Journal--both inp+(-outp-) COLUMNS

For Purchases Returns Journal- Only Vat INPUT :for purchase returns.(right way around –input accnt.gets credited-{Rem.only the 'discount vat ' is wrong way around}) For Sales Returns Journal- Only Vat OUTPUT :for sales returns. (right way around –output accnt.gets debited-{Rem.only the 'discount vat ' is wrong way around}) Contra-Accounts: For Discount : In Cash Receipts Journal :Creditors Only (for discount? too?) For Cash Sales: Bank For Credit Sales- Creditors Control For Returns of Purchases- Creditors control (not 'Purchase returns'!)

VAT-OUTPUT: a. Creditors account –(liability)- current liability. b. Only Vat charged to vendors customers.

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100ACCOUNTING Notes ACN-101-M CHAPTER 1 c. d.

All (cr) for discount etc. in CPJ or GJ :goes in brackets eg: (400)

f. g. h.

For Cash receipts journal –both Vat inp+Vat outp COLUMNS

You ONLY EVER Credit a vat Output account as a creditor-for discounts or any thing EXEPT "Returns" where VAT Output is debited to remove vat from a sales return. e. THE TWO DIFFERENT TREATMENTS for VAT reversals: 1- For discounts: CR OUTPUT for 'opposite' delete from INPUT vat- for a discount on a Credit Purchase for early payment by you (in Cash Payments Journal now)-to delete from the input vat already recorded in Purchase journal- just add to normal side of Vat Output. 2- For Returns :Dr output to delete from an output vat for a sales return

i.

j. k.

For Cash sales

Journal--both Vat inp+Vat outp COLUMNS

For Purchases Returns Journal- Only Vat OUTPUT.for purchase returns. For Sales Returns Journal- Only Vat INPUT .for purchase returns. Contra-Accounts: Only -1-Bank For Cash books -2-Creditors/Debtors for all other books exept General Journal . crj,cpj,sj,srj,gj

5-VAT CONTROL ACCOUNT: 1. At End of period of VAT period Close off & transfer from Vat Input /Output accounts to Vat Control Account ONLY 2. DR Balance –SARS owes company. 3. CR Balance –Company owes SARS 4. Performs like a-ACCOUNT DEBTORS /CREDITORS-depending on which side balance is. 5. Input-goes on DR side /////Output on CR 6. Allways close off account and put b/d balance below double line . Transfering From Vat In/Out to Vat Control 1. First one eg:Input Vat gets transfered

:Notes on the 3 Vat Accounts

a.

2.

In:Ledger : Input Vat Accnt: no 'balance,b/d,c/d' Only :"Vat Control"+ Date+ Transfer Rands:+Journal Folio(eg:J.G. 2)......then close account utterly+no b/d or c/d below double lines -because it was transferred. b. In: G.Journal: double entry (Rem. dr first) :"Input Vat"-CR Side(+from+) transfer//" Vat Control"-DR Side(actual side)(+to+)Transfer.... c. In:Ledger: Control Vat Accnt: Input-Dr side,(Output is Cr side) then balance c/d ------/draw double line/ then balance b/d with date below. Then other eg:Output Vat

a. b. 3. 4. 5. 6.

7. 8. 9.

In:Ledger : Output Vat Accnt: no 'balance,b/d,c/d' Only :"Vat Control"+Date+Transfer Rands:+Journal Folio(eg:J.G. 2)......then close account utterly+no b/d or c/d below double lines -because it was transferred. In: G.Journal: double entry (Rem. dr first) :"Output Vat"-DR Side(is opposite for "from") transfer//" Vat Control"-CR Side(+to+)Transfer.... then same as above for (c)Ledger

-NO b/d Total in Vat input/output-account gets closed utterly-only"Vat control" as heading. Must put folio of G.Journal in Ledger. DO NOT transfer Vat Inp./Outp. to Trial balance at end of 2 mnth period BUT DO TRANSFER to trial balance in inbetween months.(end period close off to Vat contrl. accnt.,between go Tr.Bal. You Transfer to Vat Control account from Vat Inp.Outp. accounts,you do not Post. VAT Input is like a "Debtor" VAT Output is like a "Creditor". A Vat Control Account in DR: SARS MUST PAY YOU ////In CR :YOU MUST PAY SARS.

Vat 10. 11. 12. 13.

Calculations: Cost less vat from Vat Inclusive =100%/114%* vat inclusive price. Vat from vat Inclusive =14%/114% * vat inclusive price To Add Vat= Cost *114/100 GOLDEN RULES 14. OUTPUT TAX is the tax levied (charged) by the business on sales of goods or services rendered by the business. 15. INPUT TAX is the tax paid (or payable) on goods delivered and/or services rendered to

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101ACCOUNTING Notes ACN-101-M CHAPTER 1 the business, including imports. Deductions for input tax will only be allowed if a proper tax invoice is received and kept. 16. OUTPUT TAX minus INPUT TAX = amount payable/refundable, i.e. the amount payable to the South African Revenue Services (SARS) or the amount that can be claimed from SARS.

Example of Vat accounts.

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102ACCOUNTING Notes ACN-101-M CHAPTER 1

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103ACCOUNTING Notes ACN-101-M CHAPTER 1

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104ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 7 STUDY GUIDEp99 | Chapter 7 Textbook115

Chapter :7

HEADING :ADJUSTMENTS

KEY CONCEPTS KEY CONCEPTS . Adjustment . Closing . Prepaid expenses . Accrued expenses . Consumable inventory adjustments . Income received in advance . Bad debts . Depreciation . Accumulated depreciation . Asset contra account . Carrying amount . Pre-adjustment trial balance . Post-adjustment trial balance . Post-closing trial balance

ADJUSTMENTS P99s,p115t Introduction:

1) At the end of the fin. period ,the ledger accounts ,each ledger account has to be analysed with great care to determine if the balance on that account needs to be adjusted to ensure tht the Income,Expense,Asset,liability and Equity accounts are correctly stated. 2) Income statement done once in 12 months,Sometimes accounts must be adjusted before fin.stat.. 3) Additional entries which do not originate from source documents are prepared. 1) To understand adjustments important to know which accounts are :A = E/inc,exp/ +L 2) Adjustments only at end of period-Examine ledger and then Adjust.

Source Documents of Adjustments: •

Internal Vouchers-specially developed and Signed /Authorised by authorised person.

Journal:

Adjustments recorded in General Journal as book of first entry.

Characteristics of Adjustments:

1) Only meant for financial statements to make sure only expense/income for that specific year are shown,and not mixed up with last years or next years payments/receipts etc. 2) Adjustments are not mistakes. 3) GOLDEN RULE :Adjustments allways influence at least :

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105ACCOUNTING Notes ACN-101-M CHAPTER 1 i) ii)

one Nominal (Inc/Exp) account and

one Balance Sheet account 4) Only at End of period. 5) Not part of Closing off procedure. 6) Of all 7 adjustments-each one gets its own temp. heading:Eg "Adj:pre-paid expenses-d" and only two dont let many other accounts : transfer to same heading -1-consumable inventory adj. and ddepreciation ie:consumable inventory must hav e name of type in front:eg Adj:Stationary Inv./entory-A ----Adj:depreciation machinary 7) I have developed own style for Adjustment headings ;namely :Adj:Accrued expenses-D D/C/E/I/A/L=debtor/creditor /expense/income etc. 8) Can be taken into account for interim statements but not recorded,only at period end. 4) Adjustments neccessary to comply with i) Accrual basis :???(check what recognition of transactions means/fits in here)

1.4. 1.5.

Realisation Principle:?????-

Matching Principle:matching costs with revenue????6) Adjustments mostly temporary thus i) Adjustments to reflect a temporary situation should be REVERSED at Beginning of Next Year,or accounts+balance sheet and income statement will be wrong for the next year. ii) Due to continuous nature of business. 7) ONE LEG usually affects Income/Expense account(NOMINAL account)

8)

ONE LEG usually affects BALANCE SHEET account.(A or L)

1) 2) 3) 4) 5)

Identify the Accounts in Ledger which must be adjusted. Determine how accounts will be affected and what new balance. Calculate amounts involved. Record adjustments in General Journal and post to Ledger. Check if new account balances are correct.

----5----Steps to take when doing Adjustments:

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106ACCOUNTING Notes ACN-101-M CHAPTER 1

-1- Special Notes: Adjustments : ACCRUED EXPENSES(accrued means arrears) •

At end of Financial year each Ledger Account analysed with great care to determine:

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107ACCOUNTING Notes ACN-101-M CHAPTER 1 •

Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

SHORT TERM ADJUSTMENTS:

Part of :ACCRUED and PREPAID EXPENSES:

1 -ACCRUED EXPENSES.=(liability) 1.

2. 3. 4. 5. 6. 7.

Definition : Yet unpaid expense from Financial Period(current period). Accrued means the same as 'in Arrears' Expenses Incurred during financial period but not recorded in books nor paid yet.eg:Water +lights account for previous months usage-(account received late problem) Adjustment needed where all costs must be reflected in current Financial periods Fin.Statements and not in next years. CONTRA-ACCOUNT – The contra-account egWater+Lights is "Distribution Administration and Other' in the Income Sheet.(Liabilities in balance sheet would show the :"Accrued Expenses" DOES go into Profit and Loss statement /affects it.(New Expense 'Discovered')

EXAMPLE EXAMPLE : water + lights account received in month (after) close of financial period(month fin. stat.are done in).-----Received May 14 for April 'end of year' ADJUSTMENT ACCRUED EXPENSES

ACCOUNTS AFFECTED Dr :Water+ Electricity Cr:Adj:Accrued Expenses

TYPE OF ACCOUNT Expense (N) :Increase Liability (B) :Increase

FINANCIAL STATEMENTS AFFECTED Income Statement Balance Sheet

a -2- Special Notes: Adjustments : PREPAID EXPENSES • At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year.)

•

Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet Acc .

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108ACCOUNTING Notes ACN-101-M CHAPTER 1 SHORT TERM ADJUSTMENTS: Part of :ACCRUED and PREPAID EXPENSES:

2 -PREPAID EXPENSES.=(Asset - normally Current OR -Non-Current- )

1. 2. 3.

Definition: Expense paid for already in current financial period where expense relates all Or In Part to a FUTURE FINANCIAL PERIOD or more than one future financial period. Eg: Insurance Expenses usually payable in advance or Rent ,Advertisements.

Matching Principle: Prepaid Expenses Adj. neccessary to Match Only that portion of expense relating to Specific Fin. Period against income for that period. 4. Merely 'reversed' out of Profit and Loss statement : Becomes an Asset instead. 5. Pre-Paid Expense is an Asset - normally Current ,but can be Non-Current for part recoverable over more than 12 months.. 6. Thus-Where an Expense Account includes a Pre-Payment ,the Pre-paid portion should be identified and transferred to the Pre-paid Expenses (Asset) Account. 7. NOTE: If Insurance :Perhaps first calculate year payment /12 months* No. Not Used = No.prepaid 8. No transfer gets made to a'profit and loss account'if eg:'Cleaning Expenses'balance is '0'after Adj. EXAMPLE EXAMPLE : On 2 January 20.1 Xa-Xa Dealers paid a new annual insurance premium of R2 400. Its financial year ends on 28 February 20.1. Using this information we can work out that the actual amount it spent on insurance up to and including 28 February was only R400, which is R2 400 / 12 = R200 per month for two months, namely January and February. The R2 000 which was paid in advance represents an asset at that point. The apportionment of the amount between asset and expenditure elements will be as follows: R400 is an expenditure item in respect of insurance for the current financial year. This amount must appear in the profit and loss account and the income statement. The R2 000 is a prepaid expense and therefore represents an amount that will be used in future. It must appear on the balance sheet of 28 February 20.1 and is therefore a short-term (current) asset. ADJUSTMENT Pre-Paid EXPENSES

ACCOUNTS AFFECTED Dr:Adj:Pre-paid Expenses Cr :Insurance(asExp. ac)

TYPE OF ACCOUNT Asset (B) :Increase Expense (N) :Decrease

FINANCIAL STATEMENTS AFFECTED Balance Sheet Income Statement

a a -3- Special Notes:Adjustments :Accrued Income(accrued means arrears) • •

At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year-nothing else from adj. Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

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109ACCOUNTING Notes ACN-101-M CHAPTER 1 SHORT TERM ADJUSTMENTS: Part of :ACCRUED INCOME and INCOME RECEIVED IN ADVANCE

3 -ACCRUED INCOME=(Asset -Current)(accrued means arrears :owed but not yet recorded)

9. Definition: Income earned but Not Recorded in books yet and No Cash Received.(accrued-arrears) 10. Eg: Investment ; if over 1 year and profit/interest paid at end of year,and financial year end is half-way in between –for Adj. interest on months applicable must be calculated.,also Commission unrecorded &unpaid Principle: ??????

11. 12. 13.

Accrued Income is an Asset- Current .(very similar to a debtor)(accrued means arrears)

Thus-Where an Income Account excludes a Accrued income ,the accrued portion should be identified and added to the Relevant- Income- eg:Interest and Accrued Income-Asset- Account. 14. NOTE: for Interest:perhaps you must first calculate the amount to be included: Interest=Capital amount*Interest rate*Time :thus first calc.how many months interest are for number of months in Fin.Period for which the Fin.statements are relevant.-then * by per/month EXAMPLE On 28 February 20.1, the end of its financial year, Xa-Xa Dealers' commission income account shows an income of R2 200. On closer examination it is established that an amount of R200 earned in commission has not yet been received. With this information the actual income in commission can be determined. It is R2 200 + R200 = R2 400. The apportionment of the item between actual earnings in commission and the associated asset (the commission which has not yet been received) will be as follows: R2 400 which has actually been earned and R200 which is still to be received. ADJUSTMENT ACCRUED Income

ACCOUNTS AFFECTED Dr:Adj:Accrued Income Cr :Commission Income

TYPE OF ACCOUNT Asset (B) :Increase Income (N) :Increase

FINANCIAL STATEMENTS AFFECTED Balance Sheet Income Statement

The closing transfer completely separate from Adjustment-just to show(in case)Interest incomenotreversed out thus closing transfer will apply(nothing recordedyet

Special Notes: Adjustments :Income Received in Advance(PrePaid • •

At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year-nothing else from adj. Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

SHORT TERM ADJUSTMENTS:

Part of :ACCRUED INCOME and INCOME RECEIVED IN ADVANCE

4 -INCOME RECEIVED IN ADVANCE( PREPAID INCOME)=(Liability - normally Current)

15. 16. 17. 18.

Definition:Usually relates to cash received for services not yet rendered /goods not yet supplied. Eg: Rental received in advance ,Magazine subscriptions,The sale of tickets by airlines. Principle: Recognition of income:In terms of latter income cannot be recognised until earned. Income received in advance is a Liability- Current .(very similar to a creditor)

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110ACCOUNTING Notes ACN-101-M CHAPTER 1 19.

Thus-Where an Income Account includes an Income received in advance,the advance portion should be identified and subtracted/moved to the Relevant Inc.Rec.in Adv. account.now a creditor 20. NOTE: only portion related to current period can be recorded as income-(where amount includes an advance payment,the rest must be adjusted) EXAMPLE On 28 February 20.1, the end of its financial year, Xa-Xa Dealers' rent income account shows that R10 400 was received. Xa-Xa Dealers rent out a part of their building for R800 a month. On closer investigation it is established that the rent for March 20.1 has already been received. With this information the actual income received in rent for the year can be determined, that is R10 400 - R800 =R9 600 (=R800 * 12). The apportionment of the item between actual income and the liability (amount owing) component will be as follows: R9 600 is the actual income and R800 is due to the lessee because it was paid in advance. Differently stated, the income has not yet been earned. ADJUSTMENT Income Received in Advance

ACCOUNTS AFFECTED Dr :Rent Income Cr:Adj:Income received in Advance

TYPE OF ACCOUNT Income (N) :Decrease Liability (B) :Increase

FINANCIAL STATEMENTS AFFECTED Income Statement Balance Sheet

Special Notes: Adjustments :Bad Debts: • •

At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year-nothing else from adj. Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

SHORT TERM ADJUSTMENTS: 5 –BAD DEBTS = (is an Expense Account)

21.

Definition: Before Credit Sale –credit rating neccessary-on approval-The Sale then Recorded and Recognised).Irrespective of method used for credit rating, some people however will still not pay. 22. Eg:Bankruptcy-Any/ depends on how long /type of customer before a debt is declared "bad debt"

23. 24. 25.

Principle:????? Bad debts: Is an Expense./Expense account.

Thus-Where an Income Account includes a bad debt,the bad debt should be identified and subtracted/moved to the Bad Debts account.now an expense.

EXAMPLE On 25 January 20.1 Xa-Xa Dealers receive a notification that a debtor, A Boeka, is insolvent. On closer investigation it is established that the debtor still owes R230. With this information an adjustment must be made in A Boeka's account. The outstanding amount of R230 must be removed from his account and shown as an expense or loss. The assets will therefore decrease and an expense or loss component, namely bad debts, will

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111ACCOUNTING Notes ACN-101-M CHAPTER 1 come into being. ADJUSTMENT ACCRUED EXPENSES

ACCOUNTS AFFECTED Dr :Adj:Bad Debts:Expense (expense acc) Cr:Debtor Control

TYPE OF ACCOUNT

FINANCIAL STATEMENTS AFFECTED

Expense (N) :Increase

Income Statement

Asset

Balance Sheet

(B) :Decrease

Special Notes: Adjustments:CONSUMABLE INVENTORY ADJUSTMT. • •

At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year-nothing else from adj. Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

SHORT TERM ADJUSTMENTS: 6 - CONSUMABLE INVENTORY ADJUSTMENTS =(Assets-Current)

26.

Definition: This happens when an entity purchases consumables during a Financial Period and they are not completely consumed by the end of the Period and become Assets. 27. Eg:Stationary not completely consumed.

28. 29.

Principle:?????

Consumable Inventory on hand classified as "Type of Inventory on Hand" eg:"Stationary on Hand" once adjusted is an ASSET – Current.(gets converted from an –expense- to an asset here (if left over at end of period) 30. Thus-Where consumables(eg stationary) are left over at end of Fin.period ,a Consumable Inventory on Hand Account is opened/used to move whats left from the Expense account(eg 'Stationary Expense') to. 31. NOTE: only what's left according to a stock take is moved-the rest that got used is an expense . EXAMPLE On 28 February 20.1, the end of its financial year, Xa-Xa Dealers' stationery account shows that stationery to the value of R500 was purchased during the year. At a physical count it is determined that R150's worth of stationery is still on hand. With this information the actual expenditure on stationery can be calculated, namely R500 - R150 = R350. The apportionment of the item between actual expenditure (profit and loss account and income statement) and the asset element (balance sheet) will be as follows: R350 represents expenditure on stationery while R150 represents the value of the stationery that will be used in the future. ADJUSTMENT

ACCOUNTS AFFECTED

ACCRUED EXPENSES

Dr:Adj:Inventory:Stationary Cr:Stationary Expense

ACN-101-M

TYPE OF ACCOUNT Asset (B) :Increase Expense (I) :Decrease

FINANCIAL STATEMENTS AFFECTED Balance Sheet Income Statement

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112ACCOUNTING Notes ACN-101-M CHAPTER 1

Special Notes: Adjustments: DEPRECIATION ADJUSTMENTS. • •

At end of Financial year each Ledger Account analysed with great care to determine:(only meant for make Financial statements to show the correct expenses/income that specific year-nothing else from adj. Golden Rule:One Leg of Journal allways affects a Nominal (I/E) the other a Balance sheet account .

LONG TERM ADJUSTMENTS: 7 – Depreciation adjustments =(Assets-Non-Current & Expense)

32.

term Definition:Tangible Assets not for resale decrease in value due to wear /tear /age /obsolete . Depreciation over useful life charged against profits. Eg:Stationary not completely consumed.(depreciation is thus the accounting process by means of which the cost of an asset is fairly and systematicly allocated to expenses over the economic life of that asset. 33. Principle:???? 34. You DO NOT CREDIT ASSET Account directly. 35. term Asset contra Account:You DO CREDIT this:ie:" Accumulated Depreciation : -Asset Name- "

36.

term "CARRYING AMOUNT".The value of Asset ; eg 'Motor vehicle' ,after the amount in the contra-ledger account has been subtracted from its original value is known as the 37. " Accumulated Depreciation : -Asset Name- "is classified as an EXPENSE.

38.

Thus-Where Accumulated depreciation is apportioned to an asset it is credited to the assets contra account to make it less-eg 'Accumulated depreciation :machinary' and debited to an expense account :"Depreciation" to go to Income statement as an expense. 39. NOTE:

40. Note: method of working out cost from carrying amount if they only give you a carrying amount in exam etc. For straight line method: EG 20% over 5 years – then after 2 years : 1- acc depr= 20+20% , 2-carrying amount = 100-(20+20)= 60%. 3- cost = 100/60 X carrying amount. For Reducing balance Method : same as above exept : for 20% on reducing balance method = 1-year 1= 20% 2- year 2 = 20% + (20% X 80%)= 36% 3-year 3 = 36% + (20%x 64 %) =36+12.8=48.8% 4-year 4 = 48% + (20% x 52%) = 48+10.4=58.4% and so on etc. etc. 41. NOTE: For the movement during year : a. Disposals of Assets: Put it at carrying amount – less [pro-rata depreciation to that month+other years depreciation] b. Depreciation: include all : incl -rata depreciation to that month for any disposals/sold assets + other unsold assets. 42. Note: for end of year balances:

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113ACCOUNTING Notes ACN-101-M CHAPTER 1 a. LEAVE out any depreciation from disposals -out of Acc. Depr. , and also leave out costs of disposals out of ‘Cost’. 43. EXAMPLE Xa-Xa Dealers bought machinery to the value of R80 000 during the year. On 28 February 20.1, the end of its financial year, an amount of R12 000 has to be written off as depreciation. ADJUSTMENT CONSUMABLE INVENTORY ADJUSTMENTS

ACCOUNTS AFFECTED Dr:"Depreciation :expense" Cr:"Adj:Accumulated Depreciation:machinary"

TYPE OF ACCOUNT Expense (N) :Increase Contra Asset (B) :

FINANCIAL STATEMENTS AFFECTED Income Statement Balance Sheet :deducted from cost of asset in notes

9 –term Pre-Adjustment Trial Balance.

•

This is the 1st Normal Trial balance after all journal entries have been posted to ledger ,done at each month end.

10-term Post Adjustment Trial Balance

•

This is the 2nd Trial Balance after all the Adjustments have been posted to the ledger/s.

•

This is the 3rd Trial balance after all the Closing Journal Entries have been posted to ledger.

11-term Post Closing Trial Balance. • • • • •

GOLDEN RULE One entry or ``leg'' of the adjustment journal always affects a nominal account and thereby the trading or profit and loss account. The other entry or ``leg'' of the journal always affects a balance sheet account.

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114ACCOUNTING Notes ACN-101-M CHAPTER 1

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ACCOUNTING NOTES ACN-101-M CHAPTER 8 STUDY GUIDEp99 | Chapter 8 Textbook131

Chapter :8 HEADING :The Closing –off Procedure ,determining Profits and Preparing Financial Statements. KEY CONCEPTS . Financial period . Nominal accounts . Cost of sales . Gross profit . Net profit . Inventory . Perpetual inventory system . Periodic inventory system . Closing entries . Trading account, profit and loss account . Income statement, statement of changes in equity, balance sheet and notes.

Introduction:The Accounting Cycle: 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11)

Transactions taking place-------------------------------------Completion of source documents------DAILY Recording of transactions in journals-DAILY Posting to ledgers----------------------------------------------------DAILY-Journal Totals Monthly. Balancing of Accounts and preparing a Trial balance----------MONTHLY Adjustments of accounts and post adjustment Trial balance-ANNUALY Closing of Nominal Accounts----------------------------------------ANNUALY Preparing financial statements and reporting of results--------ANNUALY Analysis and interpretation of financial statements---Management. 7 Decision making by the management------------------------BACK TO START

The Closing Off Procedure: Closing off Nominal Accounts GOLDEN RULES To determine the financial result All nominal accounts (i.e. income or revenue and expense acounts) MUST be closed off (made NIL) at the end of the financial period to either the Trading account or the Profit and Loss account. Only entities that trade i.e. buy and sell merchandise, will have a Trading account. Closing Off TO : Trading Account GOLDEN RULE The trading account, being also a nominal account, is closed off to the profit and loss account. (See the schematic representation.) • For the below GENERAL Journal procedure:to do all entries in Journal at once instead of separately-one must put all the accounts exept the "trading or profit/loss" on the OPPOSITE side to from where they "Come from" in ledger,,,,,and the "trading and profit &loss "on the side where it will balance these others out to ZERO (in this journal write-up).But of course IN THE trading/pr&loss acc. amount goes on same side as from where ORIGINALLY came.-(so: -1-where it balances& on -2-side opposite to came from)

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116ACCOUNTING Notes ACN-101-M CHAPTER 1

• • •

• •

Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account.(balance never goes below double lines!!!-only in Capital account at end of yearEVER) In acc. terms Gross profit=Sales(at selling price)- [Cost price of goods sold :{ Opening inventory+Purchases(all at cost price) – Closing inventory} ] -Purchasing costs(import duties/assembly costs/freight in/) Closing off Inventory :is valued at the lower of -1-historical cost or //// -2-market price.It is recorded in books by General journal entry and Inventory is an Asset.(remains as a balance sheet account after nominals closedonly the opening inventory is 'deleted'completely to trading account as Expense for profit calc.. The Gross Profit on the Trading account is only obtained when the 'Balance' is determined (and b/d..c/d..) on the Trading account. Bad debts+Discount allowed +Discount reveived NOT for Trading account only profit &Loss

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117ACCOUNTING Notes ACN-101-M CHAPTER 1

Closing off TO : Profit and loss accounts

• • •

Bad debts+Discount allowed +Discount reveived NOT for Trading account only profit &Loss Try pd 136-study guide for the notes as above for this section and for the next-Capital- section To the Pr& Loss Acc GOES: o The Gross Profit/(or just Revenue for the Service Entity) o All Business expenditure

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118ACCOUNTING Notes ACN-101-M CHAPTER 1 o

ALL Other Income(eg:Discount received+Interest charged+Rent etc.)

Closing off TO Capital Account

•

See page 138 s for good explanation.

The Post closing Trial balance: • Balances from here (not are used to prepare the trial balance • There are no NOMINAL or DRAWINGS accounts left to put on it-because they were closed off.

The Closing Off Procedure: of a Service Entity:135t,119S 1. 2. 3. 4.

5. 6.

Term Nominal or (Temporary) account-called this because they only refer to a certain period ie:because they get closed off at end of year. Term Balance Sheet or (Permanent accounts):Assets, Equity,Liabilities(Perm.-not closed-off) At End Of Financial Year only Called "Closing entries." CLOSING OFF is 2 Processes. :(1) First Nominal Accounts closed off to Profit&Loss Accnt.,Then (2)'Drawings' and 'Profit &Loss Accnt ' both closed off to CAPITAL ACCOUNT=last account where they all reside. For the below procedure:to do all entries in Journal at once instead of separately-one must put all the accounts exept the "trading or profit/loss" on the OPPOSITE side to from where they "Come from" in ledger,,,,,and the "trading and profit &loss "on the side where it will balance these others out to ZERO (in this journal write-up).But of course IN THE trading/pr&loss acc. amount goes on same side as from where ORIGINALLY came.-(so: -1-where it balances& on -2-side opposite to came from)

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119ACCOUNTING Notes ACN-101-M CHAPTER 1

7.

8.

STEP:(1)-Closing off NOMINAL ACCOUNTS to the PROFIT & LOSS ACCOUNT:

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120ACCOUNTING Notes ACN-101-M CHAPTER 1

1.

METHOD: a. All Nominal accounts are closed off (balanced+transferred) to Profit +Loss Account. b. ONLY the -1- 'Income' +-2- 'Expense' Accounts are affected

c.

Each Nominal account first transferred to General Journal-Then to Profit&Loss Account:

1.

Expense:

a. b.

Ledger:From Ledger expense accnt.:Put Cr balance(opposite side) in ledger(answer after calculations) to balance and write:Contra Account ="Prof&Loss Accnt." +Date + Amount+Folio of G.Journal. Journal:Write : (also write only:"closing entry" as bottom description.)

i.

2.

ALL of the EXPENSE ACCOUNTS go under each other in ONE same single Journal entry ,NOT in SEPARATE multiple journal entries,and single 'Pr&Loss Accnt' entry on the other side. ::::: Write:"expense accnt Name"+Cr balance in Journal(still opposite side-ie.- from-) +Folio of Ledger Expense Accnt.THEN next and next etc. expense accnts. underneath it to last. ii. Write:Name:"Profit &loss Accnt"+ Dr Amount balance (REAL side now forTo- Profit+Loss Account).+ Folio of 'Pr&Los Accnt' c. Ledger:To Profit & Loss Account. :Write: Contra-account="Expense Accnt Name" + Dr Amount balance (REAL side now in Profit+Loss Account). +Folio of GJournal. +Date Income: Visa Versa to expense.

STEP:(2)Closing off the DRAWINGS ACCOUNT and the PROFIT & LOSS ACCOUNT to the CAPITAL ACCOUNT. 1.

2. 3.

METHOD: The Drawings Account and the Profit & loss Account are closed off to to the CAPITAL ACCOUNT. Only the : -1- 'Equity=Drawings and Capital' + -2-'Profit & Loss' accounts are affected. The Drawings Account and the Profit & loss Account are first transferred to the General Journal-Then to Capital Account 1. Profit & Loss Account:

a. b.

Ledger:From Ledger Profit &Loss Accnt.:Put balance(opposite side) in ledger(answer after calculations) to balance and write:Contra Account ="Capital Account" +Date + Amount+Folio of G.Journal. Journal:Write : (also write only:"closing entry" as bottom description.)

i.

2. 5. 4.

Write:"Profit & Loss Accnt "+balance in Journal(still opposite side-ie.- from-) +Folio of Ledger 'Pr&Loss Accnt.' ii. Write:Name:"Capital Account "+ Amount balance (REAL side now for-ToCapital Account)+ Folio of 'Capital Account'. c. Ledger:To Capital Account :Write: Contra-account=" Profit & Loss Accnt " +Amount balance (REAL side now in Capital Account ) +Folio of GJournal. +Date Drawings Account-Same as above exept close off Drawings now to Capital Account.

AFTER CAPITAL ACCOUNT has all transfers in it already-it must be balanced just like any other Ledger Account at end of a Month/ or Year and its 'balance ' total first b/d ,then c/d below double ruled lines -WRITE NEXT MONTHS DATE : the 1ST of. (not current months date!!!) OWN EXTRA NOTES: a. Interest is an 'expense'

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121ACCOUNTING Notes ACN-101-M CHAPTER 1 b. c.

Remember to balance/cd & b/d capital account after all transfers finished. Any closed off account with a 'balance ' allways gets a double,not single line under totals.

Income Statement:

•

•

The Info. on Profit & Loss Account Is exactly the same as in the Income statement (exept short 'cost of sales'&'sales') but in a different Format.-Can use Pr&Loss statement to compile Inc.Statement –(although one can also use the Trial Balance to compile Inc.State.) see chapter 4 for examples. Differences between income statement and Profit&Loss account: • Income Statement • Profit& Loss Account • According IAS1 (AC101) • According requirements of Entity • Compiled when required by Mngmnt. • Compilied ONLY end of Fin.year. • Profit/loss used to calc. State.Ch.Equity • Profit/loss closed-off to CAPITAL Acc.

Statement of Changes in equity

• •

see chapter 4 for examples.(in own notes) or pg 138t Profit/loss goes here.

Balance Sheet.

• •

see chapter 3 examples(in own notes) or pg 139 t Balance Sheet or (Permanent accounts):Assets, Equity,Liabilities(Perm.-not closed-off)(includes the 'Capital Account'-as the equity account)

Notes to the Statements:

1. see chapter 4 for examples(in own notes) or pg 160t The Closing off Procedure of a Trading Entity:p139t 1. 2.

3.

4.

INCOME from a trading entity=called=SALES EXPENSES from a trading entity=divide in 3 categories: a. Cost of Sales b. Distribution,Administrative and other Expenses. c. Finance Costs Gross Profit =Sales –cost of Sales------Calculated in "TRADING ACCOUNT" a. Possible reasons for Gross profit Mark-up different to Actual gross profit. i. Trade discounts allowed ii. method used to calculate the cost of goods iii. loss/shrinkage/waste/pilferage iv. Accuracy of the physical inventory account v. method used to calculate the inventory on hand. Net Profit -only- =Income-Expenses---------Calculated in "PROFIT &LOSS ACCOUNT"

5.

Closing off Procedure for a TRADING ENTITY.

1. 2.

Same as for a service entity exept a 'trading account' must be added as a process in beginning. Method: a. The Difference between Sales &Cost of Sales is calculated in a Trading Account=Gross Profit b. Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account. (balance never goes below double lines!!!-only in Capital account at end of yearEVER)

Cost of Sales : p140

1. 2. 3. 4.

If 1000 merchandise bought in year BUT 500 only sold Must calculate Cost of sales forREVENUE Periodic Inventory System : Cost of Sales Account is Never opened/used and the actual cost of sales is only :may be calculated in the Income statement and in Trading account itself. only sort of calculated in Trading account at END of Fin. Year-and closed-off to Profit and Loss account etc.Perpetual Inv System: 'Cost of Sales Account' – ALLWAYS - exists and is updated with every transaction and only CLOSED-OFF to ????at End of Fin Year. Cost of sales = includes all costs of bringing goods to present location &condition.

a.

Transport costs/ Freight :Called a 'Freight in account' or 'Freight on purchases account'

i.

ACN-101-M

All Expenses related to purchase costs are seen as part of the price of the goods bought,and included as such in calculating the Gross profit from trading alone in the Trading Account-And in the perpetual system also goes straight to Inventory account and - they are seen as an

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122ACCOUNTING Notes ACN-101-M CHAPTER 1 ASSET-ie financially as a part of the asset purchased's cost price-to be divided out to cost of sales on transfer from Inventory Acc. to the Cost of Sales Acc. for each and every sale) ii. If seller incurs 'selling (OUTWARD not IN) transport costs' it is allways ever only an EXPENSE and ONLY Debited to the Profit &Loss Account,NOT Trading account. iii. Packaging costs not just seen as a cost of sale but an expense(ie: an exeption). b. Assembling Costs c. Import Duties d. Purchase returns And Allowances :debit note from purchaser with goods when he returns a defective goods : expects a credit note from supplier to be sent soon -normally wait for credit note before enter 'Return' in Books,but not allways. i. Purchase returns are a contra to purchases

ii.

'Allowances are if seller offers at Cheaper price instead of a Return-The amount less/off goes to a "Allowances account"as a DR –Do a general journal entry with Allowances:DR(expense) and Debtors Control& D.Ledger/Acc. CR(by amount to less owe)-also a nominal account.

The Perpetual and Periodic Inventory System. 2. for GROSS PROFIT close-off to="TRADING ACCOUNT". 3. for NET PROFIT close-off to ="PROFIT &LOSS ACCOUNT". 4. for EQUITY/CAPITAL close-off to ="CAPITAL ACCOUNT". 5. REMEMBER TO CONVERT: AT COST FOR : All 'Inventory' or 'Cost of Sales' (or Purchases) or 'Purchases Returns' 6. REMEMBER TO CONVERT: AT SELLING PRICE FOR :All 'Sales' or 'Sales Returns'

DRAWINGS and DONATIONS of inventory

1. 2.

DRAWINGS and DONATIONS of inventory are recorded at Cost Price IN the General Journal. DRAWINGS and DONATIONS of inventory are not exempted from VAT.The Vat is HOWEVER calculated on the cost price and is credited to the output vat account as normal(it will automaticaly balance and come out as having input vat cancel/balance the output vat. Transaction Perpetual Inventory Periodic Inventory Inventory 'Drawings' by Owner Dr Drawings Dr Drawings Cr Inventory Cr Purchases Donation of Inventory Dr Donations Dr Donations Cr Inventory Cr Purchases

3. 7. PERPETUAL SYSTEM -1-merchandise purchased debited to inventory account -2-ALL purchasing expenses debited inventory acc.AND they are seen as an ASSET-ie financially as a part of the asset purchased cost price-to be divided out to cost of sales on transfer for a sale(from Inv. to Cst.Sal -3-purchases returns are credited to inventory acc. only -4-cost of sales acc. maintained thus updating inventory . with sales -5-sales returns recorded as sales returns-Inventory and cost of sales must also be updated here though. -6-at any time cost inventory on hand known -7-the gross profit can be determined for every sale

8. PERIODIC SYSTEM all merchandise purchased debited to purchases acc. Purchasing expenses debited to a specific expense acc.

purchases reutrns are credited to the purchases returns acc. the cost price of merchandise is not recorded at time of sale sales returns are only recorded in the sales returns acc. inventory counted periodicly to determine inventory the gross profit can be determined only after the cost of sales has been determined.

-8-

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123ACCOUNTING Notes ACN-101-M CHAPTER 1

The Perpetual Inventory System:

REMEMBER TO CONVERT: AT COST FOR : All 'Inventory' or 'Cost of Sales' (or Purchases) or 'Purchases Returns' REMEMBER TO CONVERT: AT SELLING PRICE FOR :All 'Sales' or 'Sales Returns' If MARKUP=25% of SELLING PRICE=25/100=Markup amount:Cost=(100-%Mark)/100 *Price =cost if MARKUP =25% ON COST PRICE= 100/125 =COST

1.

WHERE IT IS USED :

a.

2. 3. 4.

each item must be easily identifiable and measurable and value get attached to them as sold/bought b. Eg:where barcode scanners used for Sales+purchases c. Not where many items are sold(and unrecordable /unidentifiable immediately) INVENTORY = ALLWAYS but ALLWAYS at COST ONLY-must be at cost. Gross Profit CAN be(if want to) determined Continuously by deducting Cost.. Sales from Sales.,BUT is only Automaticly done at year-end :by Closing both Nominal Acc's off toTradingAcc JOURNAL Columns needed:

a.

In Purchases and Cash Receipts Journals:

i.

b.

INVENTORY Column(goes ONLY to Inventory account) (NOT 'purchases column like periodic sys.')+Creditors +Vat In Sales and Cash Sales Journals:

i. ACN-101-M

(COST OF SALES Column –PLUS-Dr-Expense)&(Inventory-MINUS-Cr-Asset) column(goes to Inv -Cr+Cost Sls. -Dr accounts) + Debtors + Sales +Vat

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124ACCOUNTING Notes ACN-101-M CHAPTER 1 5.

new type LEDGER Accounts needed: a. INVENTORY Account :Asset Acc. -(BALANCE SHEET Acc.) b. COST OF SALES Account.:Expense Acc.-(NOMINAL Acc.)(because you get rid of assets?)

c.

6.

FOR YEAR END CLOSING-OFF:"TRADING ACCOUNT" + other normal closing off accounts="Profit & Loss account" and "Capital account". Method :FOR a PURCHASE : ONLY 1 Account involved :

a. b. c. d. 7.

'Inventory Account 'is Debited (as expense/asset) DIRECTLY from Journal(cpj or pj) and not only at end of Fin Year after stock-count.-Vat treated normally. CPJ & P Journal Must have a 'INVENTORY'column and not a 'PURCHASES' column. Ledger must have an 'INVENTORY account'. Inventory is an "Asset" immediately.-not like 'purchases' in'Periodic-expense till stocktak

Method:FOR A SALE : 2 Accounts Involved:

a.

b.

c.

d.

'Cost of Sales Account'(a Nominal :Expense: Account) is Debited with 'cost price PART OF sale +share of extra costs' from INVENTORY ACCOUNT only-NOT with the full amount of the sale-the cost price of each sale must first be worked out (NOT just SELLING price given) { One must also include the SHARE of extra costs incurred in purchase as the "share of extra costs" ie:work out first the part that belongs to the 'SALE' of all the - carriage duties,import duties,assembly costs- that are in the 'Inventory Account,and include the amount.} (the complete/whole incl.purchase price transfer amount is now an expense-Equivalent now of 'purchases'/-both actually Nominal accounts)asset) DIRECTLY FROM Journal(cpj or pj)(daily Sundries)or monthly if cost of sales columns provided in Journal.---(as well as crediting 'SALES' as an income &Dr Bank/Debtors) 'Inventory Account 'is Credited with - "Cost Price + Share of Extra costs"(to delete sold good) DIRECTLY from "Cost Of Sales Column" in Journal- NO SEPARATE INVENTORY COLUMN Just PUT Double Folio below column (cpj or pj)(or daily- Sundries-with 'Cost of Sales' for "Details"-also double folio) (monthly if COST OF SALES column is provided inJournal) ........................................................ [....Remember : -NOT with the full amount of the sale-the COST PRICE of each sale must first be worked out (NOT just SELLING price given) and also remember to :{ One must also include the SHARE of extra costs in the amount to be transferred :ie. costs incurred in purchase ie:work out first the part that belongs to the 'SALE' , of all the - carriage duties,import duties,assembly costs- that are in (all got written in previously)the 'Inventory Account,and include the amount. in transfer,not separately,but as part of the purchase price as one figure} ] CSJ & SJournal Must have a 'COST OF SALES' column and a 'SALES' column.-(And No Separate INVENTORY COLUMN –the transfer to Inventory account is directly from Cost of sales account-You just have to put a Double Folio under 'Cost Of Sales column' –[or in sundries if daily]-) Ledger must have a 'COST OF SALES account' and a 'INVENTORY account'.

8.

Method:FOR A Credit :SALES RETURN : 4/5 Accounts Involved:

9.

Method:FOR A Cash

ACN-101-M

:SALES RETURN:: 4

Accounts Involved:

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125ACCOUNTING Notes ACN-101-M CHAPTER 1

10.

Method:FOR A merchandise returned to creditor: PURCHASES RETURNS SALE : 3 Accounts Involved:

11. Vat input account is debited with Vat same as normal when 'Inventory accnt' system is used. 5. ALL EXTRA EXPENSES: includes all costs of bringing goods to present location &condition.... ..........GO STRAIGHT TO "INVENTORY ACCOUNT" a. Transport costs(in not out/exclude packaging unless specified)—NO Account For

b. c. d. 6. 7. 8. 9.

Assembling Costs—NO SEPARATE Account For Import Duties—NO SEPARATE Account For Purchase Returns-NO SEPARATE Account For

Sales Returns & Allowances :DOES: have a Sales Returns Account & an Allowances Account(both are EXPENSE acc.) (2) and both get closed-off to TRADING ACCOUNT as expenses well. ??????????????????????????? DISCOUNT RECEIVED AND GIVEN are NOT recorded in the TRADING ACCOUNT-are seen as a separate (finance type) income /expense for closing to PROFIT&LOSS acc. TRADE DISCOUNT left out of books entirely-seen as part of purchase/selling price. The inventory should be checked once per year anyway with a stocktake to be sure,for good prac

10.

Method :CLOSING–OFF Procedure at FINANCIAL Year End: FOR:A Perpetual Inventory System a. Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account. (balance never goes below double lines!!!-only in Capital account at end of yearEVER) b. EXTRA:FOR:Gross Profit: FOR: A TRADING ENTITY : First :TO GET: Gross Profit ,"nominal inc : Sales" +nominal exp : Cost of sales +nominal expense Sales Returns Account & if have a nominal exp. Allowances Account must be closed off to to : TRADING ACCOUNT(also a nominal acc.):to get GROSS PROFIT i. IN : General JOURNAL:2 double entries:

1. 2. 3.

ii.

ACN-101-M

First:(1) – 'Cost of Sales':Close-off and Transfer =Dr -Trading Account(real side) + folio AND Cr 'COST OF Sales'(an expense 'dr' type acc.)(opposite side)to delete from/Close-Off "Cost of Sales" to "Trading Account" for year-(permanent-utterly.) Second(2)-'Sales':Close off and Transfer This Nominal income acc. by: DR 'sales account'(opposite side to delete/transfer/close) +GL folio+ Date AND CR 'Trading Account'(real side of income acc. =cr( income ) for new home)+ GL folio +Date. ALSO:the (3) and (4) accounts are : CR :Sales Returns Account & if have one CR: Allowances Account(both are EXPENSE acc.) &DR 'Trading Account' separately for both ,in same manner as done above

IN : Ledger : 1. Close-off utterly(must be no b/d left at end to put below double lines at bottom) the Nominal Accounts : 'Cost of Sales' And 'Sales' to the 'TRADING ACCOUNT' as explained in previous section for closing-off's(folio of GJournal in folios-not contra ledger account's folio)

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126ACCOUNTING Notes ACN-101-M CHAPTER 1 iii.

.GO STRAIGHT TO "INVENTORY ACCOUNT"

1. 2. 3. iv. v. vi. c.

d.

Transport costs(in not out/exclude packaging unless specified)—NO Account For Assembling Costs—NO SEPARATE Account For Import Duties—NO SEPARATE Account For

Purchase and Sales Returns & Allowances :get each own account (3) and get closedoff to TRADING ACCOUNT as an EXPENSE as well. DISCOUNT RECEIVED AND GIVEN are NOT recorded in the TRADING ACCOUNT-are seen as a separate (finance type) income /expense for closing to PROFIT&LOSS acc. TRADE DISCOUNT left out of books entirely-seen as part of purchase/selling price.

Then FOR:Net Profit: "TRADING ACCOUNT" +all other "Nominal acc's" CLOSED OFF AS NORMAL to the Profit + Loss then i. trading account treated same as any nominal expense/income account,depending on if profit or loss SO : Closed-Off by journalising to "Profit & Loss" account(see previous section on this) (folio of GJournal in folios-not contra ledger account's folio) ii. Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account.(balance never goes below double lines!!!-only in Capital account at end of yearEVER) Then FOR :Net Equity/ Capital Drawings & 'Profit&Loss acc' closed off to CAPITAL Account –(now all nominal Gone!!!) (see previous section on this)

a

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127ACCOUNTING Notes ACN-101-M CHAPTER 1

The Periodic Inventory System:

NOTE:SEE page 145 Textbook for examples: REMEMBER TO CONVERT: AT COST FOR : All 'Inventory' or 'Cost of Sales' (or Purchases) or 'Purchases Returns' REMEMBER TO CONVERT: AT SELLING PRICE FOR :All 'Sales' or 'Sales Returns' If MARKUP=25% of SELLING PRICE=25/100=Markup amount:Cost=(100-%Mark)/100 *Price =cost if MARKUP =25% ON COST PRICE= 100/125 =COST 1. Entities that are not able to update inventory constantly-Wait till end of Year to STOCKTAKE 2. 'Inventory acc' is an ASSET ACCOUNT and cannot be closed off. 3. INVENTORY = ALLWAYS but ALLWAYS at COST ONLY-must be at cost. 4. STOCKTAKING:value of inventory at end of year is recorded BY MEANS of an ADJUSTING entry.AND the opening inventory at beginning of year is CLOSED-OFF permanently and utterly to the 'TRADING ACCOUNT' 5. Cost Price of merchandise sold is then calculated by subtracting the closing inventory from total value of inventory available for sale. 6. When an entity uses a Periodic System-a 'Cost of Sales account' is not usually maintained in the General ledger-BUT the figure is calculated in the income statement.NOTE!!!!!!!!!! 7. LEDGERS and JOURNALS needed: a. SAME as for perpetual system (see above and-re-copy to here when time)but no : i. Ledger: Cost Of Sales account. ii. Journal:Cost of Sales column in CRJ/CPJ or any other journals. 8. METHOD:

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128ACCOUNTING Notes ACN-101-M CHAPTER 1 a. b.

c.

d.

ACN-101-M

EXTRA:FOR:Gross Profit: FOR: Periodic System for TRADING ENTITY (1)First is old & new inventory to Trading account transfer,then(2) closing off of Sales and Purchases accounts to the Trading account. After Trading account finished done up/ it is closed off utterly to the Profit and loss account as an expense/income (1) Old and new stocktake Transfer:First Do The New Stocktake in the Storeroom :Then Enter Count/Number into books BY: i. General Journal:close–off the last years balance from inventory account for good to the Trading account FIRST-BEFORE New stocktake is transferred: JOURNAL: DR the 'Trading Account' as details; with the last years balance amount to be permanently deleted /closed-off to the Trading Account for Gross profit working out to make space for the new stock count in "Inventory" AND Cr Ammount:last years balance to be deleted- Details:the inventory account(asset account)+folio of Inv.Acc.--- description at bottom of account:Closing Entry. ii. Ledger: CR Inventory account (contra-is-Trading acc.)to delete last yrs.balance to make place for new balance AT COST PRICE!! (folio of GJournal in folios-not contra ledger account's folio)--AND--- Dr Trading Account(contra is-inventory-) to transfer for working out Gross Profit'. (folio of GJournal in folios-not contra ledger account's folio)....The new balance in Inventory account must be b/d and c/d with date :Of NEXT MONTH when finished all calculations in it because it is a Month end(YEAR END) procedure –(and shows up new stocktake amount-no mix ups) iii. General Journal:AT COST PRICE: DR the 'Inventory' (once yearly only type account,still open from last year) with the new level/count. --Details: "Inventory account +folio " AND credit CR the TRADING ACCOUNT (details:Trading account+ folio) immediately to make/put an 'expense' part in account FOR : calculating Gross Profit now at end of year from part leftover.(details at bottom:'write : cost price of closing inventory on hand brought into account')(a stockcount will allways go twice through the trading account-once in year counted+next year when deleted into trading account)(trading acc.must be closed off immediately and balanced at least for this transfer to be effective+there must be stocktake or dos'nt work at all (trading acc.method according to your own logic??????). iv. Ledger:Dr Inventory account (contra-is-Trading acc.)with NEW stocktake as an 'ASSET' -(folio of GJournal in folios-not contra ledger account's folio)--AND--- CR Trading Account(contra isinventory-) to transfer for working out Gross Profit'. (folio of GJournal in folios-not contra ledger account's folio)....The new balance in Inventory account must be b/d and c/d with date :Of NEXT MONTH when finished all calculations in it because it is a Month end(YEAR END) procedure –(and shows up new stocktake amount-no mix ups) (2)Closing off of Nominal Accounts:SALES and PURCHASES (plus any other Gross Profit Type accounts used exclusively in trading to the Trading account. i. "PURCHASES Account" is seen as an 'EXPENSE'account ii. "SALES Account" is seen as an 'INCOME' account iii. They are both closed off utterly to the Trading account(just like in section one for a trading entity-but here first to the trading account NOT first to the Profit & loss account) (folio of GJournal in folios G'Led'-not contra ledger account's folio in G'Ld') iv. Transport costs(in not out/exclude packaging unless specified not to ) gets own ACCOUNT in PERIODIC SYSTEM & CLOSED–OFF to :"TRADING ACCOUNT " as "EXPENSE" v. Assembling Costs—NO SEPARATE Account For gets own ACCOUNT in PERIODIC SYSTEM & CLOSED–OFF to :"TRADING ACCOUNT " as "EXPENSE" vi. Import Duties—NO SEPARATE Account For gets own ACCOUNT in PERIODIC SYSTEM & CLOSED–OFF to :"TRADING ACCOUNT " as "EXPENSE" vii. Purchase and Sales Returns & Allowances :get each own account (3) and get closedoff to TRADING ACCOUNT as an EXPENSE as well. (folio of GJournal in folios of LedgerNOT contra ledger account's folio for all iv to vii) viii. DISCOUNT RECEIVED AND GIVEN are NOT recorded in the TRADING ACCOUNT-are seen as a separate (finance type) income /expense for closing to PROFIT&LOSS acc. ix. TRADE DISCOUNT left out of books entirely-seen as part of purchase/selling price.

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129ACCOUNTING Notes ACN-101-M CHAPTER 1

e.

f.

Then FOR:Net Profit: "TRADING ACCOUNT" +all other "Nominal acc's" CLOSED OFF AS NORMAL to the Profit + Loss then i. trading account treated same as any nominal expense/income account,depending on if profit or loss SO : Closed-Off by journalising to "Profit & Loss" account(see previous section on this) ii. Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account.(balance never goes below double lines!!!-only in Capital account at end of yearEVER) Then FOR :Net Equity/ Capital Drawings & 'Profit&Loss acc' closed off to CAPITAL Account –(now all nominal Gone!!!) (see previous section on this)

The Financial Statements of a Trading Entity. 1.

2.

The details in Trading account and Profit and Loss account used to compile the Income Statement ON INCOME STATEMENT :Gross profit determined for "Revenue"-A separate calculation is done to show this for the periodic system to show "Cost of Sales" see chapter 3 / ch 4: income statement.

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130ACCOUNTING Notes ACN-101-M CHAPTER 1

3.

4. 5.

THE STATEMENT OF CHANGES IN EQUITY : IS THE THE SAME AS A SERVICE ENTITY.and is prepared from the CAPITAL ACCOUNT(in chapter 5.15.2 s)///ch 4/5 own notes. AND BALANCE SHEET ARE THE SAME AS A SERVICE ENTITY.-ONLY THE INCOME STATEMENT IS DIFFERENT .

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131ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 9 STUDY GUIDEp171 | Chapter 9 Textbook163 Topic C:Accountability for Current & Non-Current Assets

Chapter :9

HEADING :Cash &Cash Equivalents.

KEY CONCEPTS . Outstanding cheques . Deposits . Bank charges . Interest on overdraft . Direct deposits . Dishonoured cheque . Stale cheque . Stopped/cancelled cheque . Bank reconciliation statement . Balance per bank account . Balance per bank statement . Petty cash float . Imprest system . Petty cash journal

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132ACCOUNTING Notes ACN-101-M CHAPTER 1 9.1- The Nature of Cash and Cash Equivalents.

1.

2. 3. 4.

Cash Equivalents Are any Investment that can be Converted to Cash in Period less 12 mnths. :Definition: short-term highly liquid investments which are readily convertible into cash,and subject only to insignificant risks relating to the value thereof. a. Includes:savings accounts,investments.,Money market Instruments-(eg :Treasury Bonds) and bankers acceptances. Cash :Defined As: Any LEGAL means/tender of payment which can immediately be used to pay someone else: INCLUDES : Notes & coins,ALSO: + Postal orders + Cheques + Credit card vouchers (transactions)and any demand deposits at bank.-ALL. (P.S . notes & coins are called 'cash instruments') Entries Must Comply with: .33/.34-Faithful Representation, .37-Prudence, .46Fair Presentation. term Liquidity: The availability of cash for payment of claims against the entity.:Primary liquid tender is cash,savings deposit more than 12 mnths fixed is less liquid.-The Liquidity of entity changes after each cash payment or receipt.

9.2- Internal Controls over Cash: 1.

The Following are measures that can be used for Control Purposes:Internal controls So one detects others mistakes: Duties of employees divided so one detects others mistakes-Also It Should take 2 Employees to Embezzle cash. 1.2. Cash received Check Independant Record: cash received should be recorded in such a way so it can be checked against an INDEPENDANT daily record. 1.3. Cash Banked Daily: cash received should be banked daily.

1.1.

1.4. 1.5. 1.6.

Only Cheque Payments-exept for petty cash.:All payments should only be made by cheque - exept for some Petty Cash payments. Compare Bank Statement to –Cash receipts/Cash payments Journal:The Cash Receipts & Payments Journals should be compared to the Bank Statement. Bank Reconcilliation: Bank Statement-balance should be reconciled with the 'Bank Account' –balance.

1. Internal control over Cash receipts/payments: 1.1. Determination of responsibility:only specified personnel handle cash

1.2. 1.3. 1.4. 1.5. 1.6.

Allocation of Duties:different persons receive/ record /safekeeping.& employees duties divided- one checks other's mistakes/ + takes 2 to embezzle Documentation Procedures.: cash recieved checked independant record Physical,mechanical& electronic methods.:eg safes etc. Independant internal verification:supervisors check /count cashiers money.

Other control measures.:Personell handling cash should be covered by fidelity insurance, also must take annual leave(cash handlers), Cash Banked Daily: cash received should be banked daily. Only Cheque Payments-exept for petty cash.:All payments should only be made by . cheque - exept for some Petty Cash payments. . Compare Bank Statement to –Cash receipts/Cash payments Journal:The Cash . .. Receipts & Payments Journals should be compared to the Bank Statement. . Bank Reconcilliation: Bank Statement-balance should be reconciled with the 'Bank . .. Account' –balance., also cheques specific employees sign+double check etc.,Mark .. ... documents as PAID once they have been paid. .. GO THROUGH THIS AGAIN-RE-CHECK THINGS LEFT OUT IN TEXTBOOK!!!! VERY IMPORTANT.

9-The use of a BANK Account.: 1. 2.

Current bank account(or cheque account)-account which mainly uses cheques,also debit/stop orders/electronic transfers. Overdraft= Current Liability –changes(likely) within 12 months-(also at every transaction),bank agrees on maximun facility+rate of interest+repayment conditions, penalties for exeeding max overdraft charged..

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133ACCOUNTING Notes ACN-101-M CHAPTER 1 3. 4.

internal Controls-creates a added control because bank statemnet must be reconciled.(two fold record is kept !-one at bank –for all transactions) Once account opened client is provided with :deposit slips& cheque book:cheque book has :name,address,tel. no. of client on them.+sequentially numbered.

Depositing of money: 1.

different ways of depositing: 1.1. cash deposited, 1.2. interest credited, 1.3. 3rd party payments directly into bank account(where bank statement is source document for CRJ, it must show separately details of client &Trnsaction(note incomplete information) 1.4. ,electronic transfer.-must all be accounted for in cash receipts journal.source document for the person paying as well as payee are bank statement-both must regularly reconcile cpj& Crj from bank statement. 2. Source document for CRJ: Stamped Copy of deposit slip.

Issuing of Cheques: 1. 2.

A cheque is an unconditional order in writing addressed to the banker,and signed by DRAWER. SOURCE DOCUMENT: cheques have a -1-counterfoil or a -2-duplicate bottom copy with same serial no.s + info :To be used as source .Doc. for CPJ.

The Bank Statement: 1.

2. 3. 4. 5.

Monthly or as requested-weekly etc. Daily balance +All Transactions.eg:cheques paid- (debited),bank charges,etc. Also all paid cheques are usually returned to you stamped. Symbols& Format differ from bank to bank. Some amounts must go to the CRJ/CPJ eg electronic payments.

Debit & Credit Memos

1-Debit memo : for bank costs,even for costs on cheque returned to bank because of alterations or no funds 2-Credit memo: only some banks issue this one:eg :for clients electronic payments.

9.3- Bank Reconcilliation Statement: 1) Entries Must Comply with: .33/.34-Faithful Representation, .37-Prudence, .46Fair Presentation. 2) Depositors are Creditors of bank,borrowers are Debtors of bank. 3) Reconcilliation is to : Reconcile bank account with bank statement:Reconcile balance in banks own books(bank statement balance) with balance in entities 'Bank account balance' in ledger. 4) Bank Recon. Statement = a separate piece of paper or Book ruled same as General Journal

Following are most common causes of differences:

1. ITEMS IN ENTITIES BOOKS,but not yet in Banks books. i. Outstanding Cheques : Drawn(given out to pay someone) but NOT yet Presented to Bank by them.

ii. Deposits not yet credited / processed by bank 2. ITEMS IN BANKS BOOKS ,but not yet in entities books. i. Bank Charges: i. Ledger Fees ii. Cash deposit fees and Commission on Cheques ii. Interest Paid/Charged on Favourable / Overdrawn balance iii. iv. v.

Direct Deposits into Entities Bank account.-not yet recorded by entity. R/D Cheques -referred to drawer- Unpaid Cheques.

Bills Paid/Recovered by the Bank for the Entity.-bank advises immediately by means of debit /credit notes of these and also unpaid cheques but entity only records all these when Bank Reconcilliation Statement is received. 3. ERRORS made by Entity OR Bank.

Reconcilliation Procedure.

(A) Official who does reconcilliation- NOT– responsible for receipts/payments of cash-detect cash fraud. (B) - 2 Processes Involved : -1-businesses records updated -2- bank reconciliation statement prepared. (C): FAVOURABLE Bank Account balance in Ledger & Bank Reconcilliation Statement =DR UNFAVOURABLE Bank Account balance in Ledg.& Bank Reconcilliation Statement=CR : FAVOUR Bank Statement balance & Bank Recon. Statement :UNFAVOUR =(DT,DR,OD) Bank Statement & Bank Recon. Statement

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= CR =DR

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134ACCOUNTING Notes ACN-101-M CHAPTER 1 SHORT SUMMARY before Full Main Explanation of: METHOD of the BANK RECONCILLIATION PROCEDURE: 1) Compare Bank Statement with Cash Journals (for CURRENT MONTH) :In Cash Receipts & Payments Journal: i) Tick off CREDIT SIDE of Bank Statement and 'Bank column of Cash Receipts Journal.' ii) THEN tick off DEBIT SIDE of Bank Statement and 'Bank Column' of Cash Payments Journal." iii) NOW Move all things missing in CRJ/CPJ into these two books and Close them Off to the "Bank Account" (eg: Bank charges,Interest Charges/;Payment,Direct deposits& electronic receipts,Electronic payments,R/D Cheques)iv) NOW only can the "Ledger Bank account" be "balanced & cd/bd for the month" end ,THEN only can one start the Bank Reconcilliation Statement & Checkup :see next. 2) NEXT Compare Bank Statement with Last Months Bank RECONCILLIATION Statement.

a) b)

First Tick off all items on last months Recon. AND the Current Bank Statement-BOTH of -ALL TICKS. All items on LAST MONTHS Statement BUT NOT reflecting on THIS MONTHS Statement yet, must be "carried forward" to this months statement FIRST. Now Complete The whole bank Recon Process- (1) Bank Recon &any (2)'Writing Back' of Cheques required. :see following detailed explanation for all.

FULL METHOD FOR BANK RECON & ALL OTHER STEPS INVOLVED IN PROCESS.: 1) Compare Bank Statement with Cash Journals (for CURRENT MONTH)

TERMS USED ON BANK STATEMENT: 'Deposits' = Your deposits in bank,including ANY cheques deposited. 'Deposit : T. van der Merve' = direct deposit by another person into your account. 'Cheques' = Your Cheques 'Admin fees,Service fees,Ledger fees' = all Bank fees 'XYZ Insurance Co.' = payment you made to them. 'Interest' = Interest paid or received on account balance.

a)

Cash Payments/Receipts Journal:

i) CRJ-Tick off CREDIT SIDE of Bank Statement and 'Bank column of CRJ' - BOTH of. ii) CPJ-Tick off Only DEBIT SIDE of Bank Statement and 'Bank column of CPJ'-BOTH iii) FIRST post to CPJ/CRJ from B. Statm., ,all on date of Bnk. Stat. :eg 31st,no other dates, only after

iv)

posting FROM bank statement can the 'Bank' totals of the CRJ/CPJ be posted to the LEDGER: 'Bank account' and ledger get balanced & bd/cd to the next month.THEN only can this ledger balance can go to RECON. ALL EXTRAS on Bank Statement (has extra things on)-to CPJ/CRJ –they must be :Add all changes to CRJ/CPJ( eg direct deposits) or add nothing if all items ARE Ticked on Bank Statm-NONE short. (i) Bank Charges: All go End Mnth usually, -are several methods-we use following-

1.

To C.P.J.-VAT is included in all charges and must be (minused-for 'Vat input column'&'Bank Charges' heading –sundries-in CPJ)-full amountgoes to 'Bank Column' in CPJ as contra to other two. 2. Ledger :Separate "BANK CHARGES account" as expense account.(sundriescpj) 3. 'Bank Charges account' –CONTRA- 'Bank Account' 4. Source doc. is bank statement., DATE is ONLY date of End Mnth. :eg 31st,no others,same one for all entries!! (ii) Interest Charged/Received:To C.P.J.

1. ACN-101-M

'Finance Cost' -in Income Statement :(no VAT !)

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135ACCOUNTING Notes ACN-101-M CHAPTER 1 2.

CPJ/CRJ –sundries column-'Interest Income/Expense (on Current account)account' & Bank column' 3. Ledger : "Interest Income OR Expense account"(on Current account) –CONTRA- Bank account. 4. DATE is ONLY date of End. Mnth.:eg 31st,no others,same one for all entries! (iii)Stop orders/Debit Orders: 1. either C.P.J. or C.R.J Check if Amounts CORRECT –-

2. 3.

– eg: CPJ- amount goes to 'Bank column' and CONTRA account:eg Water& Lights etc,remember Vat as extra 2nd contra account to Bank ,Source doc. is bank statement. DATE is ONLY date of End Mnth.:eg 31st,no others,same one for all entries!!

(iv) Direct deposits:

C.R.J.-same as any payment ,just use Bnk. Stat. as source doc.AND Date is ONLY date of End Mnth. :eg 31st,no others,same one for all !!! (v) NOW ONLY CAN THE LEDGER 'BANK ACCOUNT" BE BALANCED OFF AND bd/cd FOR THE MONTH END(after all CPJ /CRJ final entries for 'bank charges' etc etc. are completed): AFTER THAT ONLY CAN ONE DO THE ACTUAL BANK RECON .-AS FOLLOWS.: . b) Fill in Bank Recon Statement.

(1) Headings used on Recon: (a) Debit (favourable) balance as per Bank Account(B15) –FIRST/LAST

(b) Credit (favourable) balance as per Bank Statement (c) Debit outstanding cheques(payment by you) :

-FIRST/LAST

No5 R350 B.Berry No8 R850 A .Apple Can ONLY BE CHEQUES-nothing else is used-eg direct deposit only from bank statement,cash only from cheque,debit card only from bank statement source doc.etc. (d) Credit outstanding Deposit (date:1 june 2007) (e) Credit outstanding deposit(Post-Dated cheque,date:25 july 2007) (f) credit outstanding deposit-r/d cheque-cheque no. 887 replaces no.364 :deposited 1 june 2007 (2) Format: Same as General Journal format,but can mix up dr/cr's.

(3) Your LEDGER BALANCE is only entered in the B. Reconcilliation

after ALL corrections have been posted to the CPJ/ CRJ already. (4) First and Last: go any/either one of Ledger or Statement balance. Put one, eg:the ledger balance in on it's original side (only one that does not go to "banks" side-across!!!) : as it is in your books.:ie-DR for Positive balance.,then LAST put :Bank. Statement on it's original side ie:CR for positive balance. (5) ONLY the LEDGER "BANK ACCOUNT" Balance goes to it's own side in the Recon-ie:as found in the "Ledger Bank Account" of firms books.(6) ALL other entries go on OPPOSITE side to source side: to same side as a bank statement would have.-you only do the Ledgers 'Bank Account' entry on it's OWN sideONLY EVER – (7) Positive Amounts –To CR side (in banks books it would say bank owes you) eg: Deposits (8) Negative Amounts - To DR side(In banks books it would say you owe bank) eg:Payment (9) :BUT for overdrawn account =(DT,DR,OD) Bank State. & Bank Recon. =DR balance (10) Types of BANK RECONCILLIATION Entries. (i) from CP/R/J :Outstanding Cheques :not on B.Stat-so put in Recon-on DR side. (banks side )

(ii) from CP/R/J: Outstanding Deposits : not on B.Stat-so put in recon-on Cr side (banks side) (iii) from Bank Stat: Mistakes by Bank / Deposits not meant for your account: these must be shown on bank reconcilliation only!!!, Phone bank & report matter & write an official letter explaining.

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136ACCOUNTING Notes ACN-101-M CHAPTER 1 (iv) Bank Charges:?????????? All go End Mnth, (v) Interest Charged/Received:??????? (vi) Stop orders/Debit Orders:????????? On B.Stat- Not Yours –so put in Recon-on CR side. (your side) (+ Check if Correct /accurate to your figures) (vii) Direct deposits(to you):?????? On B.Stat- Not Yours –so put in Recon-on CR side. (your side) 2) Compare Bank Statement with Last Months Bank RECONCILLIATION Statement. a) First Tick Off check last months Recon. with this months Bank Statement,THEN Tick off all last Recons. on BOTH OF THEM. b) Those NOT ticked on Last Months Recon. must be Carried Forward to NEW Months Recon.unless a cheque was re-issued by you/ or to you !!-then new No.in CPJ or CRJ.!!! 3) For bank-recon last month tick off to – bank statement this month :only one ODD problem:if re-issued r/d cheque owed to you:this will not be ticked on old recon(different number now) and must just check first if any amounts from old recon to be transferred to new recon are not maybe a re-issued cheque that DID infact APPEAR on BANK STATEMENT and is SUPPOSED to be ticked off. 4) Cheques Referred back to Drawer and Outdated Cheques: R/D Cheques.

a)

R/D Cheque: Referred back to Drawer :because of: i) Mistakes on Cheque : (1) Unsigned Cheque (2) Amounts in words.figures differ (3) Changes made to cheque ii) Post Dated Cheque(

iii) Outdated Cheque:ANY CHEQUE over 6 MONTHS OLD must be REVERSED/Written Back(esp. if you issued it!!!!) iv) Insufficient Funds

•

Redepositing : If a mistake/no funds / other is rectified in same month –New cheque issued can simply be redeposited without any changes to Entities accounts-exept a note in journal-,but if redeposit only in following month then Must Go to Recon.(if same mnth - not go to recon!) Redeposit slips must keep separate from other slips a r/d cheque that is replaced only needs a single entry with no amounts in the CPJ/CRJ ONLY to say – replaced by cheque 597 etc. from you or to you –any of two.BOTH cases will go to recon.!(unless still processed by bank in same month) –one as a payment not yet processed, other as a r/d cheque –"replaced by cheque no76" (deposit not yet credited) b) . c) WRITTEN BACK CHEQUES:( FROM OTHERS) If insufficient funds or if other persons cheque is Stale etc.,the cheque can be written back:NOT go Recon. i) Do OPPOSITE entry in C. Payments J. to cancel C. receipts J.:The Exact Opposite no extra.

ii) iii)

Bank Discount +(Disc.Vat.-)CONTRA to Debtors Control( there is no NORMAL vat entries here-only "discount VAT" ,vat has already been recorded and just remains the same(just back to debtors with payment) If : Got debtors column , discount allowed & vat output columns : ONLY in CPJ

(1) In CPJ: Amount + ADD Discount + allowed + vat = Back to Debtors Control (& D.L.) (2) In CPJ:Discount goes to Discount ALLOWED column-as a reverse-NOT discount received-(in brackets for cross casting- as a cr NOT normal dr!!!) (3)

(4) In CPJ:???????? Vat from Discount (previously reversed by adding to vat input as receivers share

iv)

of Disc.) gets re-reversed by adding to Vat Output again as CR .- CONTRA – Dr :Debtors Control ????????? (5) If customer has no debtors account- open a new one for him. If: NOT got all these columns : In CPJ + GENERAL JOURNAL.

(1) In CPJ: SUNDRIES :Amount ONLY , not add disc.= Back to Debtors Control (&D.L.) (2) In General Journal :Discount (and any Interest same way) –(less Vat taken off before )- goes

to Discount ALLOWED account(CR to reverse DR expense)-as a reverse-NOT to 'discount received' CONTRA - DR (add again) to 'Debtors Cntrl.'+'Debtors ledger'. ALSO do all others below together with this one in one entry below each other as cr to debtors cntrl. dr . (3) In General Journal : 1) Discount & 2) Interest charged-& 3) vat on interest if applicable????? & , 4)VAT from reversed Vat part added to Input Vat before (receivers share of Disc.) back into vat

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137ACCOUNTING Notes ACN-101-M CHAPTER 1

d)

Output column as Cr.(to re-reverse reversed Vat -) , - CONTRA - debtors ledger/debtors cntrl (as a Dr (add it again- he still owes you the Vat part of former discount again + interest + discount etc. ) (4) If customer has no debtors account- open a new one for him. Outdated Cheques:

i)

If Post-Dated-

(1) If RETURNED By bank(or already receipted –ie recorded in a Journal as a receipt):

ii)

Put in Recon. until deposited in Correct Post-Dated Month.:in recon as'Post Dated' (2) If UNDEPOSITED yet : Do NOT Put in Recon.-Just keep till correct Date-then only do you deposit it. Stale ,or Too old- if older than 6 MONTHS :Must Immediately be written back!!! (or as stated on face of cheque): (1) WRITTEN BACK Cheques (YOURS): IF YOUR OWN cheque is STALE-it gets written back/reversed (2) Exact opposite of original entry in C Payment J is made in C Receipts J: (i) In CRJ: credit Creditors Control to re-enter debt (in Sundries column) -CONTRA- debit 'Bank Column'. (ii) In General Journal : Discount received ONLY gets done here NOT in CRJ for Your cheques(unless special column is provided). : Dr Discount Received(to reverse CR income) –CONTRA- Cr Creditors (to reverse liability payment by you) (iii) General Journal :Discount (&Interest -separately- same kind of treatment if applicable) reversed by adding to output Vat (SARS share of Disc.) gets re-reversed from Vat Output by adding to Vat OUTPUT column As Dr.(to re-reverse the vat liability that became owing ) , - CONTRA - Creditor (as a Cr (add it again- YOU still owe the Vat part of former discount again (iv) If no creditors account-open new one.. (v) EXCLUDE Written back cheques from Current bank Reconcilliation.

iii) Cheques Damaged or Lost(1) You Issued It : (a) Inform bank by stopping payment thereof. (b) CPJ :write one entry in Current month- When actually replaced- saying only: "Cheque No. 5 replaces cheque no 4 :B.Viljoen." in Details column-With NO AMOUNTS NEXT TO IT!!! (c) Bank Recon: write: "Cheque No. 5 replaces cheque no 4 :B.Viljoen." at very bottom of recon in last mnths finished recon if cheque received late,or In current recon in 'Details' as needed.(ie :in both) (2) You Received it as payment : (a) Inform drawer-request replacement-make a note in debtors ledger to know.All entries as per Logic.

To remember:add this: check for following odd/special difficult cases. •

•

• • • •

a r/d cheque that is replaced only needs a single entry with no amounts in the CPJ/CRJ ONLY to say –replaced by cheque 597 etc. from you or to you –any of two.BOTH cases will go to recon.!(unless still processed by bank in same month) –one as a payment not yet processed, other as a r/d cheque –"replaced by cheque no76" (deposit not yet credited) For bank-recon last month tick off to –bank statement this month :only one ODD problem:if re-issued r/d cheque owed to you:this will not be ticked on old recon(different number now) and must just check first if any amounts from old recon to be transferred to new recon are not maybe a re-issued cheque that DID infact APPEAR on BANK STATEMENT and is SUPPOSED to be ticked off. check for "unpaid cheques " as 'details' / on the bank statement –must be reversed !!---Aslo check for 'error correction' on bank statem. check for date STALE cheques .!!!! check for : if on bank statement –a cheque with different amount to that in cash journals BUT SAME cheque number, then you must check for error-AND JUST PUT DIFFERENCE on the bank recon –NOT rewrite cheque or any thing. bills receivable : + some Cr bnk state. entry means someone put money directly into your account to pay for a bills receivable to you/or part of it. check for errors/ or error

• • EXAMPLE as per exercise 9.2on page 177 Study guide.

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138ACCOUNTING Notes ACN-101-M CHAPTER 1

Petty Cash Journal: 10) For small costs eg; day workers,stamps.-KEPT completely separate from Business banking CASH. 11) IMPREST system: Monthly: responsible official (better 2 of ) counts petty cash/Checks/Restores to Specific balance with a Cheque.-----a) Journal must be written up by another person to one responsible for petty cash handing out, b) Official handling petty cash must NOT handle other cash as well.(?)

12)

Petty cash float :Cheque for specific amount is cashed From CPJ –CONTRA- 'Petty Cash account(asset –like a small bank -account)' and put in safe keeping :post in :Sundries column if no column for petty cash in CPJ 13) Source Document: Consecutively numbered Petty Cash slips:signed by 'authoriser' or '2 persons'

14)

Petty Cash journal: a) Divide in 2 parts :Receipts & Payments b) Receipts part: Has no 'details' column- only Date,'Folio',& 'Amount' ,{Folio for receipts is CPJ page no. This side for memo purposes only-EXEPT FOR MONTH END b/d ...c/d .Comes from CPJ only.Does not transfer/post anywhere.,exept bd/ ..c/d} :b/d total only: b/d total under all lines at bottom of "RECEIPTS" SIDE-write: "Balance b/d" –ALL-in Folio column! +DATE 1st of NEXT Month ONLY. c) Payments side: Exept for "bank column" is now = "Total column" ,basicly the rest is Same as the CPJ/CRJ ie: special columns for recurring amounts + sundries column (same as CPJ ) –at end month all columns + sundries transferred to Ledger accounts,but first do 1 extra special calculation: see below

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139ACCOUNTING Notes ACN-101-M CHAPTER 1 i)

Method of Posting to G.Ledger from Petty Cash Journal:

(1)

Sometime in month, WHEN NECESSARY-ie when cash nearly finished ,on 20th or some date, the cash box is counted & checked-then filled up to former(Imprest) level again with a cheque-entry only in (-as reference mainly-Petty Cash J on "RECEIPTS"-LEFT side as Date,folio,Amount (no Totals or ruling off at all YETl)) and in Cash Payments J.(AS: Dr Petty cash account–Cr Contra-Bank) —NOTHING ELSE-!!!!-this is a utterly separate!!!!! process to "posting at Mnth end procedure" At Month end-posting to General ledger is done like follows:

(2) (a)

FIRST PART: on payments side :do normal totals at month end at bottom of each column(EVERY ONE-ALL)-below a single ruled line ON PAYMENTS SIDE ONLY.-then...... (b) SECOND PART: (i) Do a : b/d & c/d workout between the whole "RECEIPTS" side and the single total at bottom of the "TOTAL" column of "PAYMENTS" side of P.C.J . Write this total below "TOTAL Column" ,under the "actual expenses Total of column" done in (a)(see example).:Date:31st (end) Mnth, Details:ONLY-"balance" Folio :c/d:put in Doc.No/Folio. Column. nothing else. THEN after double line level is ruled for both sides,put b/d total under all lines at bottom of "RECEIPTS" SIDE-write: "Balance b/d" –ALL-in Folio column! +DATE 1st of NEXT Month ONLY. (ii) Then put same total under sundries column total(as a cash input type of)

(iii) Now single underline below this and put all new totals under here again. (iv) Last :double underline below and fill in all Folios of General Ledger postin. (v) NOTE:The Folio of the "TOTAL COLUMN" goes NEXT to first ,NOT below second-Total,and only 1st –actual expenses total – goes to general ledger Petty C.J.-so NO folio goes below TOTAL or SUNDRIES columns,only the others get. (vi) THEN : transfer each Column Total to specific ledger account with CONTRA-"Petty Cash Account" :eg "Coffee& Tea Account",and ALSO each Sundry ITEM to ledger,each sundry gets own folio and each column gets own folio of G.Ledger account number.-CONTRA- Cr Petty Cash Account from Main TOTAL column(NOTE:folio written next to ,not below PCJ total here because of second set of totals below!) : ASSET -like a small bank-account (Cr reduce asset) -AS PER USUAL . ALL TRANSFERS From Expense accounts goes TO Dr SIDE Ledger. (vii) IN "PETTY CASH ACCOUNT" ONLY FROM "Total Column" goes to Cr SIDE Ledger With contra as –"Petty Cash Payments."-just like ,( ie :not Receipts.! or 'expenses' or anything - )-{P.S. NOTE:notice,remember on the whole :, just like for any other Contra's with multiple accounts-eg bank –you just write "payments" or receipts if their are too many contra's,down to where there are 3-eg:Debtors Vs Bank + Discount + Vat:you just say 'bank' as contra and leave other 2 out-or just bank & discount-and leave out vat etc etc} (3) At Month End-"RECEIPTS SIDE" of P C.J is: (a) First single/Then double at bottom ruled off –AND Totaled. (but only once-the second part,not first part –only) (b) Below Total –write in new b/d total under all lines at bottom of "RECEIPTS" SIDE-write: "Balance b/d" –ALL-in Folio column! DATE:1st of NEXT month- AMOUNT:b/d balance left over.It should be CASH ACTUALLY in the BOX and + : DATE:1st of next month

15)

Ledger:'Petty Cash Control:Asset 'Account : ASSET account- it is like a "small Bank account" in a box. Every petty cash cheque goes here from the Cash Payments Journal, -Contra – is 'Bank'(not 'cheque.. ! etc' )(also from cpj) Receipt of the float is by the -1-ledger & -2- petty cash "Receipts" column.-both of ! ALL EXPENSES from petty cash journal are –CONTRA- to this account-comes from 'TOTAL column' in petty cash journal to here –just like from a 'bank' column! 16) Financial Statements: a) Petty Cash Account from ledger goes to the Cash and cash Equivalents as an ASSET.

b)

PETTY cash Account From LEDGER IS NOT an Expense Account!!!!!!!!!!!,it is Asset ac cash & cash equival. can also be called:deposits on demand,bank balances and cash,deposits on short notice. d) All nominal or expense accounts related to the petty cash will be closed of as normally at year end.(eg 'Wages','Refreshments',etc.) e) In cases where amounts on specific deposits are material they should be shown separately. c)

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140ACCOUNTING Notes ACN-101-M CHAPTER 1

Note: All Folios at Mnth end transfer: a) For TOTAL of ONLY-'TOTAL COLUMN'goes next to in folios column because of workings out below it b) Sundries gets no Folio! c) ALL other columns get a folio below column.at bottom.(under double ruled line)

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141ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 10 STUDY GUIDEp193 | Chapter 10 Textbook195 Topic C:Accountability for Current & Non-Current Assets

Chapter :10

HEADING :Trade & Other Receivables.

KEY CONCEPTS . Credit transaction . Trade debtors . Credit term . Discount allowed . Bad debts . Current assets . Provison for bad debts . Bills receivable . Debtors control

Introduction: • • • • •

Trade debtor-from a credit sale normal operations-pay over a period known as a Credit Term. Loan Debtor-from giving a loan Sundry debtors-all others for 'Other Income' heading eg;rent etc Entries must comply with-Prudence ,Faithful representation,fair presentation, : Comply with :Accrual basis-same period record as happen,not only when paid,also matching principle-(where material or reasonable ! )

Discount Allowed: Discount terms:

1)

n/30 or 30 days Net =MEANS (n ='net' )30 days from date of invoice-allways starting on actual date-never only on the next day-ie:if 30 days after sale-it means day of sale is day 1 !!! 2) 1/20 n/30 =MEANS 1% discount for payment in 20 days 3) Unisa lecturer PTA says :start counting on day AFTER the date of transaction-not on date of transaction-(cannot be sure of full 8 hr day or 2 hr day) BUT stop coiunting on very day of payment. 4) 1st –to -1st next mnth= for 31days month eg jan,march- 32 days |||||| for 30 days month=31 days 5) settlement disc. =sales discount =discount allowed –all means same thing or 6) Financing separate from Sales in books and in Firm itself.

Discount & Vat Reversing •

• •

see following accounts for methodremenber 14/114 (%) * total = VAT part. 2% DISCOUNT on R500 = R10 :so 0nly (500-10=490) to Bank & (R10 – Vat part) to Discount Allowed. & Vat part to OPPOSITE VAT to reverse- so for sales to Input vat –to reverse. here 1st of 2 types of treatments for vat reversal is used –(here -1-indirect reversal is used -2-direct reversal is only used for sales/purchases returns)

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142ACCOUNTING Notes ACN-101-M CHAPTER 1 •

NOTE for BELOW DIAGRAM: in reality cannot put all 3 as -contras- in debtors control- just put 'Bank ' or even 'Bank + Discount+ Vat Input' (just like Debtors Cntrl. as a contra for in Sales Returns (eg) we would just put "Debtors Cntrl" , or even "Debtors Cntrl & Vat Output &Discount Allowed"

•

NOTE :if using general journal-all 3 contras to the debtors control go in 1 go in same entry/ write-up,under each other- so use 4 lines in one entry,Not 4 full entries!!!!!

•

?????FOR A DISCOUNT REVERSAL in a Sales /Purchases Returns Journalo it has 4 legs: o &you must have 3 columns in the journal(or a sundries for some) o SalesReturns –CONTRA- -1-Discount -2-Vat Output -3- Debtors Control ??????

Interest Charged: 1) On an overdue account –You charge interest ONLY EVER at an ANNUAL RATE,and work out ? much for period Pro Rata. : R * % *(Days/365) --or (Mnths/12) = Interest amount. 2) Eg: He will be charged 18% per annum interest (for 1 month) on R550 and will have to pay R558,25, calculated as follows: R550 + (R550 * 18/100 x 1/12 ) = R(550 + 8,25) = R558,25 3) "Interest charged " goes to "Interest Charged: Income"-CONTRA- "Debtors Control" account from General Journal Entry.

BAD DEBTS and PROVISION FOR BAD BEBTS. Bad Debts writing off of:

1) "Bad Debts" is an Expense in the Income Statement,while "Provision for Bd. Dbts" =Asset-Contra. 2) Call bad debts:"BAD DEBTS:EXPENSE" for clarity. 3) THERE ARE 2 METHODS: The bad debts can be written off against provision account or against bad debts account: a) -1–Using "Bad Debts" account : -AS an ADJUSTMENT: YOU dr 'Bad Debts' account(expense-dr) -CONTRA- Cr Debtors Control/Dbtrs. Ldgr.)(to remove) finished. OR you can use SAME AS Chapter on ADJUSTMENTS: Use name: Bad Debts:Expense.

b) -2–Using "Provision for bad debts" account instead of "bad debts" account to write it off: EXAMPLE:writing off R730 bad debts below from a customer.

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143ACCOUNTING Notes ACN-101-M CHAPTER 1

i) ii)

You Debit the "Provision for bad Debts Account" instead of the "Bad Debts:Expense" accnt. DIFFERENCES to method one: (1) The "Provision for Bad Debts" account. gets used for all writing off instead of the "Bad Debts" account. (2) You leave "Bad Debts:Expense" unchanged during year till end of years Re-Estimation and Recording of the NEW "Provision" instead of the "Provision for Bad Debts" account. (3) "Bad Debts" only gets: The newly estimated "Provision...." entry and then, gets closed-off immediately after to "Profit & Loss" Acc.- ie:it ONLY EXISTS FOR A FEW MINUTES +/- at the YEAR ENDnever ever else. (4) When you re-estimate& record the Provision at Year End- Here you MUST FIRST ALLWAYS EVER ANYWAY work out the balance left (dr's & cr's) on separate paper: to work out how much to deduct /or add to "Provision ..." account.DO NOT JUST USE LAST YEARS PROVISION>!!!!! (5) ????:Either bad debts could be misleading OR Debtors could be misleading-or both of For Decreasing OR "Stays the same" "Provision ..." story for the 2 methods.!!!!! ?????The balance sheet etc. will all work out no matter what the provision/and real bad debts does because a Dr provision at year end will go to bad debts account and debtors and balance them???????

PROVIDING for DOUBTFUL DEBTS:

NOTE: There are 2 ways of writing off bad debts- 1- from the provision account first then when negative ,still from provision acc, and only at end of year,when new provision is made does the bad debts acc. start to reflect and show a balance for the year(till then = 0)(or maybe:? ??????? own idea ,alternativelywhen Prov. Acc. Goes negative ,only then do you start with a bad debts acc. balance??? No =the new provision made anew at each year end will auto reflect in the bad dbts acc. at year end as the correct bad debts for that year(excl.possible wrong % 's used)! Even if 0 new debtors and far more bad debts tahn provision that year etc) ,2- you just write to bad debts acc. for all bad debts ,and Prov. Acc stays same till each year end .=The reason/argument one can just write off bad debts against bad debts account instead of provision for bad debts account is that the provision is merely a valuation account (stated exactly in text book as reason for this!), just to show the income + balance sheet in correct light (as an asset contra acc.) and not a real expense etc. • In Financial accounting- if one does NOT make provision using the "provision" method and only uses the "bad debts" account- it is seen as NOT ACCEPTABLE because you do not MATCH(ing) the same years expenses (bad debts) with the same years income(debtors) ,and ALSO (2) you do not show the Net Realisable Value in "Debtors" on the balance sheet.

•

The more correct version of of 2 methods for "provisions" is deducting the provisions from the "Provision ..."account- not the :bad debts account because you show that you are writing off against a former provisionand can follow the balance as it changes.

Estimating doubtful debts:

1)

Provision estimated& RECORDED -only ever-AFTER all known BAD DEBTS FINISHED WRITTEN OFF for the year ALREADY. 2) ONLY determined on Debtors to be carried over to Next YEAR-all known bad debts first minused. 3) Provision for Doubtful debts base on usually: a) % of outstanding debtors: -1-experience(avg. over last 5 yrs) or -2-plain industry average

b)

An age analysis:either add all thought to be accdng. to mnths arrears-2- -add % 's accdng. to mnths arrears( is a 'very strong' matching concept practical application)

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144ACCOUNTING Notes ACN-101-M CHAPTER 1 Provision for Doubtful Debts:

1) provision is only for the debts so far-up to date-to estimate them correctly on bal. sheet.,not to estimate the next years bad debts!!!! if mnthy redone-just to see? much–for decisions-on debt.etc 2) Policy of Prudence( or Conservatism) involved here.:-1-estimated loss provided for during period of sale & -2debtors list is at net Realisable value. 3) Estimate& provision done on mntly basis in large & yearly basis in small companies. 4) New Provision RECORDED & WORKED OUT -only ever-AFTER all known BAD DEBTS FINISHED WRITTEN OFF for the year ALREADY. 5) VAT is NOT taken into account for "Provision for Bad Debts".

6)

Cr "Provision for Bad debts"(liability as an asset-contra account) -CONTRA- Dr BAD DEBTS(expense) 7) The provision for doubtful debts account remains unchanged during the year. Bad debts that occur during the year are written off against the bad debts account. 8) The " bad debts acc." is closed off to the Profit & loss account at end of year as a Cr "expense " account.

Financial Statements:

1) 2)

'Contra-Asset' account : The 'Provision for Bad/Doubtful Debts' is a called a sort of LIABILITY called a CONTRAASSET account. The 'Provision for Bad/Doubtful Debts' is a sort of liability, but is NOT added to liabilities ! in Bal.Sheet, it is instead deducted from "Debtors" ,ie: in "Trade & other Receivables" heading , when Balance sheet is Done, so it makes the debtors less by the amount expected / provided for.

Increasing/Decreasing the Provision for Doubtful Debts:

1.

2.

3. 4.

Two methods can be used: but same accounts etc. used. a. Write back former Provision (in both acc's) and enter The new provision again OR b. Just add/subtract the extra part from new provision to the "Provision for bad Debts" –we use this method. Use General Journal for entry.+ give % & amount in description +do calculation in description. P.S :decreasing the provision can result in a credit item in "Profit & Loss" account.!!!!! Same general way a new provision is created –exactly. EXAMPLE: INCREASING(left) or DECREASING(below right one) the PROVISION for bad debts.

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145ACCOUNTING Notes ACN-101-M CHAPTER 1

Recovery of Bad Debts written off: 1. 2. 3.

4. 5.

Cr :"Bad Debts Recovered" account:(as Income acc.) –CONTRA- Dr :"Bank Account" + Note in Debtors Ledger. Use Cash Receipts Journal. "Bad Debts Recovered" is a separate heading under "Other Income" in the Income Statement. If estate of person pays 30c in the Rand(or 30 %) -NO MENTION AT ALL in the books is made of any amount exept the full amount received : eg: R550 debt * 30% = R165 goes to "Bad debts recovered" -CONTRA- "Bank " -----Nothing else is done AT ALL is done exept a NOTATION in DEBTORS LEDGER. IF only 30 c in rand paid off BEFORE 'BAD debt' has been written off completely-Only record that part lost as a bad debt in the normal manner in "Bad Debt account"-AFTER- THE REST went as NORMAL to Off the "Debtors Control Account/+Dbtrs.Ledger"

VAT,Bad Debts & Bad Debts Recovered. 10.4.7S VAT And Bad Debts.

1. 2. 3. 4. 5. 6.

Method to Reverse:Put in OPPOSITE VAT. account to reverse(you probably already paid the vat output to sars by now –now you must "claim it back" through Dr the Vat Input- IE:(not DR THE VAT OUTPUT) SARS usually gets paid as soon as Debtors are recorded-even if entity not paid yet-(but special permission can be obtained to pay only when you are paid-abnormal though) Vat must be reversed from a Bad Debt written off Vat must be paid to SARS (re-reversed) from a Bad debt recovered TO REVERSE: VAT on a BAD DEBT: a. USE the general Journal b. Put VAT in OPPOSITE Vat account to Reverse(ie: Vat 'Input' not 'Output'.. for sales) c. Put all 3 Legs of Entry under each other in One Journal entry-ie: i. leg1 of 3 legs: 'Debtors Control&ledger' –CR

ii. iii.

leg2 of 3 legs: 'Bad Debts' –DR :(expense) ={Amount* 14/114 (Vat/[vat+100] Leg 3 of 3 legs: DR 'Vat Input' -DR (they owe you what you paid for nothing)

VAT and Bad Debts Recovered. 1. 2. 3.

METHOD: Put back in the VAT Output account:you owe VAT on Money you Receive now. Use Cash Receipts Journal. Works as per Normal with Vat for Cash Sales.

Debtors With Credit balances ie: Cr: 1. All debtors with Credit balances not Dr GO in as CREDITORS IN the BALANCE SHEET ONLY:ie:Trade & Other Receivables :ONLY IF IT IS SUBSTANTIAL ( MATERIAL)

Credit Cards Sales & Charges: 1. 2. 3.

4.

Use the general journal If a bank is the institution open a debtors account for them, If a Private institution eg:Diners Club -open a debtors account for them, Any Sale with credit card;

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146ACCOUNTING Notes ACN-101-M CHAPTER 1 a.

: Each transaction has 2 legs i. transaction: write up at bottom ="credit card debit notes deposited" 1. Dr XY Bank as a debtor or Other institution as a debtor 2. Cr Sales as an 'income' ii. charges for service: 1. Dr Credit card charges 2. Cr XY Bank or other institution eg :Diners Club.

Debtors Control Account: 1.

2.

3. 4. 5. 6. 7.

8.

Debtors control account must be checked at least once per month against the Debtors Ledger. Posting from Journals Incl. and SALES RETURNS JOURNALS TO Debtors Ledger Takes place Daily.

Write :'Bank and debtors ' as the contra account for any 'debtors control ' entry with debtors and even if also vat –just write first 2 –vat is just accepted as being there automaticly-See book 214 last point. SEE PAGE 216 for the reconcilliation method for the debtors control-Against debtors Ledger. All errors in accounts are merely posted by the General Journal –GJ to the proper account with –CONTRA – written as the very erroneous account where it landed up in. (eg sales:in D.Cntrl see page 216s. and below) If you have Dr and Cr balances given in a test : from the 'Debtors Ledger List of Balances' of accounts:subtract the cr from the dr to make a total up to use as the total in the first line of your reconcilliation of the debtors control & creditors ledger.-DO NOT IGNORE the cr balance because it was supposed to be transferred or something. If they give question where :G.J. says that :certain accounts were transferred to the creditors ledger from the debtors ledger :You must add these to the DR side of the debtors control account if the G.J. entry is to be written up in 'DEBTORS CONTROL' acc. - because the Cr debtors have reduced the debtors control balance ,now if you take them out of the debtors section the amount must go BACK to DR side of debtors control. a. If they give a question with visa versa to above-ALSO ADD IT to debtors if it comes from creditors now and goes to debtors. ALSO FIRST make a Debtors List from the debtors ledger- to work from: Debtors List at 30 April 2005 Folio No Debtor Amount : R DL 5 xxxxx(if cr then minus it!!) xxxx DL 8 xxxxxxxif dr add it. xxxxx TOTAL

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147ACCOUNTING Notes ACN-101-M CHAPTER 1

9.

(1) When an error is made in totalling a journal the mistake only affects the control account; it cannot affect the debtors list. (2) It is possible for a creditor of a business to be a debtor of that business as well. It can also happen that a debtor may have a credit balance on his account. If either of these situations occurs it is advisable to transfer the debit or credit amount to the debtors or creditors control accounts respectively. (3) The amount in the debtors column is R16 860. This amount is the total amount received from debtors including any discount allowed. (4) When an entry was made on the wrong side of an account, the effect of the correction is double the amount of the error. First, the wrong entry must be cancelled and then the amount must be correctly entered. (5) In cases of both A Abel and B Brown, the entries in the control account are correct. The errors have to be corrected in the accounts of the debtors and then on the list. When answering a question on the reconciliation of a debtors control account with the list of debtors, it is very important that you read the question very carefully. As you are reading, decide what type of error is involved. Also ensure that when you do the control account, you use the correct contra ledger account.

•

FIRST THING YOU DO: go through list of corrections and put a mark for all : R= recon items,D = debtors control items !!!!!!! ( some are in both-see below)

• •

a wrong side of account transfer = 2 * amount just write (2* xxx) as calculation. if a sales (etc) journal debtor entry is in wrong column :BOTH debtors control + Recon (debtors list) ,not just one but in BOTH , must have the entry corrected NOW , because the daily posting to the debtors ledger would also have missed it because it is not in debtors column.!!!! (or a R/D cheque too:both sides)( or a amount entered twice in the sales journal) if a creditors column in cash receipts journal it is = CR(overcharge +re-imburse back to creditors control), or a debtors column in cash payments journal is = dr ALLWAYS EVER (r/d cheques written back into debtors control) both are normal side entries!!!! an Bills receivable :all must first pass through the debtors ledger,so all must first go to cr side of debtors control(get written out of) if they are in the bills receivable journal and you must reconstruct a debtors control from this information.!!!!!

• •

Disclosure of Debtors& Bills receivable in the Financial Statements: -1-Disclosure -a-Balance Sheet

1)

All Provisions for doubtful debts get subtracted from the Debtors going into TRADE & OTHER RECEIVABLES for the balance sheet only.:under Current assets. 2) All installment sale debtors should be shown separately from the trade debtors-since money not recovered immediately . 3) All BILLS RECEIVABLE CAN GO WITH "Trade & other Receivables" UNLESS it is 'material' to disclose them separately under current assets.

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148ACCOUNTING Notes ACN-101-M CHAPTER 1 4) Bills receivable: if mortgaged (as surety) or if discounted it must be disclosed in Notes to the statements.Also as discounted they must be treated as a liability properly for that.????? 5) Debtors with Cr and not Dr balance go to current creditors instead-(but only if substantial enough)

-c-Notes to Financial Statements:

1)

A Note is put in the Notes at end of Fin.Stat. to indicate All the amounts included in the TRADE & OTHER RECEIVABLES-and a number next to it to index it. 2) All debtors pledged as security must get a note in the Fin Stat. 3) put a note in the statements as to if debtors with credit balances have been included in creditors? under 'policy'

'

-2-Debtors With Credit balances ie: Cr:

1.

All debtors with Credit balances not Dr GO in as CREDITORS IN the BALANCE SHEET ONLY:ie:Trade & Other Receivables :ONLY IF IT IS SUBSTANTIAL ( MATERIAL)

Bills Receivable: 1. 2.

When a debtor's account has been overdue for some time, a bill can be drawn on the debtor to give the business a stronger legal claim should the debtor fail to meet (dishonour) the bill. A bill receivable is a written agreement between the debtor and the business to pay the outstanding amount, including any interest, on a specific or specifiable future date to the bearer of the bill.

Recording of Bills Rec. 1.

2. 3. 4.

5.

Once a bill has been accepted, the asset, debtors, is replaced by another asset, bills receivable. Remove amount from debtors and Put in BILLS RECEIVEABLE: Use General Journal. Cr Debtors Control/Debtors ledger -CONTRA- "Bills Receivable" Account. REMEMBER :Allways first put ALL EXTRA interest CHARGED in the Debtors account-BEFORE transferring full amount to Bills rec. Account & 'Interest from Bills Rec. :Income' account

Payment of a Bill on Due Date: 1.

From Cash Payments Journal- simply Cr 'Bills Receivable' –CONTRA Dr 'Bank'

Dishonouring a Bill 1. 2.

Simply move it back to the debtors control Cancel : Cr "Bills receivable" –CONTRA- Re-start: Dr "Debtors control''

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149ACCOUNTING Notes ACN-101-M CHAPTER 1

1.

2. 3.

Extra Costs ,if any get debited to debtor when the bill gets cancelled from not paying the Bill, do not first go to Bill Account, THEY go straight to (1)Debtors & (2)Costs. ( ) A renewed bills receivable first get cancelled to creditors –THEN re-entered/started again. ALLWAYS first put any Bills rec. Sale in the 'Debtors' –even if Bill is from sale date itself., and ONLY THEN transfer it to the 'Bills Receivable' account. !!!

Discounting a Bill 1. 2.

3. 4.

Special solution especially for this bills system from banks.-works a bit funny/developed. Bank charges interest & if bill gets dishonoured bank immediately claims full amount back from the borrower. Cr delete 'bills receivable' asset in favour of Bank (now theirs) –CONTRA- Dr 'bank' (as 'income' from a loan) The Interest charged gets worked out then JUST FULL AMOUNT goes to "Interest expense"acc

Dishonouring a Discounted Bill 1.

2.

Simply move it back to the debtors control Re-start : Dr "Debtors Control& Ledger" –CONTRA- Cr Bank {as expense-with all- not separately (amount + 'Noting' charges}

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150ACCOUNTING Notes ACN-101-M CHAPTER 1

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151ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 11 STUDY GUIDEp224 | Chapter 11 Textbook235 Topic C:Accountability for Current & Non-Current Assets

Chapter :11

HEADING :Inventory.

KEY CONCEPTS . Valuation of inventory . Historical cost . Consistency . Gross profit percentage . Disclosure in the financial statements

Introduction: 1) Inventory must be one of the following categories:. goods which are kept to be sold in the normal course of business (merchandise) . goods which are in the process of being manufactured for sale . goods which are used during the manufacture of inventory for sale (eg manufacturing material) . goods which are consumed in the normal business activities (eg stationery) 2) One must customarily do an inventory count at year end-in addition to any other ones. 3) IAS 2(AC108)

The Importance of Correct Inventory Evaluation:CORRECTING MISTAKES And RESULTS of Incorrect Evaluation: 1. ONCE A SALE IS completed-that very second the goods should be included with any inventory count done ie: goes in that period even if not received in warehouse yet. 2. If goods are sold-they may immediately not be included in any inventory count at all. 3. It is very important that inventory is valued correctly. A mistake in the inventory figure will affect the calculation of cost of sales, the gross profit and subsequently net profit in the income statement. On the balance sheet the total of the current assets as well as the equity will be incorrect. This mistake will also affect the figures for the following year, because the closing inventory for one year is the opening inventory for the next year. 4. THE RESULTS of a mistake in Evaluation of Inventories causes a. OVER 2 YEARS : The Cost of sales + Gross Profit + Profit + Equity Is Incorrect both yrs. because last years closing inventory is used as opening inventory this year. b. BUT : Profit ADDED UP for BOTH years together in one Number will be correct though.! (somehow mathematicly)

Correcting Inventory Mistakes in the Income Statement etc.:

1. 2.

Nothing is said about in the journals +ledger-just remember so far they show to use GJ to transfer direct from mistake account to account where needed.-_CONTRA- stays mistake account (P.S:the CRJ and other journals : if wrong stay wrong.-just use GJ.) First prepare a List of correct amounts by calculation for each heading from:-1-REVENUE(/SALES-Services rendered) TO -last-CLOSING INVENTORY –ONLY –Then work out new Income Statement.

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152ACCOUNTING Notes ACN-101-M CHAPTER 1 3.

:SEE EXAMPLE BELOW pg:226/7 S

Valuation of Inventory at Historical Cost: 1. 2.

This Module only uses Historical COST basis. Exta costs incurred in Cost of Sales of Inventory: a. Freight in b. Insurance on Goods purchased. c. Import Duty d. Even transport from harbour-(maybe even petrol & wear+tear) e. Non-recoverable taxes(ie NOT VAT.) i. ALSO possible: 1. All varable & fixed overheads & direct labour for manufacturer. 2. cast of storing if product gets aged 3. research & development costs 4. etc..

3.

HISTORICAL COST: a. has disadvantages:if value of assets fall below purchase price:your inventory is overvalued. NRV:Net Realisable Value method: a. the price at which inventory can be sold,including any costs to be incurred to get product ready etc.beyond scope of the module.

4.

NOTES TO The FINANCIAL STATEMENTS: b.

c. ACN-101-M

One Must put a note in the Financial Statements saying inventory was valued at historical cost. The entire note section here is : i. (1):Accounting Policy

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153ACCOUNTING Notes ACN-101-M CHAPTER 1 1.

2.

(1.1):Financial Statements have been prepared in accordance with GAAP and the Historical Cost Basis has been used. (1.2) Property plant & Equipment:

a. ii. iii. iv.

(1.2) depreciation has been calc. using at 10 % of cost price of Assets

Revenue is Recognised as Net Sales to customers/OR Fees charged for services rendered. Breakdown of propery –plant –equipment(table) If trade& other receivables have other components:ie:debtors breakdown +bills rec.+ Vat control account.(etc.)

Methods of Estimating Inventory: 2. 3. 4.

5.

Gross Profit can be shown by % in 2 ways: 1. Gross profit % of Cost of Sales: = Gross profit/cost of sales =% 2. Gross profit % of Sales: = Gross profit/ sales =% There are different ways of estimating inventory:we only use the GROSS PROFIT method. Estimating inventory is necessary when: 1. If Inventory is damaged or destroyed. 2. if no inventory count is being done quaterly etc., 3. Or to double check the inv. count. STEPS to CALCULATE the ESTIMATE for inventory:

1. 2.

calc Average Gross profit for last 3 accounting periods-for "Sales" ,NOT 'cost of sales.'(but it must be a stable % over the years or method wont work) Use Avg Gross Profit .% of Sales to Estimate the Gross Profit : from (sales * Avg %) i. Cost of Sales:deduct gross profit you got from sales =cost of sales ii. Value of Closing Inventory = {(a) opening inventory +(b) purchases} –(minus)-cost of sales.

3.

OR one can use the Avg Gross Profit % on Cost of Sales:

i. ii. iii.

1.

cost of sales * (100 + % : 'GrPr. on cost') =Sales so cost of sales =SALES * 100/(100+%) Value of Closing Inventory = {(a) opening inventory +(b) purchases} –(minus)-cost of sales.

Gross Profit Method:or 'retail technique' (Sales - Cost of Sales)= Gross profit.

2.

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154ACCOUNTING Notes ACN-101-M CHAPTER 1 11.5 The Consistensy in the Application of Procedures. 1.

Any change in methods of valuation must be written under 1-Accounting Policies as 1.3 or so –in the NOTES.

11.6 Disclosure of Inventory in the Financial Statements: 1. Inventory is a current asset. disclosed separately under it. in balance sheet 2.

Any breakdown of inventory gets done at bottom of the notes Any change in accounting policy ,like a change in methods of valuation must be witten under . ... Accounting Policies As 1.3 or so,in the notes a. product half finished etc, ready etc.-beyond scope of the module. 4. NOTES TO The FINANCIAL STATEMENTS: a. One Must put a note in the Financial Statements saying inventory was valued at historical cost. b. Note is : i. (1):Accounting Policy 1. (1.1):Financial Statements have been prepared in accordance with GAAP and the Historical Cost Basis has been used. 2. (1.2) Property plant & Equipment: a. (1.2) depreciation has been calc. using at 10 % of cost price of Assets ii. Revenue is Recognised as Net Sales to customers/OR Fees charged for services rendered. iii. Breakdown of propery –plant –equipment(table) iv. If trade& other receivables have other components:ie:debtors breakdown +bills rec.+ Vat control account.(etc.) 5. You Allways treat packaging MATERIAL AS DISTRIBUTION ADMIN& other EXPENSES, and freight on sales(out) is also part of this and not in cost of sales.

3.

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155ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 12 STUDY GUIDEp234 | Chapter 12 Textbook p251 Topic C:Accountability for Current & Non-Current Assets

Chapter :12

HEADING :.Property Plant & Equipment.

KEY CONCEPTS . Historical cost price . Tangible non-current assets . land and buildings . machinery . vehicles . furniture and equipment . Depreciation . Accumulated depreciation . Sale (alienation) of property, plant and equipment . Disposal of property, plant and equipment

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156ACCOUNTING Notes ACN-101-M CHAPTER 1 Introduction: • •

see 'substance over form-"economic relaity of recording an asset-lease agreement/credit-as long as corresponding liability is recorded-asset is recorded as your asset in books-not other peoples asset. assets become obsolete/wear & tear-thus depreciation written off.

• •

proceeds from sale of an obsolete asset are normally used to finance purchase of the new asset

• •

For : a LEASED item,the lessee may record it as an ASSET with the corresponding Liability recorded as well.

For a: H.P. SALE :The asset,although legally ownership has not yet been transferred !! - is however still recorded as a ASSET with corresponding LIABILITY Deferred Expenses:means incurred in (but in advance)but not recorded as being for a specific period. eg: Pre-paid expenses are an asset called deferred expenses

• Non-current assets are not aquired for re-sale-they are only aquired to generate income. The Classification of Non-Current Assets. 1.

2.

TANGIBLE Non-current Assets. a. LAND: NOT Depreciated since none of it is ever consumed. b. MANUFACTURED ASSETS: eg:buildings machinary & vehicles.subject to wear&tear & obsolete + depreciation.Buildings can be technologicaly & from old obsolete. c. NATURAL RESOURCES:subject to deletion through use-eg:mines,'plantations !!!!',oil. INTANGIBLE Non-current Assets. a. copy-rights,patents,good-will,trade marks. b. deferred expenses & debits( pre-paid expenses-paid but deferred to another period)

Determining the Historic Cost Price of Non–Current Assets: 1.

2. 3.

The Actual COST PRICE of Property Plant & Equipment(Non-current assets) INCUDES: a. Purchase price - Excluding all trade discounts & rebates+ Including all expenses all expenses incurred in getting asset to premises(like freight in) in getting asset operational ( eg: non-refundable taxes (import duty), site preparation ,legal,transport,installation, also including all wages of businesses own technical personell.) Finance Costs on loans to aquire asset & Maintenance expenses for equipment etc. are NOT included in COST PRICE of asset. CAPITALIZED: means including(Dr) amount as part of asset cost price.

LAND:

•

All costs incurred in :aquiring possession,access to,and the right of disposal,and cost of assuring land is in a usable condition,and all costs incurred during the HOLDING PERIOD until DATE which is to be USED must be CAPITALISED. -converting to a condition suitable for intended use,-'all costs incurred from date of purchase until it is ready to use.,-

•

Incl.:option cost,legal fees,transfer duties,registration of servitudes,settling of outstanding costs relating to the land such as municipal rates, costs of clearing & leveling-exept for a 'construction' this is building costs,not land costs-and any costs involved in demolishing existing structures.(sale of demolished material comes OFF cost-price!!!) SALE of DEMOLISHED MATERIAL comes off cost price.!!!!!! All costs incurred during the HOLDING PERIOD until DATE on which the land is to be USED must also be CAPITALISED as Historic Cost price of Asset.

• •

• • • •

LANDSCAPING ,GARDENS & Paths ARE Capitalised as cost price –but NOT -Maintenance- of.... If several properties bought one sum-MUST use reasonable market value of each,NOT all at one sum in books. For an exchange of assets for land eg;Shares- use price of shares etc. as cost. For inherited land-reasonable market value of land used.

All Manufactured & Self erected Assets.

1.

2. 3.

Includes Purchase price - Excluding all trade discounts & rebates + Including all expenses all expenses incurred in getting asset to premises(like freight in) in getting asset operational ( and Also: eg: nonrefundable taxes (import duty), site preparation ,legal,transport,installation, also including all wages of businesses own technical personell.) Buildings: bought-include all costs of repair to get to a usable condition.If built up-includes all costs& additional expenses to get to a usable condition:incl:insurance costs in building period ,architect etc. All Expenses which prolong life of asset:beyond initial expectations-large scale repairs/modifications which would cause prolonging of useful life of asset DO GET CAPITALISED whenever they happen.ALSO if you add things to asset-the now bigger asset should be capitalised as such. BUT :NOT Maintenance since your 'initial expectations of lifespan' MUST include regular maintenance-

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157ACCOUNTING Notes ACN-101-M CHAPTER 1 Natural resources: 1.

2. 3. 4.

Three types of Natural resources: a. mineral- mining b. liquid- oil/gas boreholes c. Harvested: Food crops,fisheries,orchards,plantations(harvests not allways pure natural resource-due to more agricultural side–Must first put in a input before can expect return INCLUDE : before property indentified & purchased-all exploration costs, +DEVELOPMENT costs :incl:boreholes sinking,shaft sinking,roads & clearing-BUT once operational(first dirt processed after last processing testsprofit from test samples comes off cost price just like demolition rubble sales) all rest is operational costs. & incl. in cost of land/natural resource (????Costs of machinery & equipment that has to be installed.???) For leased property-the lease costs 'may' be discounted and capitalised but - normally rather seen as operating costs.

Intangible Assets: 1. 2. 3.

4. 5.

Gives Rights or Advantages to holder.often existence is uncertain-amount used get from as per general business practice for that asset class. Historic Cost price includes :purchase price + all legal & other costs relating to purchase of. If developed self- all costs relating to development MUST be recorded accurately-if possibly become part of cost price. LOSS- if project to start a intangible asset fails-all cost incurred are to be written off as a loss. If impossible determine value: Put as R1 ,have asset valued,or quantify advantages of self & capitalise them.

Safeguarding & Control of Property Plant & Equipment. 1.

All assets must be on an asset register specifying: 1. Location 2. Serial Number or ID. mark (Own Asset no.) & Full description 3. Date of Aquisition 4. Depreciation /Annum amount,General ledger acc.no.,Purchased from,Mainenance & Repairs details. 5. Estimated Scrap value 6. Expected Lifespan 7. Cost price 8. Carrying amount 9. Current years Depreciation 10. Total Depreciation. Asset Register and Depreciation Report FOLIO 5 Item: General Ledger Account: Identification number: Purchased from: Date purchased: Estimated Scrap value: Estimated Lifespan:

Date

Details

Folio

Asset record Dr

Cr

Depreciation record Balance

Dr

Cr

Balance

Recording the Purchase At Initial Aquisition. 1.

Vehicle/ or Equipment or buildings –are 'control accounts' should get debited on purchase-they are the 'control accounts' and asset register is like the debtors/creditors ledger- it is the details account.

ASSET/Machinary/Equipment/Vehicles ACCOUNT: 1. 2.

The Asset is recorded in the Ledger In The CLASS of Asset account:ie: ALL "Vehicles", or all "Machinery",or all "Equipment" etc :DEFINITLY NOT EACH vehicle INDIVIDUALLY,or each machine individually!!!!! –CONTRA – Creditiors control OR Bank . See below copied accounts for example/

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158ACCOUNTING Notes ACN-101-M CHAPTER 1 Re-Evaluation: 1. To re-evaluate all /some asets just put new heading:Re-evaluation " below the depreciation heading in the table in notes-and put the amount to be added or deducted in this row. put a line in spaces where nothing was re-evaluated. 2. Same as depreciation-just another method-gets minused etc same as if a depreciation amount. Depreciation: General: 1. 2.

3.

4. 5. 6. 7.

8. 9.

Ias .16 (AC123)mainly. Depreciable asset: a. Used over MORE than 1 accounting period. b. Has limited useful life c. used for admin,production or rental out etc. USEFUL LIFE of Asset: a. Period of time over which an asset is expected to be useful. b. Number of Production or Similar units (eg: service life eg:distance traveled) c. Legal/contractual/other restrictions : eg:Lease period due dates. Book value /Carrying amount of non-current asset:balance sheet or depreciated value. matching concept-match costs with period incurred/wear& tear period Viewpoint :Non-current assets merely represent deferred expenses over a period. The shorter of either the economic life(technological advances) or technical life(wear & tear) is taken as the depreciation period. Regular reviews & adjustments of rates of depreciation a MUST.

Residual value/scrap value:value expected to be realised at end of service life –AFTER costs of –disposal are deducted. Res. Val. must be estimated at aquisition if significant enough. 10. Depreciable value=Historical cost – (less) Residual or Scrap value. If residual is insignificant-can ignore it and not use for depreciable value calc.Unless-insignificant.

'Depreciation :Expense' Account 1. 2.

All depreciation Dr "Depreciation :Expense" –Contra- Accumulated depreciation(Asset-contra) The "Depreciation :Expense" account is closed off to the 'Profit & Loss account"

1.

Each CLASS of ASSETS gets one 'Accumulated Depreciation Account' –eg Machinary=1 ,Vehicles = 1,Equipment =1 ,.... NOT ONE each per asset ,only 1 per CLASS of asset. Each asset gets all its depreciation written to this account and added up over years to keep track of total to date for depreciation table in notes. Acc. Deprec. of each asset Must get removed from here to asset realisation account when sold

"Accumulated Depreciation Account: 2. 3.

Methods for Depreciation calculation:

1. 2. 3. •

• •

Straight Line Method: (Cost - Scrap/Residual value) Over/ fixed time or years usage estimated = subtract this value each year Diminishing balance/ or 'Accellerated' method: (Cost - Scrap/Residual value) Over/ % value left over (amount auto. decreases over time as value decreases)-means decrease greater in fist years than later yrs. Production Method: (Cost - Scrap/Residual value) Over/ estimated no. of units production from the asset in its.lifetime. To choose which method to use: o For straight line method- repair gets more as ages ,thus total expense incl. depreciation gets steadily larger., PLUS usage/not taken into consideration o For production unit method-preferable where usage plays a part in loosing value. o The diminishing balance method- helps balance increased repair costs in old age. Must do methods consistently for effect-any change must have good reason & show in Notes You must make an Asset & Depreciation Schedule(not register) to calculate the depreciation:

• The :"Accumulated depreciation:Machinary " MUST have a extra name: eg: 'machinary' 41. Note: method of working out cost from carrying amount if they only give you a carrying amount in exam etc. ACN-101-M

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159ACCOUNTING Notes ACN-101-M CHAPTER 1 For straight line method: EG 20% over 5 years – then after 2 years : 1- acc depr= 20+20% , 2carrying amount = 100-(20+20)= 60%. 3- cost = 100/60 X carrying amount. For Reducing balance Method : same as above exept : for 20% on reducing balance method = 1-year 1= 20% 2- year 2 = 20% + (20% X 80%)= 36% 3-year 3 = 36% + (20%x 64 %) =36+12.8=48.8% 4-year 4 = 48% + (20% x 52%) = 48+10.4=58.4% and so on etc. etc. 44. NOTE: For the movement during year : a. Disposals of Assets: Put it at carrying amount – less [pro-rata depreciation to that month+other years depreciation] b. Depreciation: include all : incl -rata depreciation to that month for any disposals/sold assets + other unsold assets. 45. Note: for end of year balances: a. LEAVE out any depreciation from disposals -out of Acc. Depr. , and also leave out costs of disposals out of ‘Cost’. •

•

NOTE below:this is HOW TO MAKE UP A SCHEDULE OF DEPRECIATION

•

Straight Line Method: (or Fixed Installment Method)

1.

(Cost MINUS - SCRAP/RESIDUAL VALUE) Over/ fixed time or years usage estimated.

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160ACCOUNTING Notes ACN-101-M CHAPTER 1

Diminishing balance method (or Accellerated Method)

1. 2. 3. 4. 5.

(ONLY Cost ONLY -not minus scrap value) Multiplied by Certain % of Value. This method says asset looses more value in first years than in later years :(ie:amount subtracted auto. decreases over time as asset value decreases) This method DOES NOT SUBTRACT THE SCRAP VALUE from the COST PRICE to CALCULATE the RESIDUAL VALUE.-at all ever The carrying value at end of one of the years is simply deemed the Scrap value-then no more. Use same Entries as above:just 'calculation' in calc. column different.

Production Method:

1.

4.

(Cost MINUS - SCRAP/RESIDUAL VALUE ) Multiplied by: ( Units produced this year /OVER/ Estimated no. of units production from the asset in its.lifetime. ) variations include :hours worked , distance traveled . The depreciation rate can also be worked out at: Rands per Production unit (or kilometre) and given 2 extra columns: depreciation per unit & annual units : in the Schedule of depreciation ,and the standard depreciation quoted as 'per unit' at top of asset register. Use same Entries as above:just 'calculation' in calc. column different.

•

If the rate CHANGES : You simply apply the new depreciation rate in the year you revise the rate.

•

According to IAS16(AC123) depreciation not normally provided for on real estate :UNLESS an amount must be written off due to adverse circumstances, a write-off could be made then.

•

BUILDINGS are NORMALLY grouped with land ,without showing separate values , BUT 'COULD' GET DEPRECIATED: due to technological+area changes+old age/wear&tear. It is COMPULSORY for companies to disclose additional information such as location AND description , and purchase date & cost price.

2.

3.

Reviewing depreciation rates:

The Treatment of Land & Buildings:

•

Property plant & equipment Aquired/Disposed During the financial year.

1. 2.

MUST calculate first years depreciation Pro Rata.( or no. Mnths of disposal year) USE Months NOT Days (closest no. of months-if bought after 29th-does?not count as a month) Annual depreciation * Mnths/12.= Pro Rata.

3. Disposal of Property Plant & Equipment 1.

If asset a. b. c. d.

is disposed of –you MUST REMOVE it from the books & Asset register :following steps: Record proceeds of Sale./Journalise Update interim depreciation elapsed since last year. Remove the 'Cost of ' AND 'Accumulated depreciation' from the books. Determine & Record any profit /loss from Sale/Demolition/scrapping of asset.

2.

There are different ways to dispose of an asset: i. Scrapping the asset: 1. If CARRYING VALUE(after depreciation) IS = 0

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161ACCOUNTING Notes ACN-101-M CHAPTER 1 a. b. c. d.

a.

b. c. d.

e. f. g. h.

ACN-101-M

If value already '0' =No loss. To be easy JUST :Delete -/Write off Machinery Acc. against Accumulated depreciation Acc. Use the General Journal. Dr Accumulate depreciation –CONTRA-Cr Machinary

2. If CARRYING VALUE (after depreciation)= POSITIVE value left. Use General Journal Delete -/Write off from 'Machinery' acc. by Transfering specific machinery to "Realisation of machinery" account (income /expense -nominal account). First add any extra PRO RATA depreciation in normal way-G.Journal entry for :"Depreciation :Expense" acc. & "ACCUMULATED DEPRECIATION'' ACCOUNT Transfer All accumulated depreciation to the 'Realisation of Machinary' account as well. Now close "Realisation of Machinary" acc. off to the "Loss/Profit on Disposal of Non-Current Assets" Account. –ie transfer balance. In Notes to Fin Stat. : Prop.Pl.& Equip. table – 'diposals' = profit/loss after depreciation Remember to Add all costs of disposal to "Realisation acc." – for profit/loss on machine. Each CLASS of ASSETS gets one 'Accumulated Depreciation Account' –eg Machinary=1 ,Vehicles = 1,Equipment =1 ,.... NOT ONE each per asset ,only 1 per CLASS of asset.

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162ACCOUNTING Notes ACN-101-M CHAPTER 1

•

Selling it outright: a. Use General Journal b. Delete -/Write off from 'Machinery' acc. by Transfering specific machinery to "Realisation of machinery" account (income /expense -nominal account). c. First add any extra PRO RATA depreciation in normal way-G.Journal entry for :"Depreciation :Expense" acc. & "ACCUMULATED DEPRECIATION'' ACCOUNT d. Transfer All accumulated depreciation to the 'Realisation of Machinary' account as well. e. ALSO Record Money received in "Realisation of Machinary" acc. –NOT in SALES-CRJ!! f. This can be done in C.R.J. or General Journal. g. remember to add all the pro rata depreciation. h. Now close "Realisation of Machinary" acc. off to the "Loss/Profit on Disposal of Non-Current Assets" Account. –ie transfer balance. i. In Notes to Fin Stat. : Prop.Pl.& Equip. table – 'diposals' = profit/loss after depreciation a. Remember to Add all costs of disposal to "Realisation acc." – for profit/loss on machine.

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163ACCOUNTING Notes ACN-101-M CHAPTER 1

•

Trading it in as partial payment on the purchase of a new asset a. Trading in uses same method as selling outright:exept: i. You record the Trade- In SEPARATE to the New Purchase

ii.

Put new purchase in new Dr machinary acc, & cr Creditors with its actual purchase price( not less any trade in yet!!!). iii. Even if machine paid for in (only cash+trade in)-you still Go the creditor routeallways!!! ie :first credit machines sale to the "creditors name account"- then work this off against "bank" and "machine realisation" account-ALLWAYS –even if Paid Immediately! iv. EXTRA: Dr- Creditor (trade-in price) -CONTRA- Cr "Realisation of Machinary acc." (as an Income) with trade-in amount only now!!! v. If paid cash –just use a creditor system as above and record cash payment AFTER whole process completed but for same date! 3.

If the asset is traded-in for another asset, or sold, the profit or loss made on the disposal of the asset must be treated as income or expenditure in the income statement for the current financial period. 1) Tax subsidies on depreciation Make NO difference to accounting treatment used above.

Summary (copied from study guide)

The following six (6) steps should be followed when dealing with the disposal of an asset: 1. Record the depreciation of the current period up until the date of disposal (general journal):Debit: Depreciation Credit: Accumulated depreciation Now calculate the total accumulated depreciation of the disposed asset. 2. Transfer the total accumulated depreciation of the disposed asset to the realisation account (general journal): Debit: Accumulated depreciation Credit: Realisation account 3. Transfer the cost price of the disposed asset to the realisation account (general journal): Debit: Realisation account Credit: The particular asset account 4. Record the amount earned on the realisation (note that the realisation account is credited in all three cases): 4.1 Sold for cash (CRJ): Debit: Bank Credit: Realisation account 4.2 Sold on credit (general journal): Debit: Debtor (and Debtors control account) Credit: Realisation account 4.3 Asset traded in (general journal): Debit: The asset account (as part of the cost price of the new asset) Credit: Realisation account

5-Determine the profit or loss on the disposed asset: 6-Transfer the profit or loss to the profit or loss account on disposal of that type of asset (general .. 6-1 Profit: Debit: Realisation account Credit: Profit on disposal of ... account 6-2 Loss: Debit: Loss on disposal of ... account Credit: Realisation account

ACN-101-M

journal):

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164ACCOUNTING Notes ACN-101-M CHAPTER 1 Presentation In the Financial Statements: • • •

All non-current assets go to non-current assets heading in the balance sheet. For companies- fixed property –land- Extra Details : location, description,purchase date & Costprice must be disclosed separately –(put underNEATH Table of Pr. Pl. &equimnt in NOTES Plant & Machinery or plant machinery & vehicles could also be used as general headings for Everything under that goes under Property Plant & Equipment- (assorted items should all be grouped under single heading preferably).

• •

Must have a table for Property Plant & Equipment- in the Notes :see example- as eg:No.3 Must disclose under eg:no1-accounting policies: say 1.3-the depreciation method & % used for each class of assets depreciated.

•

See small writing below in table for METHOD

Property Plant & Equipment: Carrying amount: Beginning of the year: ( cost – acc.depreciation) Cost Accumulated depreciation Depreciation (One Year's including Pro rata for Disposals +Additions) Additions (include all costs of : installation etc as COST price!) Re-Evaluations. Disposals (Cost price – Accumulated depreciation ONLY ) Cost Accumulated Depreciation Carrying Amount: End of year: ( cost – acc.depreciation) Cost Accumulated Depreciation ( top : Accumulated. Depreciation at beginning of Year + PLUS +-middle : Depreciation –MINUSDisposals : their Accumulated Depreciation =EQUALS= THIS AMOUNT.)

Vehicles

Machinary

TOTAL

(Brackets)

(Brackets)

(Brackets)

--------------(Brackets) (Brackets)

(Brackets) (Brackets) (Brackets)

-----------(Brackets) (Brackets)

•

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165ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 13 STUDY GUIDEp263 | Chapter 13 Textbook p281 Topic C:Accountability for Current & Non-Current Assets

Chapter :13

HEADING :Other Non-Current Assets.

KEY CONCEPTS . Intangible assets . Amortisation . Other financial assets . Cash investments . Loans granted . Investments in shares . Ordinary shares . Investment income

Introduction: 1) assets chaharacteristics to be asset: a) under control of entity b) originate from circumstances in past c) hold future economic benefits for entity. d)

Intangible Assets: 1. 2.

3. 4.

5. 6.

7.

Gives Rights or Advantages to holder.often existence is uncertain-amount used get from as per general business practice for that asset class. Reputation/goodwill bought for an amount should get disclosed on balance sheet at that amount-but to measure and disclose a firms own reputation is sometimes more/(too) difficult. eg :Goodwill(also reputation)Computer software,brands,franchises,patents,models,licences. Historic Cost price includes :purchase price + all legal & other costs relating to purchase of. If developed self- all costs relating to development MUST be recorded accurately-if possibly could become part of an intangible asset cost price.-including the costs of developing a material /manufactured product –these 'costs' could also be an 'asset' –the 'development itself' LOSS- if project to start a intangible asset fails-all cost incurred are to be written off as a loss. If difficult determine value: either :Put as R1 ,have asset valued,or quantify advantages of byyourself & capitalise them.

AMORTISATION: of Intangible assets 1.

2. 3. 4.

AMORTISATION means depreciation for intangible assets. The economic life of intangible assets is not infinite-IT is seen by IAS38 as being 20 YEARS from date when asset is available for use.(one can rebut this-say otherwise if definite) Intangible assets are depreciated EXACTLY the SAME as NORMAl ASSETS Dr Amortisation (expense) –CONTRA- Cr Accumulated Amortisation. (asset-contra)

Other Financial Assets: 1) Fixed Investments :eg :show in BALANCE SHEET. a) Shares in listed/unlisted companies b) Loans granted c) Fixed deposits in banks. 2) Earnings from Fixed investments: :show in Income statement:

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166ACCOUNTING Notes ACN-101-M CHAPTER 1

3)

a) Dividends,Interest or Growth in monetary value(the last from inflation ,scarcity/collectors value Investments usually not subject to depreciation,but often do appreciate-so even if values fluctuate(eg : go down) it is NOT ever WRITTEN OFF -thus rule is : ONLY if obvious that value has devalued should it be written off :eg bank is bankrupt.

Cost Price of other Financial Assets: 1) Purchase price + all costs incurred in purchase eg:brokers fees,stamp duty.-are cost price of other financial assetssee normal assets chapter-EXACTLY the same methods used here,like: a simple trade for another asset is valued at valuation of other asset. 2) Stamp duty is a Tax which is paid by means of revenue stamps,and is imposed by law.

Classification of Other Assets: 1) Investment means- cash which is invested outside the entity. 2) Two types of investments: a) Current assets: i) eg a firm with cash from previous operating cycle to be used in next cycle, waiting for next cycle to start. (1) easily marketable & realisable eg:short term investments,marketable shares,stock & debentures. (2) Meant to be exchanged within 12 months. b) Non-current Assets: i) longer than 12 months-eg:property,long term loans!,mortgage loans!,shares etc.

Recording & disclosure of other financial assets. Cash Investments:

•

You can use the Cash Payments and Receipts Journal for all , or also the General Journal: If interest is received 6 mnthly-entries MUST be made every 6 mnths in books of entity to record the interest received. • a normal savings account is NOT a fixed deposit acc. and is ALLWAYS current because 12mnth 1) When Buying an Investment :eg fixed deposit : a) Cr Bank(pay for it ) – CONTRA- Dr Fixed Deposit :XYZ Bank (new Asset). 2) When you RECEIVE INTEREST on an Investment a) Re-invest it: i) Dr "Fixed Deposit: XYZ Bank" (more asset in) –CONTRA- "Interest Income" (nominal ) b) Take the cash :Dr 'Bank' (normal bank acc.) –CONTRA- "Interest Income"(nominal) •

Or If Cash is Not Reinvested then:see below only Journal.savings acc. is allways 'current'

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167ACCOUNTING Notes ACN-101-M CHAPTER 1

Loans Granted:

1) If entity grants loans varying from short to long term :they may be repaid by a) :Fixed Installments b) :Lump Sum at end of term. 2) Interest may be repaid atend of term or At fixed intervals(eg :yearly) 3) Interest may be calculated monthly or annually. 4) Interest may be debited to loan account or received in cash. Method: 1) Use C.Payments Journal. usually or also General Journal.(state interest rate in sundries/or other) 2) For the LOAN: a) Simply :Dr "Loan :Borrower name "acc.( as Debtor-investment) –CONTRA-Cr Bank (asset minus) 3) For the INTEREST income:You MUST split the main repayment & interest repayment if same time. a) Dr "Bank" ( Asset receipt) –CONTRA- Cr "Interest Income" account. Balance Sheet & Income Statement disclosure of loans given out :

• •

Under Non-Current assets as: 'INVESTMENTS' when still longer than 12 months. BUT: IN THE YEAR /12 mnths the loan is repayable –it becomes a "Trade & other receivables" under CURRENT ASSETS-(this in turn gets dissembled at very end bottom of Notes-T&O Rec.)-and not an "investment " nor noncurrent any more.

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168ACCOUNTING Notes ACN-101-M CHAPTER 1 Investments in Shares:

1)

Can happen to :expand (majority stake),just invest-dividends& growth,or diversifying(+marketing) 2) if bought on 1st of january- it counts as a full month!!!! 3) Dividends are the income from shares :Are either shown as a) NOTE: a % of the nominal value of the shares ,or as cents per share 4) DIVIDENDS MUST be recorded when they are declared, not when they are received. If Financial year end lies between them getting declared and getting received- they become :ACCRUED INCOME and recorded as an 'adjustment.' Method for buying/selling shares & dividend income. Buying shares: SIMPLE: Dr "Shares Investment:blue diamond" (asset bought) –CONTRA- Cr "Bank" ( amount paid for ) Dividend SIMPLE: same as loans given out Dr "Bank" (money received) –CONTRA- Cr "Dividend Income:" ( income-nominal ) EXAMPLE:BUYING & DIVIDENDS.

Selling shares 1) :BIG PROBLEM:COMPLETELY DIFFERENT accounting treatment here.:

2) 3)

can use CRJ for 1st 2 legs BUT G.J for last 2. This transaction has 4 legs :BUT if profit/loss = 0 leave out last 2 legs:

a) b)

C.R.J. :1&2 : Dr "bank"(cash receipt) –CONTRA- Cr "Share Investment:Blue diamond"(asset ) G.J. :3&4 :Cr "Profit on Sale of Shares: Income"( for loss Dr!!!) –CONTRA- Dr "Share Investment:Blue Diamond" (to explain the profit in the amount sold for –ie:for a loss it would be a Cr-the opposite!)you see - the amount put in share account is larger than the cost in the share account –if it is a profit-so must balance& close shares account with a -profit type income- transfer)

Disclosure in Fin.Stat. of shares and all Other Financial investments. 1) If investment in shares is in a subsidiary- they should get a group financial statement. 2) If investments should get revalued-they should be revalued at balance sheet date to be accurate.

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169ACCOUNTING Notes ACN-101-M CHAPTER 1 3)

The difference between listed and unlisted shares should be shown in balance sheet & Income statement : separate & named in both of them.

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ACCOUNTING NOTES ACN-101-M CHAPTER 14 STUDY GUIDEp277 | Chapter 14 Textbook p291 Topic C:Accountability for Current & Non-Current Liabilities

Chapter :14

HEADING :Current Liabilities.

KEY CONCEPTS . Trade creditors . Bills payable . Sundry current liabilities . Value added tax payable . Instalments payable on interest bearing borrowings . Accrued expenses . Provisions . Dividends payable . Profit share payable . Discount received

-14.1 Introduction: •

• • •

• •

A liability is a claim that another party has on the assets of an entity. less than 12 mnths current liability \\\\ more than 12 mnths non-current liability TIMING –matching concept – important concept in accounting-failure to record an obligation may result in incorrect operating result for the period. One of the most important functions of Adjustments is to record liabilities not yet recorded:eg:interest payable , unpaid wages .-the criterion is that it should result from a transaction in the past. obligations are vaued at historical cost for this module :but can also be valued at current cost,current value, or realisable value. Recorded in order of either-increasing liquidity (payable last listed first OR largest amounts first

-14.2 Trade Creditors: 1. As Normal –same as for Trade Debtors –remember discount & vat though –minus/plus! 2. 3.

Creditors Ledger –DAILY TRANSFER , Creditors Control account –MONTHLY TRANSFER. CREDITORS LEDGER MUST BE CHECKED & RECONCILED against creditors control account to ensure accuracy. – at every end month + also extra regularly . 4. For Discount :record name as "Bank & Discount" in the creditors control account,not just 'bank' if discount is also given- as the contra name in details.No need to make 2 entries,but you can if you want to. 5. Most entities keep creditors ledger due to impractiality of many creditor ledger accounts. 6. ALSO FIRST make a Creditors List from the Creditors ledger- to work from: Creditors List at 30 April 2005 Folio No Debtor Amount : R DL 5 xxxxx xxxx DL 8 xxxxxxx xxxxx TOTAL

-14.3Bills Payable 4. REMEMBER: First add ALL Interest charged extra to "CREDITORS" Before transferring it all to the 5.

bills payable account. So : Dr (to Delete)creditors with interest + original amount & : Cr (add first)creditors with interest as well. A 60 d/d bill means it is payable 60 days from d.ate it was d.rawn.

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171ACCOUNTING Notes ACN-101-M CHAPTER 1

6.

7. 8. 9.

Extra Costs ,when the bill gets cancelled from not paying the Bill, do not first go to Bill Account, THEY go straight to (1)Creditors & (2)Costs.(same as above sort of) A renewed bills payable first get cancelled to creditors –THEN re-entered/started again. If Works exactly same as BILLS Receivable in Chapter 10/11.

ALLWAYS first put any paid with a Bills Payables. Sale in the 'Creditors' –even if Bill is from sale date itself., and ONLY THEN transfer it to the 'Bills Receivable' account AFTER. !!! 10. Use General journal for all transfers of Bills to Creditors and back. SJ is only for sale itself.

Sundry current Liabilities:

Current portion of Long term loan: • Eg: if any portion of loan is for next 12 months: eg R100 000 per year over 5 years=R500 000 then it must go to current liabilities. • Simply put this part as separate heading under current liabilities –and other part in Current Lia. VAT: •

Shown as a separate current liability in balance sheet :"SARS :Vat Payable"

Other Tax payable: • Also separate from others in current liabilities(also separate from vat) Accrued Expenses(arrears or accumulated obligations) • eg :late telephone or water& lights account- goes as "Accrued expenses" under current liabiliti Provisions • eg:Provision for bad debts • eg:Also "Provision for product GUARANTEE" account is another type.(if less 12 mnths –current or else if more -non-current)

Internal Control measures regarding creditors: •

timeous payment-for discount & reputation ; approval for credit ; separate responsibilities:payment one ,recording another. ; subsidiary ledger for many transactions ; the creditors ledger should be regularly reconciled with the statements from creditors.

Balance Sheet disclosure: • •

as normal: see below Recorded in order of either-increasing liquidity (payable last listed first OR largest amounts first

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172ACCOUNTING Notes ACN-101-M CHAPTER 1

Creditors Control and Creditors Ledger Reconcilliation. 1.

At the end of Month _All the accounts in Creditors ledger and also in Creditors Control Account must be balanced . 2. Next a List of all Creditors balances in the Creditors ledger must be drawn up. 3. If you have Dr and Cr balances given in a test : from the 'Creditors Ledger List of Balances' of accounts:subtract the dr from the cr to make a total up to use as the total in the first line of your reconcilliation of the creditors control & creditors ledger.-DO NOT IGNORE the dr balance because it was supposed to be transferred or something. 4. If they give question where :G.J. says that :certain accounts were transferred to the debtors ledger from the creditors ledger :You must add these to the CR side of the creditors control account if the G.J. entry is to be written up in 'creditors control' acc. - because the dr creditors have reduced the creditors control balance ,now if you take them out of the creditors section the amount must go BACK to CR side of creditors control. a. If they give a question with visa versa to above-ALSO ADD IT to creditors if it comes from debtors now and goes to creditors. i. If the balances are not equal- a Reconcilliation of the creditors journal must be drawn up. b. the following errors could be made: i. from book: . If information was omitted or was transferred incorrectly from the source document to the purchases journal both the creditors control account and the individual creditor's account will be affected by the mistake. ii. . If the information was entered correctly in the journal but a posting error was made to the creditors ledger, the individual creditor's account must be corrected and the creditors list must be adjusted to correct the error. iii. . If an adding mistake was made in one or more columns in the journals, the correction must only be made in the creditors control account. iv. . In this exercise the mistakes or omissions on the creditors' personal accounts were corrected on their accounts and a new list (adjusted list) that equalled the balance of the creditors control account was compiled at 30 September 20.2. v. other book: vi. . Error/s in posting to either the control account and/or to the creditors ledger, eg a posting to the debit side of an account instead of to the credit side, or transposition of figures (R123 instead of R231) vii. . Incorrect balancing of accounts viii. . Incorrect totalling of one or more columns in the journals ix. . Incorrect listing of a balance x. . Omission of a posting, where an entry in a journal (or the total column) was not posted to the ledger account 5. Remember :a Cr balance written as a dr balance means 2* the amount (double) is moved to the right side :so write in calc: 2 * xxx = R xxxx wrongly debited etc.(half extra one side+other half short other) A SIMPLE 'List of Creditors Balances' looks like this : 1. ALSO FIRST make a Creditors List from the Creditors ledger- to work from: Creditors List at 30 April 2005 Folio No Debtor Amount : R DL 5 xxxxx xxxx DL 8 xxxxxxx xxxxx TOTAL A reconcilliation looks like this :(this is a debtors on but they are the same)

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173ACCOUNTING Notes ACN-101-M CHAPTER 1 If:you must do a reconcilliation of both the creditors ledger & also the control account-then do 2 .. reconcilliations next to each other, and just put as the bottom total of each: "Top total reconciled& . .. adjusted" ,then write out next line :the reconciled total of cr. ledg. is equal to the reconciled total of ... the cr .control .. ... ... account (below from debtors ledger reconcilliation chapter10/11)

To:CORRECT MISTAKES: 1. To correct a mistake –you must either put a ledger account(if transferred directly from there or even back to there - as is the norm by a general journal entry) OR – a journal type details- eg:purchase returns(not the name of journal –the description eg cash receipts etc.

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174ACCOUNTING Notes ACN-101-M CHAPTER 1 2.

more methods: ........

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176ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M CHAPTER 15 STUDY GUIDEp292 | Chapter 15 Textbook p309 Topic C:Accountability for Current & Non-Current Liabilities

Chapter :15

HEADING :Non-Current Liabilities.

KEY CONCEPTS . Non-current liabilities . Long term . Mortgage bond . Debenture . Registrar of Deeds . Insured by . Disclosure . Interest-bearing borrowings

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177ACCOUNTING Notes ACN-101-M CHAPTER 1 -15.1 Introduction: 1. 2. 3. 4.

A non-current liability is a liability payable after 12 months.An Entity usually provides security for this type of loan. Represent :obligations from past events-Not future events(eg not a proposed future salary) Need not be legally enforceable to be included in the balance sheet as n-c liabilities. eg : installment sale, debentures ,long–term loans,mortgage loans. On balance sheet:Grouped in order of increasing liquidity-those payable last are listed first.

5. -15.2 Recording a Non-Current liability in the Books and Financial Statments. •

In this course:long term loans, mortgage bonds, and debentures ONLY

-i-Long term loans & Mortgage Bonds: -a-Mortgage bond:

1. 2.

3. 4. 5.

6. 7.

A mortgage bond is : a long term loan secured by fixed property.This Bond or security is registered at the registrar of deeds office. The registration is known as a mortgage and the loan is known as a 'mortgage bond'. Mortgager: person whose property is mortgaged. First bond-means person has first claim over any assets sold to pay the bond,second bond gets whats left etc,etc.If you want to sell property one cannot transfer it to the buyers name untill all money owed on mortgages has been paid . Bond gets sold –not handed over-only the part of money from the sale owed goes to eg:bank –not the land. The following MINIMUM INFO. IN FINANCIAL STATMENTS for a mortgage: a. Minimum details: i. The security. (fixed property etc.) ii. The due date. iii. The amounts of installments. iv. The interest rate. eg: @ 12% pa. b. If preferred , only the amount owed can be shown on balance sheet and additional details : By means of a Note to statements c. For Current liabilities heading :show separately in notes:if due in the following 12 months: i. The amount of interest due separate in notes & ii. Any installments due separate. d. Notes usually state what portion of amount + interest is due as "Current Liabilities" & thus transferred to that. Income statement ONLY SHOWS INTEREST CHARGES-NOT Capital REPAYMENTS!!!!!!! METHOD: a. Use the CPJ for bank payments and the G.J to record the morgage itself 's transactions. b. Remember:CASH & MORGAGE are SEPARATE inthe LAND Account: show cash portion separate to the morgage portion!!!!.ie:1Bank and 2Morgage c. Remember interest is separate to morgage completely and normally paid yearly (separate)

NOTES TO THE STATEMENTS:(at bottom) (8)Mortgage bonds consist of: The long term obligation due to a mortgage bond :Refer to note 3 .for details: The mortgage bond is for 500 000 repayable over a period of 4 years in installments of R128 000 per annum., Interest at 4 % per annum is levied on Outstanding capital and is also payable annually in addition to installment. Outstanding liability = 500 000. Less: Transferred to Current Liabilities: =128 000 384 000

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178ACCOUNTING Notes ACN-101-M CHAPTER 1

a

Debentures: 1) Debentures :are a loan by a company from others . a) They differ from ordinary liabilities in that they are offered to the public with a TITLE DEED and with a TRUTEE is who is appointed to look after their interests. b) Debentures are usually secured. c) They are subject to contractually stated conditions. d) Normally sold in units of R100 e) The Capital sum normally paid on expiry of due date ,AND interest is paid on them periodicly. f) Differ from share capital as follows:Do Not ensure holder of a vote,are redeemable at certain price & certain way & have a FIXED interest obligation. g) LAW:in terms of law it is a debt of the company as per contract conditions.

Method:

1) Details of following MUST be shown on FINANCIAL STATEMENTS for debenture: a) Date redeemable b) Price redeemable c) Interest Rate & how payable d) Security Provided. 2) Use CRJ for :"Application for debentures" receipts & CPJ for 'reinbursements' for the same.

a) b) c)

G.J. used for transfer from "Application" to "Debentures" & also for ALL :INTEREST payments. Inter est HAS NO EFFECT AT ALL ever on the Debenture account-ONLY to INTEREST ACCOUNT.

Interest goes from Bank / or Creditors control / or Accrued Expenses to "Interest:Debentures:Expense" Account. d) If Interest only Payable in middle next fin year- the portion from this fin year must be (xxMonths / 12 mnths * total annual interest amount) Credited to "ACCRUED INCOME" and Debited to "Interest:Debentures:Expense" account& go to income statement.!!!!! FOR BELOW: ALSO remember Tricky interest/accrued interest accounts –see above 3 points in bold!

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ACCOUNTING NOTES ACN-101-M CHAPTER 16 STUDY GUIDEp 301 | Chapter 16 Textbook p 319 Topic C:Accounting Reporting

Chapter :16

HEADING : Financial statements of a Sole Proprietor:

Key concepts . Sole proprietor/sole trader . Equity . Capital . Net profit/loss . Drawings . Additional investment

Introduction: • •

IAS 1(Ac101) is all about fin statments. In addition to normal Fin. Statements; one can optionally have:

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181ACCOUNTING Notes ACN-101-M CHAPTER 1

• • •

a. Statement of added value b. Environmental report c. Financial overview of the entities activities. Simplest form of business ownership= Sole Proprietor. No legislation stating how it should be established(serious stuff)-just need capitaleg:asset/cash Equity= capital+ profit/loss- drawings.

Overall Considerations 2.

Apart from the :"recognition of assets" / and "recognition of liabilities"SEE CHAPTER 1/2", the following aspects arte to be taken into consideration. a. Fair Presentation: i. of fin position(balance sh),fin performance/result(income stat),cash flow(cash flow stat, b. Accounting policy i. Appears in Gaap-& ALSO based on entities own policies 1. Must At least:Measurement basis used to compile the Fin .Statments. 2. And :Whether prepared according to GAAP or not.(both 1& 2 in same sentence!!!!!!) 3. Recognition of income(revenue is recognised as net sales/service fees etc) 4. Recognition of depreciation/amortisation of tangible & intangible assets. 5. research & development costs 6. provisions 7. employee benefit cost 8. definition of cash & cash equivalents c. d. Going concern : –entity continue exist foreseeable future

e. f. g. h.

i.

Accrual basis of accounting :

-when transactions occour,not when recorded.

Consistency of presentation :

-same method used one fin. period to next.

Materiality& Aggegation i. –displayed separately if considered by judgement to be material,otherwise aggregated with similar amounts.-sound judgement. Offsetting i. -Assets& liabilities And Also income & expense not offset against one another,exept where GAAP permits.-but then must consider disclosing in 'notes' ii. Creditor/ Debtor is only offset when with arrangement/permission of the creditor/debtor. Comparitive information. –For previous period must be shown,to compare trends/tendencies.

Establishment of a Sole Proprietorship: •

• •

Sole proprietor usually contributes capital: cash/motor vehicle etc.:Following entries Needed to start in books: Cash portion of capital normally recorded in the Cash Receipts Journal. Books for Owner Personally :would show just:"Investment in JB Television Enterprises".

•

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182ACCOUNTING Notes ACN-101-M CHAPTER 1

Further capital contributions would cause the ledger account to look like this:

Net Profit goes like this to the capital account from Profit& Loss account:

Drawings : DRAWINGS ARE RECORDED AT COST –directly from asset account:eg:Inventory account(perpetual system) without affecting the 'cost of sales' account,or from "Purchases"(periodic system) without affecting the "Sales Account" –and the drawings is an Equity account which is transferred to "Capital" at end of Year with "Closing Entries".:Donations gets treated the same exept it is an expense account and not an Equity account.

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183ACCOUNTING Notes ACN-101-M CHAPTER 1

Owners Equity:

Balance sheet: Following items should appear separately: 1. Property plant & equipment 2. intangible assets 3. investments 4. trade & other receivables 5. cash & cash equivalents 6. trade & other payables 7. provisions

Notes to the statements: a.

Accounting policy i. Appears in Gaap-& ALSO based on entities own policies 1. Must At least:Measurement basis used to compile the Fin .Statments. 2. And :Whether prepared according to GAAP or not.(both 1& 2 in same sentence!!!!!!) 3. Recognition of income(revenue is recognised as net sales/service fees etc) 4. Recognition of depreciation/amortisation of tangible & intangible assets. 5. research & development costs 6. provisions 7. employee benefit cost 8. definition of cash & cash equivalents

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184ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M

CHAPTER 17 STUDY GUIDEp 328 | Chapter 17 Textbook p 333 Topic C:Accounting Reporting

Chapter :17

HEADING : Non-Profit Organisations:

Key concepts . Receipts and payments statement . Income and expenditure statement . Trading statement . Balance sheet . Special funds . Nonexpendable special funds . Expendable special funds . Accumulated fund . Entrance fees . Membership fees

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185ACCOUNTING Notes ACN-101-M CHAPTER 1 Introduction: 1.

2. 3. 4.

5.

A Non-profit organisation :economic entity which has the legitimate goal of furthering certain interests in the community.-objective not distribute profits but use profits achieve stated goal. Membership acquired through paying membership fees-not same rights as shares in a company.-not entitled to distribution of profits.(normally clause in constitution that if entity is dissolved all assets go to a entity with similar objectives.) Funds from:donations,membership fees,fund raising projects,bequests,government subsidies. Under section 21 of companies act-61 of 1973- may register as a company not for gain. Must register for Vat if 'Taxable supplies' or Income/Revenue exeeds R300 000 ,or may register if below that and want to.

Organisational & Control Characteristics.: • •

•

Either voluntarily & unpaid by committee chosen by members or Paid managers etc in larger. Acc. records often incompleteo Smaller-treasurer likely to keep cash transaction record in a receipts & payments statement,using a single entry system.Here only control is bank reconcilliation. o If double entry system used- accrual basis used& normal acc. procedures followed.This means depreciation + adjustments are done ,trial balance extracted& normal financial statements prepared. o eg:university discloses more info. to enhance usefulness of fin.statements In principle however-no difference between accounts of trading entity & non-profit organisation.

Sources of finance for : 1. 2.

Membership acquired through paying first entrance fees, thereafter membership fees-not same rights as shares in a company.-not entitled to distribution of profits.(normally clause in constitution that if entity is dissolved all assets go to a entity with similar objectives.) Funds from:donations,membership fees,fund raising projects,bequests,government subsidies.

Accounting records: 1. 2.

Return on Capital not goal of – non-profit organisation- so EQUITY REPLACED by FUNDS. Profit is called a Surplus and Loss is called a Deficit- Added/ subtracted to Accumulated funds account. B.A.E of Non-Profit Organisations ASSETS = FUNDS + LIABILITIES. B.A.E of Non-Profit Organisations ASSETS = FUNDS + LIABILITIES. DIFFERENCE IN ACCOUNTS BETWEEN: NORMAL ENTITY Non- PROFIT ENTITY Capital Account Accumulated Funds Account Profit and Loss Account (Yr.End) Income and Expenditure Account Income Statement Income and Expenditure Statement DIFFERENCE IN TERMS Used Profit Surplus Loss Deficit Equity Funds Accounting Treatment of various Sources of Finance Capitalised: First :"Entrance fees Acc"/"Bank Acc." Entrance Fees End of Year Close-off to "Accumulated Funds Acc." Membership Fees Revenue (Budget / No.members=annual fees) Fees paid in Advance : to "Income Received in Advance(Membership fees)" Account" + 'Trade& Other Payables' MUST be written back out of 'in advance' acc. in new year back into "Membership fees" account as pay Fees in Arrears to "Accrued Income(Membership Fees)" Account.+'Trade & Other Receivables' But in new year rereverse to act as a Debtors Account

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186ACCOUNTING Notes ACN-101-M CHAPTER 1 Bad debts can be written off against "membership fees" acc as it being a debtor account-from the accrued expenses on the Dr side of it allways. Doantions & Bequests: 3.

Entrance fees:

a. b.

Capitalised normally–Ie:First go straight to "Entrance fees" account- then at Fin .Year End with:ClosingEntries/Procedure closed-off to "Accumulated Fund account" (like :Capital account). DO NOT GET ADDED TO REVENUE in 'Income and Expenditure Statement'

Membership fees:

c. d.

e.

f. g.

Annual Fee = Estimated Budget for Following Year / divided by / Number of members Some fees could be in arrears,some could be irrecoverable. "Membership fees :Income" account can act as a "debtors" account at same time as being income account.-if there are no "debtors' for members but is actually ONLY an INCOME account by GAAP.So— 1-you can write off bad debts against it if no (2)... following is true: -2-have already (from past fin . year end procedures)put fees in arrears on debit side –to act as a debtors.- BUT if a fin. year end has not passed& the very bad debts have been written up as accrued income - then you cannot write the bad debts off in this manner –nor in the books at all. Sometimes no debtors accounts kept for arrears members fees-so one ONLY uses adjustment accounts for arrears membership fees + fees paid in advance's at YEAR END ONLY. SOME Bad Debts( if already an accrued income in books) CAN get written off against the "Membership fees " account if there are no "debtors accounts" for members.

h. Only bad debts that have been moved to dr side from last year ,ie , as accrued incvome reversed in new year, can be written off as bad debts to cancel the dr (which would have been used to cancel any payment for last years stuff in the current year). i. "Membership Fees account" is empty at beginning of year:EXEPT FOR first entries are the adjustments transferred back :Arrears=Debtor as DR ----- AND Income in advance='Income' as CR for new yrs. income now showing . ALL Arrears Fees :

i. ii.

iii. iv. v.

get included in Fin. Stat. as income for the year(still owing – like a debtor)under "Trade& Other Payables" :BUT ONLY AT YEAR END. "Adj:Accrued Income" can also be called:"Membership fees in Arrears" !!!! No other arrears payments go to same adjustment acc. they must go to another Fees in arrears go to :"Adj:Accrued Income (Membership fees)" –CONTRA- "Membership Fees Income" account same as an adjustment " at year end –BUT MUST: MUST get REVERSED back into 'membership fees' account in new year (to accurately show income for new year)- on the DEBTORS SIDE if there are no Debtors accounts.-account acts as a debtors account at same time as an income account here.:do exact opposite to above procedure.

Fees paid in advance : vi. go to separate account –same as for Adjustments- the 'Income Received in Advance(membership fees)" account :Under "Trade & other Payables" on balance sheet.vii. "Adj: income received in advance(membership fees)" can also be called "Membership Fees Received in Advance" account. viii. No other advance payments go to same adjustment acc. they must go to another ix. 'Must first go to "Membership fees: Income" Acc. from'Bank' Acc. , ONLY then to "in advance" acc. AFTER by reversing -out of 'Membership Fees:Inc.' Acc x. MUST be reversed back out of 'in advance' acc. in new year and re-reversed back into "Membership account" to accurately show income for that year.

Income from Bar,Tuck Shop,Restaurant:

j. k. ACN-101-M

Gross profit –Not a Surplus- is Shown for "trading" only- in trading statement. All trading closed off to Trading account at year end procedures as normal

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187ACCOUNTING Notes ACN-101-M CHAPTER 1 l.

The Gross profit for : Each trading activity must be calculated separately.as:

i.

goes in income statement as calculation if any expenses which 'must' appear in inc& exp statement are involved eg:wages: these must be subtracted in the inc & exp stat . and while all other expenses come off in the Tading statemnt.- see example!!!!!! see calc . : Net Income /'Gross Profit'/(Expenses Incurred here in brackets. eg: 'wages') in inc&exp. statement. m. Otherwise all other expenses are subtracted as normal from all the Gross profits to show the Net Surplus for the year at bottom on the "Income & Expenditure Statement". (Net profit)

Donations and Bequests:

1. 2.

3.

Treated as REVENUE. : Dr bank –CONTRA- Cr donations received( income account) UNLESS: As an EXEPTION a 'special fund' is created from it –which must NOT be added to "accumulated funds"(old 'Capital account'), but goes to "Special Fund "account which is regarded as a 'type' of capitalisation:ALLWAYS utterly apart from other capitalisations though eg: if very large bequeathement from a testament or donation or conditional donation.

Receipts & Payments Statement: 1. AN: analysed & classified Statement of ONLY the Cash transactions .-cash actually out or in. 2. Smaller entities with only cash as assets need ONLY show this statement For Fin.Stats. at year end.meeting3. 4. 5. 6.

7. 8. 9.

BUT larger must show Balance sheet & Income & Expenditure Statement as well. T format or Narrative-vertical where all ACTUAL cash received on DR and all cash Paid on CR. Accrual principle not applied here:So Prepayments + Accrued amounts received or paid + Income received in advance All recorded here. All operational + capital nature (assets buy/sell) cash goes on here –no separate. Opening balance = cash on hand in bank at beginning & Closing Balance = cash on hand in bank at end of period. Disadvantages: -1-No fin. performance OR fin. position can be determined from this statement.,-2-only cash transactions recorded,-3-surplass/deficit cannot be determined,-4-includes cash from A/F/L & Inc/Exp accounts All-no distinction. ALL INVESTMENTS are cash payments=CR :even fixed deposits. ALL LOANS are cash receipts.

Income and Expenditure Statement: 1.

2. 3. 4. 5. 6.

ACN-101-M

Same as normal 'Income Statement' –also prepared according to GAAP-ias1(ac101) Determine surplus / deficit for a fin. year. All Income ONLY shown under

ONLY :heading :INCOME &

All Expenses ONLY shown under ONLY :heading :EXPENSES NOTE : MUST SUBTRACT / ADD all relevant accrued or pre-paid Income/Expenses for the period –AND RE-ADJUST THEM IN START OF NEW PERIOD. (see memb.fees) The Gross profit Breakdown for all Trading activities works as follows:

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188ACCOUNTING Notes ACN-101-M CHAPTER 1 7.

IN 'INCOME' SECTION:

a.

Gross Profit :'from xyz' =in this statement means no wages /similar expense still to be deducted in this statement- was already worked out in trading statement. b. 'Income from :xyz activity' 348.87 Gross Profit 389.44 Wages expense 40.43 .....means that an expense must still be deducted in this statement for some or .. other reason and it gets shown like this :method 2.-The main reason being that wages do not form part of gross profit and must be shown as a 'deduction' on this statement-not on the trading statement .

Trading Statement: 1. IF the scale warrants it :a separate trading statement can be prepared for each operational activity'.eg :for 2. 3. 4.

Tuck shop one ,for restaurant one ,for fun run one etc. Layout similar to Trading section (revenue+ cost of sales....+gross profit of a normal Income Statement. Closes off with gross profit NOT surplus/deficit because trading calc. done here . WAGES MUST NOT BE SUBTRACTED IN THE TRADING STATEMENT :The main reason being that wages DO NOT FORM PART OF GROSS PROFIT and must be shown as a 'separate deduction IN the Income PART' of THE: "Income and Expenditure Statement"(see section on "Inc.&Exp. Statement")- not on the trading statement.

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189ACCOUNTING Notes ACN-101-M CHAPTER 1

5.

Accumulated Fund Account 1. 2.

3.

The Capital Account is CALLED the 'Accumulated funds' account ,AND EQUITY is called "Funds" because: no owners=no equity The following go to the "Accumulated Fund account" (-old "capital" account) a. Any INITIAL DONATIONS made to begin organisation. b. Entrance Fees c. Surplus / Deficit for each period. d. "Special Funds" donated for "General Expenses" –separate investment account must be opened. Separate investment accounts must be opened for "Special Funds" donated for a special purpose :to be able to issue meaningful reports on the acquisition & utilization of funds.

Special Funds 1. Used like an "Income" and "Expense" account same entries style for Dr & Cr .- NOT like an 'ASSET' ACCOUNT!2.

3. 4.

5.

so for all assets bought(asset exchanges) FIRST move(REVERSE) to Accumulated funds account-and leave it alone there. Money can be set aside so not all the cash is spent on expenses of general nature :in a Special Fund.. A Special fund can also be established for a 'Legacy' or a 'Conditional donation' with special conditions attatched. When purpose of fund is Finished / finalised –it must be closed off to the "Accumulated Funds" account. FOR A RECEIPT :ALWAYS FIRST to normal bank,then only to "Investment account" Bank account, :ALSO for a PAYMENT :first from "Investment bank acc" to normal 'bank' acc–then ONLY PAYMENT MADE from here. (:unless stipulated otherwise in exercise instructions). a. RECEIPT: i. Dr bank(normal ) –CONTRA Cr "Special non-expendable : Star Fund." account.

ii. b.

Cr bank (normal)-CONTRA- Dr Investment Bank account (eg : fixed deposit )...move to investment account.

PAYMENT:

i.

c.

d.

Cr Investment Bank account-CONTRA- Dr Bank account (normal ).FIRST move to normal bank account ii. Cr "Accumulated Funds" account –CONTRA-Cr "Special non-expendable: Star Fund." account. FIRST Move to "Accumulated Funds" account(old 'Capital acc'.) as a new 'contribution' to 'Funds' (not called capital here) so for all assets bought(asset exchanges) FIRST move(REVERSE) to Accumulated funds account-and leave it alone there. iii. Cr bank(normal ) –CONTRA Dr "ASSET BOUGHT':eg:"Land & buildings" account Interest either back to same ledger account as double-up account if non-exp. , or to other income acc. if expendable. Remember to add accrued interest at year end (with contra as :"accrued income") AND REVERSE IT AT BEGIN NEW YEAR out of same account and out of contra : "accrued income"

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190ACCOUNTING Notes ACN-101-M CHAPTER 1 6.

7. 8.

If stipulated that interest MAY be used for "general expenses"-not only special ones- then the interest income goes to separate income account :eg:"Interest: Star Special Fund :income" account. and DOES GO to normal Income & expenditure account (old profit& loss account) & 'Income & Expenditure Statement' & part of "Surplus or deficit "etc etc. All interest not used, usually should be re-invested. "Income & Expenditure Account OR ..Statement :NO ENTRIES: Special Funds :the donations for them and the income from them and expenses paid from them- should NOT be reflected on the Income & Expenditure Account OR ..Statement .-BUT through the fund account itself.-this account ats as a MINI Fin. Statments all by itself, so no extra entries needed. a. USED AS : 'Expense' account. –(all expenses -'Bank' is –CONTRA-)

b. c. d. e.

Used as :'Income ' account

b.

Non-Expendable fund: May ONLY use Interest for a specific purpose.

Used as :Income & Expenditure Statement.(only this fin. stat.) Used as :Statement of Changes in Equities.

Used as:Accumulated Fund account.-is actually officially seen as 'capitalisation' ! ( old 'capital' account) because never goes as 'surplus' to here. f. Used as :Income & Expenditure account (profit & loss account) 9. Putting money in a special funds account is actually officially seen as 'capitalisation' of the funds-exept kept apart from: a. -"Accumulated Funds" account: .Special funds are normally accounted for separately from "Accumulated Funds" account .& "Funds'( old equity)EXEPT any asset bought from/through a special fund must be added/credited to the "accumulated fund " account-or any part of total money contributed toward asset from special fund . b. so for all assets bought(asset exchanges) FIRST move(REVERSE) to "Special Funds" account money used to Accumulated funds account-and leave it alone there as 'FUNDS' (same as in equity-cash type capital from an owner). 10. A separate investment (At the bank) bank account is normally opened for each special fund in which capital is deposited. 11. A Special Fund can be either of 2 types. a. Expendable Fund: May use Capital & Interest for specific purpose. i. Investments from these funds must be shown as separate items on the balance sheet-Cross References must be given. ii. CAPITAL &INTEREST-Separate on balance sheet under :"Special Funds:Expendable Funds"

i. ii. iii.

Investments from these funds must be shown as separate items on the balance sheet-Cross References must be given. CAPITAL -Separate on balance sheet under :"Special Funds:Non-Expendable Funds"

Any interest accrued ,where more than (excess to) expenses in year,IF not allowed to be used for anything(see other no.s above) gets shown ,in addition to the above, as an extra heading: "Special Fund :Expendable Funds" -SO 2 HEADINGS FOR 1 FUND. iv. If expenses exceed costs for fund-entity must find other means to pay for them-may not use capital portion at all. 12. AN ASSET bought from a special fund –MUST include note in Fin statements to show this transaction,BUT treated normally in balance sheet exactly same as all other assets.EXEPT any asset bought from a special fund must be credited to the "accumulated fund " account-or any part of total money contributed toward it .

13. NOTE: Accrued income: gets reversed from Cr side to Dr side in beginning of ANY NEW FINANCIAL YEAR BECAUSE at end of LAST year interest owed on account-went to "accrued income' account ('debtors type) and to Cr side of Special fund account(as a income) to reflect. EXAMPLE OF: A NON-EXPENDABLE SPECIAL FUND ACCOUNT:

Used like an "Income account"

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191ACCOUNTING Notes ACN-101-M CHAPTER 1

EXAMPLE OF: An EXPENDABLE SPECIAL FUND ACCOUNT:

Ignore contents here –just any old account example was used –because Same as any other . ... NOTHING Special- used like an "Income account"

account

FINANCIAL STATEMENTS -for SPECIALFUNDS Statement of changes in Equity:

a.

special funds each in own single separate column to 'accumulated funds' .

i.

ii.

headings for entries in special funds columns: 1. balance at beginning of year 2. Funds Invested /or Donations(in ) 3. 'Accrued Interest Income'/ or just 'Interest Income' 4. Funds used(out) headings for entries in accumulated funds section 1. balance at beginning of year(uses same entry as above section) 2. surplus for the year 3. entrance fees 4. Lapa built from donation.etc.

Balance Sheet 1.

All Special funds are shown under Accumulated funds on balance sheet –under 2 separate headings-one a. Non-expendable funds b. Expendable funds.(remember this includes interest from non-expendable funds under same name –one put '-capital' , other put '-interest' next to heading (see below).

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192ACCOUNTING Notes ACN-101-M CHAPTER 1

Notes to the statements; 1.

2.

normal notes + notes to disclose any assets purchased from special funds-now in accumulated funds. table for depreciation: Just add below the "additions" :as a breakdown:( otherwise all the same) a. from own funds b. from special fund:star fund (etc)

IF INTEREST FROM A NON-EXPENDABLE FUND – MAY BE USED FOR GENERAL EXPENSES:show like this:

TO REMEMBER:IN GENERAL:

1) There are 2 instances where one must reverse ADJUSTMENTS on the first day of the new year in these books: a) For MEMBERSHIP ACCOUNT: ACN-101-M

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193ACCOUNTING Notes ACN-101-M CHAPTER 1 i) Income received in advance gets reversed back in (to cr side) ii) Accrued income gets reversed from dr side to cr side/ +deleted out of "accrued income"(debtors)account iii) last years total cd/bd GOES TO :INCOME & EXPENDITURE ACCOUNT-and membership fees account is then EMPTY IN THE NEW YEAR ALLWAYS EVER!!!!! b) fOR SPECIAL FUNDS ACCOUNT: i) Accrued income: gets reversed from Cr side to Dr side in beginning of ANY NEW FINANCIAL YEAR BECAUSE at end of LAST year interest owed on accountwent to "accrued income' account ('debtors type) and to Cr side of Special fund account(as a income) to reflect. 2) Add all membership fees in arrears AS WELL AS SUBTRACT all fees paid in advance to get the total for Income & Expenditure statement for the year.

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194ACCOUNTING Notes ACN-101-M CHAPTER 1

ACCOUNTING NOTES ACN-101-M

CHAPTER 18 STUDY GUIDEp 356 | Chapter 18 Textbook p 361 Topic C:Accounting Reporting

Chapter :18

HEADING : INCOMPLETE RECORDS:

Key concepts . Incomplete records . Statement of assets and liabilities . Conversion to double entry system CONTENTS Key concepts 357 18.1 Introduction 357 18.2 Disadvantages of using incomplete records 357 18.2.1 Incompleteness 357 18.2.2 No record of non-current assets and non-current liabilities 357 18.2.3 No details of profits and/or losses 357 18.2.4 The final results are unreliable 357 18.3 Calculation of profit/loss from incomplete records 358 18.4 Conversion from a single entry into a double entry system 360 18.4.1 Where subsidiary journals are kept 360 18.4.2 Where minimal records are kept 361 18.5 Revision exercises and solutions 366 18.5.1 Revision exercise 1 366 18.5.2 Revision exercise 2 369 Self-assessment 373

18.1 Introduction: 1) Incomplete records can arise from:

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195ACCOUNTING Notes ACN-101-M CHAPTER 1 a)

b) 2)

Double ENTRY SYSTEM not used : eg: Not statuatory/ required by law: for a Sole proprietor to keep accounting records:only companies & close corporations : by the companies act & close corporations act : Therefore many sole proprietors keep minimal records-eg: just list of debtor& creditors etc: referred to as the "Single entry" accounting system. –leads to incomplete records. i) Need for proper double entry accounting records can arise when : (1) Apply for a loan, (2) tax purposes, (3) sell business. If Financial data :-1-Lost , -2-Destroyed by fire , -3-Stolen.

Two Methods possible to remedy situation: a) B.A.E. is used to calculate PROFIT / LOSS for a period. b) Also possible to prepare accounts and then fin. stat. from incomplete records.

18.2 Disadvantages of using incomplete records: 1) Incompleteness –only personal records,no impersonal transactions records. 2) No record of non-current assets & non-current liabilities 3) No details of profits and/or losses. 4) The final results are unreliable. –no reconcile to control accounts,no trial bal. possible either,

18.3 Calculation of Profits / Loss from incomplete records. 1) B.A.E. is used to calculate PROFIT /LOSS where accounting records inadequate. 2) THE WHOLE PROCESS IS DONE OVER A 1 YEAR/ PERIOD WHERE 2 DIFFERENT SETS OF ASSET/LIABILITY FIGURES ARE AVAILABLE 3) Profit/Loss is calculated by subtracting equity at begin & end of Fin. Period.THE equity is first calculated using BAE: E=A-L. 4) This very method is used by SARS to determine the income of taxpayers who have not kept proper accounting records. 5) Must compare equity at beginning of period with equity end of period-but must make provision for any drawings or owner contributions as well. :THE equity is then calculated using BAE: E=A-L. 6) TAKE NOTE OF THE SYSTEMATIC GROUPING (standardized headings used: eg Trade & Other Receivables etc) OF ITEMS WHICH IS WHICH IS ESSENTIAL TO G.A.A.P.(in the Statements of A & L)-vertabim as per textbook. 7) The following steps can be done to calculate the profit for the fin. year: i) Equity at the end of the period (before adjustments) ii) MINUS : Equity at the beginning of the period

iii) PLUS

:income not yet accounted for iv) MINUS :Expenses not yet accounted for v) PLUS :DRAWINGS vi) MINUS :Additional capital contributions vii) = ESTIMATED NET PROFIT/LOSS for the period. b) For obvious reason this method of calculating profit/loss is not very satisfactory and must only be used where inadequate accounting data is available. 8) Value of Assets & Liabilities determined as follows: Where no ledger accounts exist. a) Non-current assets : Refer to original purchase contracts.:for prices., b) Non-current assets: Start with value at beginning of period, +additions – disposals = value at end of period. c) Debtors : invoices,credit notes,debit notes,receipts. ALSO check for discounts allowed + bad debts. d) Cash & cash on hand:counting cash on hand,referring to bank statements,bank deposit books,cheque book counterfoils, e) non-current liabilities:original agreements, check remember repayments made +check if new loans incurred. f) Creditors: invoices,credit notes,debit notes,cheque book counterfoils,-compare to monthly statements received from creditors to verify correctness.

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196ACCOUNTING Notes ACN-101-M CHAPTER 1

5) STEP 1 a) STATEMENT OF ASSETS and LIABILITIES. Do No. 1 OF 2 of : b) (put a small calculation of equity at bottom/top) c) Compile 1 for beginning of period /and another 1 for end of period AFTER step 2.

2) STEP 2 a) Make a calculation to determine Capital / Equity of Statement of Assets and Liabilities# 2 ,and to fill all the other totals in it in with : simple but same as balance sheet format.(you could leave this step out really! –and substitute: (put a small calculation of equity at bottom/top) b) ) c) remember to minus depreciation ETC.in brackets before totals The final capital must be determined first: Assets R Furniture and fittings (less depreciation =10% * 16500= 1650 ) 14850 Inventory 9 600 Sundry debtors 11 200 Bank 3 000 Petty cash 400 total: 40 700 Liabilities (13 600) Loan: DJ Bank 5 000 Sundry creditors 8 600 Capital 27 100 In order to determine the estimated net profit for the year,drawings must first be subtracted: STEP 3: second Assets and Liabilities Statement d) Draw up a second Assets and Liabilities Statement for the END of Financial Period. to "Officially" show up capital/equity for calculation of profit later. e) (put a small calculation of equity at bottom/top)

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197ACCOUNTING Notes ACN-101-M CHAPTER 1

3)

STEP 4: Do the calculation for the Profit

a)

Do the calculation for the Profit at end of Financial year one by subtracting all drawings in the year from: (Equity 1 –Equity2).(depreciation has already been subtracted from equity 2!!!) - (minus) = + PLUS - (minus) =

Capital BEGINNING Fin period Capital END Fin period total Drawings Additional capital contributions ESTIMATED NET PROFIT for the year:

23700 (27100) 3400 2500 xxxx 4250

18.4 Conversion from a Single Entry into a Double Entry System •

Once steps below are completed,the balances on accounts are used to continue in a double entry sytem.Oneshould encourage client to use these balances and continue with using double entry system.

18.4.1 Where subsidiary journals are kept

Step 1 Prepare a statement of assets and liabilities at the beginning of the period (or use the closing statement of the previous period). STEP 2: "General Journal" ise conglomerate totals The "balances'' as shown in this statement are then journalised (general journal for all main generalised "totals" entries, other journals for all follow up single entries) and posted to the various general ledger accounts. This procedure opens the accounts in the general ledger in accordance with the double entry system. Step 2 : Start all other Subsidiary Journals -ise The next step is to prepare the various subsidiary journals as discussed in study unit 6. (general journal for all main generalised "totals" entries, other journals for all follow up single entries) The cash receipts, cash payments, purchases, purchases returns, sales, sales returns and any other subsidiary journals for example, bills receivable and bills payable, must be prepared. The necessary entries for rent, salaries, wages, sundry expenses, purchase or sale of assets, cash purchases and sales, etc. should be made in the cash journals.(do all journals for over '1 period' only-ie: like a journal for month eg: aug 2005–put : journal for period start of business june 2001 to 31 july 2005(new start of fin year/ or just new start of 'keeping books' .) Step 3: Debtors/Creditors Reconcilliation.(or at least a –"check up"- sort of) The individual debtors' and creditors' accounts should be checked carefully. Any mistakes should be corrected in the general journal. Step 4:Full Bank Reconcilliation. It is also essential to regularly do a bank reconciliation as well as at the end of the period. Step 5 :Post to Ledger The entries in the subsidiary journals can now be posted to the various ledger accounts. Step 6 :Month End Procedure :Balance accounts+ Trial balance + (Adjustments-accrued+prepayed etc.) Once satisfied that all the journals have been completed and that all postings have been made to the ledger accounts, the accounts must be balanced, and a trial balance prepared. Step 7 : prepare Closing Financial Statements for end No-books Period. Compile the financial statements as previously discussed in this study guide.

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198ACCOUNTING Notes ACN-101-M CHAPTER 1 18.4.2 Where minimal records are kept Because of the practical difficulties of constructing a proper set of books on the double-entry system from incomplete entries, it is sometimes better to start by preparing the income statement, statement of changes in equity and balance sheet. In the following year proper systematic books and accounts can be kept. The procedure is as follows: Step 1 :Make Assets& Liabilities (& calc.Capital )list up Beginning of Period.(preferably a Statement of Assets& Liabilities+ equity incl. Make a list of all assets and liabilities as at the beginning of the financial period. The final capital must be determined first: Assets R Furniture and fittings (less depreciation =10% * 16500= 1650 ) Inventory Sundry debtors . Bank Petty cash Liabilities Loan: DJ Bank Sundry creditors

14850 9 600 11 200 3 000 400 total: 40 700 (13 600) 5 000 8 600

Capital 27 100 In order to determine the estimated net profit for the year,drawings must first be subtracted:

Step 2 : Reconstruc :Ledger :BANK Account Reconstruct / Prepare a summary of the bank account for the year by using cheque counterfoils, deposit slips and bank statements as reference. Step 3 : Reconstruct :Ledger :Petty cash account – Estabish if float or petty cash in use :summrise all receipts& payments and determine all cash on hand as petty cash. Step 4 : Ascertain Assets& Liabilities Totals (NOT capital here )for END of period.(or make a list -can leave out this though) Ascertain the balances of the assets and liabilities at the end of the period.(Same as above (#1)method/ setout) Step 4 :CASH / CREDIT : Sales & Purchases and Debtors & Creditors Ledger + Control Accounts in one. The next step is to calculate the figures for purchases and sales. If no distinction can be made between cash and credit sales and purchases, the amounts can easily be calculated with the aid of the debtors and creditors control accounts- (i think : ie:PUT ALL CASH SALES+ DEBTOR SALES THROUGH THE DEBTORS CONTROL ACCOUNT). All money received with regard to sales of inventory must then be credited to the debtors control account. (This procedure is unnecessary where cash sales and receipts from debtors can be determined accurately.) Similarly, all payments for purchases of inventory are debited to the creditors control account. Items such as discounts received and allowed, purchases or sales returns, interest received and paid, R/D cheques and bills dishonoured, bad debts, transfers from debtors to creditors and vice versa must be correctly debited/credited in the appropriate control accounts. Step 4.1 : Write Bills Receivable/Payable : into debtors/credrs /by total of debtors/credrs or singly,+then write it out again

as a Cr. Careful attention must also be given to any bills receivable and bills payable. Bills receivable must be entered on the credit side of the debtors control account and bills payable on the debit side of the creditors control account.,after having entered them in here first,they are thus written out on opposite side to their respective "Bills Rec/Payable Accounts" ,but MUST first pass through "debtors/creditors"! Step 4.2 : Use balances b/d as Sales & Purchases . After provision has also been made in the control accounts for both opening and closing balances in respect of debtors and bills receivable, and of creditors and bills payable, these accounts can be balanced. The balancing figure on the debit side of the debtors control account then represents sales, and the balancing figure on the credit side of the creditors control account will represent purchases. Step 5 :Adjustments:for accruals & prepayments for income statement. Where accruals and prepayments exist for income and expenditure items, the amounts which must be disclosed in the income statement need to be calculated. -Accrued wages from previous fin year to this statement must be written OUT OF this years wages "totals" by bringing in on the OPPOSITE ( Cr side ,NOT "DR expense" ) side to which it would have been last year-even if nothing/anything done last year at all,just to get this years totals right for 'MATCHING PRINCIPLE'. Step 6 :Post all the other items to the ledger accounts + Trial balance. -Major conglomerate totals posted from general journal, but other subsidiary journals can also be used for recurrent/ +more accurate figures.

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199ACCOUNTING Notes ACN-101-M CHAPTER 1 Step 6 :Financial Statements. All the required information is now available and the financial statements can be prepared -start with the income statement ,then statement of changes in equity,and end with the balance sheet –no balance sheets/or "Statements of assets and liabilities" done at all till now .

TO REMEMBER:

3.

Creditors control:SPECIAL PROBLEM (basicly problem is about:-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side) a. Discount Received (SPECIAL PROBLEM)(ONLY funny -odd side = TO DR side - NOT cr)

i.

b.

goes to Debit Side to end up showing up in Cr side "purchases" worked out total later when it is calculated : ( to get "total purchases amount" –ie :IT WAS deducted-Now add it to total ON Dr SIDE TO GET the increase in the "original" PURCHASES total on the CR side you are looking for ,since discount was only received when the payment was made to creditors weeks later,not at date of PURCHASES when you work it out later- YOU ADD IT TO DR TO GET CR PURCHASES TOTAL-NOT TO CR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD –IT WILL APPEAR NOW ON CR SIDE BY ITSELF )-Although it also still goes to income statement as a "Other Income" Bills Payable :

i. ii. c.

Include all "paid" bills payable as Dr (like any payment of creditors) Include all normal bills (still) payable as creditors-no separation yet!

Refunds from creditors in respect of overpayments -already received: SPECIAL PROBLEM :

i.

d.

Goes to Cr side to reduce "purchases worked out afterwards balancing figure" before it is/gets calculated. 'Interest income' paid on creditors accounts- SPECIAL PROBLEM :

1.

4.

Put on Cr side to reflect as a part of total creditors-ie it also reduces "purchases" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total creditors and total payment payed or one of the two} since it was recorded earlier. (included as paid out! –now we must reduce "purchases" balance ) 2. If interest income is still to be added to "creditors "-ie completely left out till now somehow-see no.(f) below-last no. this part. e. If ANYTHING is still to be added to "creditors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE CR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'creditors') and below(as balance :b/d total) to achieve correct "Total Purchases Amount " etc. Debtors Control: SPECIAL PROBLEM (Some points below)(basicly:problem is about-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side) i. Dishonoured Bills receivable + Noting charges: 1. To Dr side as a normal re-addition to debtors control after a 'dishonouring' ii. R/D cheques 1. To Dr side as a re-addition to the debtors control( again added due to r/d)

iii.

iv. v. vi.

ACN-101-M

'Interest income' collected on debtors accounts- SPECIAL PROBLEM : 1. Put on Dr side to reflect as a part of total debtors-ie it also reduces "sales" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total debtors and totall payment received or one of the two} since it was recorded earlier.charged out! 2. If interest income is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts to achieve correct "Total Sales Amount " etc. Bill receivable discounted: 1. To Cr side as a "payment already received " Discount ALLOWED (ONLY funny -odd side=TO Opposite side=CR side - NOT dr) goes to Credit Side to end up showing up in Dr side "sales" worked out total later when it is calculated : ( to get "total sales amount" –ie :IT WAS deducted-Now add it to total ON Cr SIDE TO GET the increase in the "original" SALES total on the DR side you are looking for ,since discount was only allowed when the payment was received from debtors weeks later,not at date of SALES when you work it out later- YOU ADD IT TO CR TO GET DR SALES TOTAL-NOT TO DR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD have–IT WILL APPEAR NOW ON CR SIDE BY ITSELF by 'mathematical cancellation' Special trick to get itto work out like this –could

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200ACCOUNTING Notes ACN-101-M CHAPTER 1

vii.

viii.

also have been added straight to dr side and ALSO to worked out at end balancing figure then to then all = "Sales" ,this is easier way!!! )-Although it also still goes to Income statement as a "Distribution and Other Expenses" If ANYTHING : 1. is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'debtors') and below(as balance :b/d total) to achieve correct "Total Sales Amount " etc. Bad Debts:SPECIAL PROBLEM

1.

5.

Bad debts go to CR side to "mathematicly increase" Dr side "Sales total" when one calculates it later. LOANS:remember to check if loans PAID amount is DIFFERENT to loans ORIGINAL VALUE: to calculate the interest for "FINANCE CHARGES" in the Income Statement.!!!!!

6.

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

SHORTENED Notes:ch 18

Shortened Notes ch 18:

18.3 Calculation of Profits / Loss from incomplete records. STEP 1

b)

STATEMENT OF ASSETS and LIABILITIES. Do No. 1 OF 2 of : c) (put a small calculation of equity at bottom/top)

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201ACCOUNTING Notes ACN-101-M CHAPTER 1

STEP 2 Make a calculation to determine Capital / Equity of Statement of Assets and Liabilities# 2 ,and to fill in all the other totals a) remember to minus depreciation ETC.in brackets

b)

CALCULATE totals to be calculated –could even make a whole list of all A+E+L totals up. (you could leave out this step and put a small calculation of equity at bottom/top of next step)

STEP 3: second Assets and Liabilities Statement for end of period to officially show up capital etc. a) (put a small calculation of equity at bottom/top) STEP 4: Do the calculation for the Profit :ADD ALL Drawings ,& MINUS all CONTRIBUTIONS.=Net profit for year

18.4 Conversion from a Single Entry into a Double Entry System 18.4.1 Where subsidiary journals are kept

Step 1 Prepare Statement of Assets & Liabilities at beginning of period.(or use the closing statement of the previous period). STEP 2: "General Journal" ise conglomerate totals opens the accounts in the general ledger in accordance with the double entry system. Step 2 : Start all other Subsidiary Journals -ise The next step is to prepare the various subsidiary journals as discussed in study unit 6. (general journal for all main generalised "totals" entries, other journals for all follow up single entries) The cash receipts, cash payments, purchases, purchases returns, sales, sales returns and any other subsidiary journals for example, bills receivable and bills payable, must be prepared. The necessary entries for rent, salaries, wages, sundry expenses, purchase or sale of assets, cash purchases and sales, etc. should be made in the cash journals.(do all journals for over '1 period' only-ie: like a journal for month eg: aug 2005–put : journal for period start of business june 2001 to 31 july 2005(new start of fin year/ or just new start of 'keeping books' .) Step 3: Debtors/Creditors Reconcilliation.(or at least a –"check up"- sort of) The individual debtors' and creditors' accounts should be checked carefully. Any mistakes should be corrected in the general journal. Step 4:Full Bank Reconcilliation. It is also essential to regularly do a bank reconciliation as well as at the end of the period. Step 5 :Post to Ledger The entries in the subsidiary journals can now be posted to the various ledger accounts. Step 6 :Month End Procedure :Balance accounts+ Trial balance + (Adjustments-accrued+prepayed etc.) Once satisfied that all the journals have been completed and that all postings have been made to the ledger accounts, the accounts must be balanced, and a trial balance prepared. Step 7 : prepare Closing Financial Statements for end No-books Period. Compile the financial statements as previously discussed in this study guide.

18.4.2 Where minimal records are kept

Step 1 :Make Assets& Liabilities (& calc.Capital )list up Beginning of Period.(preferably a Statement of Assets& Liabilities+ equity incl. Make a list of all assets and liabilities as at the beginning of the financial period. The final capital must be determined first:

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202ACCOUNTING Notes ACN-101-M CHAPTER 1 Assets R Furniture and fittings (less depreciation =10% * 16500= 1650 ) Inventory Sundry debtors . Bank Petty cash Liabilities Loan: DJ Bank Sundry creditors

14850 9 600 11 200 3 000 400 total: 40 700 (13 600) 5 000 8 600

Capital 27 100 In order to determine the estimated net profit for the year,drawings must first be subtracted:

Step 2 : Reconstruc :Ledger :BANK Account Reconstruct / Prepare a summary of the bank account for the year by using cheque counterfoils, deposit slips and bank statements as reference. Step 3 : Reconstruct :Ledger :Petty cash account – Estabish if float or petty cash in use :summrise all receipts& payments and determine all cash on hand as petty cash. Step 4 :CASH / CREDIT : Sales & Purchases and Debtors & Creditors Ledger + Control Accounts in one. Step 4.2 : Use balances b/d as Sales & Purchases . After provision has also been made in the control accounts for both opening and closing balances in respect of debtors and bills receivable, and of creditors and bills payable, these accounts can be balanced. The balancing figure on the debit side of the debtors control account then represents sales, and the balancing figure on the credit side of the creditors control account will represent purchases. Step 5 :Adjustments:for accruals & prepayments for income statement. Step 6 :Post all the other items to the ledger accounts + Trial balance. if asked for. Step 6 :Financial Statements.-No second list of assets & liabilities is done because the second equity total is worked out in the Statement of changes in equity: Only equity at start is needed!!! : +profit + contributions – drawings = answer!!

1.

2.

Creditors control:SPECIAL PROBLEM (basicly problem is about:-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side) a. Discount Received (SPECIAL PROBLEM)(ONLY funny -odd side = TO DR side - NOT cr) i. goes to Debit Side to end up showing up in Cr side "purchases" worked out total later when it is calculated : ( to get "total purchases amount" –ie :IT WAS deducted-Now add it to total ON Dr SIDE TO GET the increase in the "original" PURCHASES total on the CR side you are looking for ,since discount was only received when the payment was made to creditors weeks later,not at date of PURCHASES when you work it out later- YOU ADD IT TO DR TO GET CR PURCHASES TOTAL-NOT TO CR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD –IT WILL APPEAR NOW ON CR SIDE BY ITSELF )-Although it also still goes to income statement as a "Other Income" b. Bills Payable : i. Include all "paid" bills payable as Dr (like any payment of creditors) ii. Include all normal bills (still) payable as creditors-no separation yet! c. Refunds from creditors in respect of overpayments -already received: SPECIAL PROBLEM : i. Goes to Cr side to reduce "purchases worked out afterwards balancing figure" before it is/gets calculated. d. 'Interest income' paid on creditors accounts- SPECIAL PROBLEM : 1. Put on Cr side to reflect as a part of total creditors-ie it also reduces "purchases" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total creditors and total payment payed or one of the two} since it was recorded earlier. (included as paid out! –now we must reduce "purchases" balance ) 2. If interest income is still to be added to "creditors "-ie completely left out till now somehow-see no.(f) below-last no. this part. e. If ANYTHING is still to be added to "creditors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE CR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'creditors') and below(as balance :b/d total) to achieve correct "Total Purchases Amount " etc. Debtors Control: SPECIAL PROBLEM (Some points below)(basicly:problem is about-to increase "Sales" total : on Cr side(opposite) –to decrease "Sales" total :on Dr side(same side)

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203ACCOUNTING Notes ACN-101-M CHAPTER 1 i.

3.

Dishonoured Bills receivable + Noting charges: 1. To Dr side as a normal re-addition to debtors control after a 'dishonouring' ii. R/D cheques 1. To Dr side as a re-addition to the debtors control( again added due to r/d) iii. 'Interest income' collected on debtors accounts- SPECIAL PROBLEM : 1. Put on Dr side to reflect as a part of total debtors-ie it also reduces "sales" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total debtors and totall payment received or one of the two} since it was recorded earlier.charged out! 2. If interest income is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts to achieve correct "Total Sales Amount " etc. iv. Bill receivable discounted: 1. To Cr side as a "payment already received " v. Discount ALLOWED (ONLY funny -odd side=TO Opposite side=CR side - NOT dr) vi. goes to Credit Side to end up showing up in Dr side "sales" worked out total later when it is calculated : ( to get "total sales amount" –ie :IT WAS deducted-Now add it to total ON Cr SIDE TO GET the increase in the "original" SALES total on the DR side you are looking for ,since discount was only allowed when the payment was received from debtors weeks later,not at date of SALES when you work it out later- YOU ADD IT TO CR TO GET DR SALES TOTAL-NOT TO DR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD have–IT WILL APPEAR NOW ON CR SIDE BY ITSELF by 'mathematical cancellation' Special trick to get itto work out like this –could also have been added straight to dr side and ALSO to worked out at end balancing figure then to then all = "Sales" ,this is easier way!!! )-Although it also still goes to Income statement as a "Distribution and Other Expenses" vii. If ANYTHING : 1. is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'debtors') and below(as balance :b/d total) to achieve correct "Total Sales Amount " etc. viii. Bad Debts:SPECIAL PROBLEM 1. Bad debts go to CR side to "mathematicly increase" Dr side "Sales total" when one calculates it later. LOANS:remember to check if loans PAID amount is DIFFERENT to loans ORIGINAL VALUE: to calculate the interest for "FINANCE CHARGES" in the Income Statement.!!!!!

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204ACCOUNTING Notes ACN-101-M CHAPTER 1

Shortened notes ch 1- 18 :INCOME EXPENSE

CREDIT DEBIT

ASSET DEBIT LIABILITY CREDIT EQUITY CREDIT Ch1-6: all sales/purchases on credit terms of assets etc that are non-operational merchandise go to sundries –NOT SALES. CH 6-VAT:

• • •

vat on sales from past is :Vat inclusive amount * 14/114

NOT 14/100.!!!!!!!!

Vat owed to you by sars is a dr on vat output account. THE TWO DIFFERENT TREATMENTS for VAT reversals:  For discounts:



•

Dr input for 'opposite' delete from Output vat- for a discount on a Credit Sale for early payment(in Cash Receipts Journal now)-to delete from the output vat already recorded in Sales journal- just add to normal side (Dr) of Vat Input. (+visa versa for discounts on "purchases"){ because you probly already paid to /received from SARS the applicable vat by the time the discount happens so you claim it back/or pay it back – like this.

•

Also for bad debts:use same opposite entry:because you probly already paid SARS the applicable vat by the time the bad debt happens so you claim it back instead of "subtracting from Output vat".Thus one just puts it in Dr side of : " vat input " to reverse the original " Cr to vat output at time of sale".

For Returns :Cr the VAT Input to delete from an Input vat for a purchase return (+visa versa for sales return)

CH 7-Adjustments:

•

For exam:if they give a creditor/debtor and sale/purchase is before month end or even on last day of monthDo not send to adjustments ;accrued expenses/income –it goes straight to creditors or debtors-as per exam

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205ACCOUNTING Notes ACN-101-M CHAPTER 1 paper:ONLY AFTER MONTH END or if eg:interest not due untill next year some time etc.:ie cannot put in creditors because you do not supposed to pay it yet!!!! ch 9 Closing off procedures Closing Off TO : Trading Account GOLDEN RULE The trading account, being also a nominal account, is closed off to the profit and loss account. (See the schematic representation.)=result of tading account is GROSS PROFIT • Trading account never gets "balance c/d or b/d ---only ever gets closed-off to the Profit &Loss account.(balance never goes below double lines!!!-only in Capital account at end of yearEVER)

• •

• •

•

In acc. terms Gross profit=Sales(at selling price)- [Cost price of goods sold :{ Opening inventory+Purchases(ALL AT COST PRICE) – Closing inventory} ] -Purchasing costs(import duties/assembly costs/freight in/) Closing off Inventory :is valued at the lower of -1-historical cost or //// -2-market price.It is recorded in books by General journal entry and Inventory is an Asset.(remains as a balance sheet account after nominals closedonly the opening inventory is 'deleted'completely to trading account as Expense for profit calc.. The Gross Profit on the Trading account is only obtained when the 'Balance' is determined (and b/d..c/d..) on the Trading account. Bad debts+Discount allowed +Discount reveived NOT for Trading account only profit &Loss

For the below GENERAL Journal procedure:to do all entries in Journal at once instead of separately-one must put all the accounts exept the "trading or profit/loss" on the OPPOSITE side to from where they "Come from" in ledger,,,,,and the "trading and profit &loss "on the side where it will balance these others out to ZERO (in this journal write-up).But of course IN THE trading/pr&loss acc. amount goes on same side as from where ORIGINALLY came.-(so: -1-where it balances& on -2-side opposite to came from)

•

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206ACCOUNTING Notes ACN-101-M CHAPTER 1 Closing off TO : Profit and loss accounts • •

Bad debts+Discount allowed +Discount reveived NOT for Trading account only profit &Loss To the Pr& Loss Acc GOES: o The Gross Profit/(or just Revenue for the Service Entity) o All Business expenditure o ALL Other Income(eg:Discount received+Interest charged+Rent etc.)

Closing off TO Capital Account • • •

See page 138 s for good explanation. NOTES

Notes to remember: • FOR PURCHASES RETURNS:only the cost price-excluding any vat or discount –off the inventory account!!! • For sales RETURNS –only the COST PRICE :ie :returns price –MINUS- profit = cost ------goes off the cost of sales account as a cr = (decrease the expense account) AND ONLY COST price goes back to the inventory account as a dr(more asset). • remember gross profit only ever comes from the trading account- ever only –never from any other-ie not profit & loss OR capital ever at all!!! Perpetual inventory system:

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207ACCOUNTING Notes ACN-101-M CHAPTER 1

Periodic inventory system

For Inventory –at closing transfer –firstBEFORE YOU TRANSFER this YEARS closing inventory to the trading account-FIRST TRANSFER the OPENING INVENTORY (from last year) OUT/delete from the inventory account and into the DR side of the trading account to subtract off the 'cr closing inventory'. Cr :Inventory account(delete asset) –CONTRA-Dr Trading account (to become a minus to the closing inventory) Chapter:9-Bank Recons & Petty cash SHORT SUMMARY before Full Main Explanation of: METHOD of the BANK RECONCILLIATION PROCEDURE: 3) Compare Bank Statement with Cash Journals (for CURRENT MONTH)

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208ACCOUNTING Notes ACN-101-M CHAPTER 1 :In Cash Receipts & Payments Journal: i) Tick off CREDIT SIDE of Bank Statement and 'Bank column of Cash Receipts Journal.' ii) THEN tick off DEBIT SIDE of Bank Statement and 'Bank Column' of Cash Payments Journal." iii) NOW Move all things missing in CRJ/CPJ into these two books and Close them Off to the "Bank Account" (eg: Bank charges,Interest Charges/;Payment,Direct deposits& electronic receipts,Electronic payments,R/D Cheques)iv) NOW only can the "Ledger Bank account" be "balanced & cd/bd for the month" end ,THEN only can one start the Bank Reconcilliation Statement & Checkup :see next. 4) NEXT Compare Bank Statement with Last Months Bank RECONCILLIATION Statement. a) First Tick off all items on last months Recon. AND the Current Bank Statement-BOTH of -ALL TICKS. All items on LAST MONTHS Statement BUT NOT reflecting on THIS MONTHS Statement yet, must be "carried forward" to this months statement FIRST. b) Now Complete The whole bank Recon Process- (1) Bank Recon &any (2)'Writing Back' of Cheques required. :see following detailed explanation for all. To remember:add this: check for following odd/special difficult cases.

•

a r/d cheque that is replaced only needs a single entry with no amounts in the CPJ/CRJ ONLY to say –replaced by cheque 597 etc. from you or to you –any of two.BOTH cases will go to recon.!(unless still processed by bank in same month) –one as a payment not yet processed, other as a r/d cheque –"replaced by cheque no76" (deposit not yet credited)

•

For bank-recon last month tick off to –bank statement this month :only one ODD problem:if re-issued r/d cheque owed to you:this will not be ticked on old recon(different number now) and must just check first if any amounts from old recon to be transferred to new recon are not maybe a re-issued cheque that DID infact APPEAR on BANK STATEMENT and is SUPPOSED to be ticked off. check for "unpaid cheques " as 'details' / on the bank statement –must be reversed !!---Aslo check for 'error correction' on bank statem. check for date STALE cheques .!!!!

• •

• • •

e)

check for : if on bank statement –a cheque with different amount to that in cash journals BUT SAME cheque number, then you must check for error-AND JUST PUT DIFFERENCE on the bank recon –NOT rewrite cheque or any thing. bills receivable : + some Cr bnk state. entry means someone put money directly into your account to pay for a bills receivable to you/or part of it. check for errors/ or error WRITTEN BACK CHEQUES:( FROM OTHERS) If insufficient funds or if other persons cheque is Stale etc.,the cheque can be written back:NOT go Recon. i) Do OPPOSITE entry in C. Payments J. to cancel C. receipts J.:The Exact Opposite no extra. ii) Bank Discount +(Disc.Vat.-)CONTRA to Debtors Control( there is no NORMAL vat entries here-only "discount VAT" ,vat has already been recorded and just remains the same(just back to debtors with payment) iii) If : Got Debtors Control account: ONLY in CPJ (1) In CPJ: Amount + ADD Discount allowed = Back to Debtors Control (& D.L.)

(2) In CPJ:Discount goes to Discount ALLOWED column-as a reverse-NOT discount received(3) In CPJ:???????? Vat from Discount (previously reversed by adding to vat input as receivers share of Disc.) gets re-reversed by adding to Vat Output again as CR .- CONTRA – Dr :Debtors Control ????????? (4) If customer has no debtors account- open a new one for him. iv) If: NOT got debtors control column: In CPJ + GENERAL JOURNAL. (1) In CPJ: SUNDRIES :Amount ONLY , not add disc.= Back to Debtors Control (&D.L.)

(2) In General Journal :Discount (and any Interest same way) –(less/without Vat taken off

f)

before )- goes to Discount ALLOWED account(CR to reverse DR expense)-as a reverse-NOT to 'discount received' - CONTRA - DR (add again) to 'Debtors Cntrl.'+'Debtors ledger'. ALSO do all others below together with this one in one entry below each other as cr to debtors cntrl. dr . (3) In General Journal : 1) Discount & 2) Interest charged-& 3) vat on interest if applicable????? & , 4)VAT from reversed Vat part added to Input Vat before (receivers share of Disc.) back into vat Output column as Cr.(to re-reverse reversed Vat -) , - CONTRA - debtors ledger/debtors cntrl (as a Dr (add it again- he still owes you the Vat part of former discount again + interest + discount etc. ) (4) If customer has no debtors account- open a new one for him. Outdated Cheques:

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209ACCOUNTING Notes ACN-101-M CHAPTER 1 i)

If Post-Dated-

(1) If RETURNED By bank(or already receipted –ie recorded in a Journal as a receipt):

Put in Recon. until deposited in Correct Post-Dated Month.:in recon as'Post Dated' (2) If UNDEPOSITED yet : Do NOT Put in Recon.-Just keep till correct Date-then only do you deposit it. ii) Stale ,or Too old- if older than 6 MONTHS :Must Immediately be written back!!! (or as stated on face of cheque): (1) WRITTEN BACK Cheques (YOURS): IF YOUR OWN cheque is STALE-it gets written back/reversed (2) Exact opposite of original entry in C Payment J is made in C Receipts J: (vi) In CRJ: credit Creditors Control to re-enter debt (in Sundries column) -CONTRA- debit 'Bank Column'. (vii) In General Journal : Discount received ONLY gets done here NOT in CRJ for Your cheques. : Dr Discount Received(to reverse CR income) –CONTRA- Cr Creditors (to reverse liability payment by you) (viii) General Journal :Discount&Interest (if applicable) reversed by adding to output Vat (SARS share of Disc.) gets re-reversed from Vat Output by adding to Vat Input column As Dr.(to re-reverse the reversed- liability) , - CONTRA - Creditor (as a Cr (add it again- YOU still owe the Vat part of former discount again (ix) If no creditors account-open new one.. (x) EXCLUDE Written back cheques from Current bank Reconcilliation. iv) Cheques Damaged or Lost(1) You Issued It : (a) Inform bank by stopping payment thereof. (b) CPJ :write one entry in Current month- When actually replaced- saying only: "Cheque No. 5 replaces cheque no 4 :B.Viljoen." in Details column-With NO AMOUNTS NEXT TO IT!!! (c) Bank Recon: write: "Cheque No. 5 replaces cheque no 4 :B.Viljoen." at very bottom of recon in last mnths finished recon if cheque received late,or In current recon in 'Details' as needed.(ie :in both) (2) You Received it as payment : (a) Inform drawer-request replacement-make a note in debtors ledger to know.All entries as per Logic. EXAMPLE as per exercise 9.2on page 177 Study guide.

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210ACCOUNTING Notes ACN-101-M CHAPTER 1

Petty cash journal• Receipts side folio only comes from CPJ –never from ledger petty cash account. • Imprest system • petty cash is a "cash& cash equivalents" balance sheet account. • "petty cash 'CONTROL' '' account. Chapter 10:cash + cash equivalents:

• Discount/interest is counted from the day after th transaction takes place –not including the day itself . Bad debts: • • •

• •

When you re-estimate& record the Provision at Year End- Here you MUST FIRST ALLWAYS EVER ANYWAY work out the balance left (dr's & cr's) on separate paper: to work out how much to deduct /or add to "Provision ..." account.DO NOT JUST USE LAST YEARS PROVISION>!!!!! "Bad Debts" gets a DR balance as an EXPENSE account. = nominal = closed/gone at year end! "Provision for bad debts" gets a CR balance :as an ASSET- CONTRA account (not expense etc) PROVISION FOR BAD DEBTS as an asset-contra account gets subtracted from DEBTORS CONTROL TOTAL for "Trade & other Receivables " in the balance sheet. Provision estimated& RECORDED -only ever-AFTER all known BAD DEBTS FINISHED WRITTEN OFF for the year ALREADY.

•

remember in a question :if no balance for last years provision for doubtful debts is given- then use the "normal % of debtors to be a provision" and last years debtors balance to calculate the opening balance of the "provision for bad debts". Debtors reconcilliation.

• •

FIRST THING YOU DO: go through list of corrections and put a mark for all : R= recon items,D = debtors control items !!!!!!! ( some are in both-see below) a wrong side of account transfer = 2 * amount just write (2* xxx) as calculation.

•

if a sales (etc) journal debtor entry is in wrong column :BOTH debtors control + Recon (debtors list) ,not just one but in BOTH , must have the entry corrected NOW , because the daily posting to the debtors ledger would also have missed it because it is not in debtors column.!!!! (or a R/D cheque too:both sides)( or a amount entered twice in the sales journal)

•

or a debtors column in cash payments journal is = dr ALLWAYS EVER (r/d cheques written back into debtors control) both are normal side entries!!!! ( for creditors recon only : if a creditors column in cash receipts journal it is = CR(overcharge +re-imburse back to creditors control)),

•

A Bills receivable :all must first pass through the debtors ledger,so all must first go to cr side of debtors control(get written out of) if they are in the bills receivable journal and you must reconstruct a debtors control from this information.!!!!! Bills receivable: • gets written out of debtors ledger as well as from debtors control when MOVED to Bills receivable account. • allways first goes to debtors-ever at all!

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211ACCOUNTING Notes ACN-101-M CHAPTER 1 •

all interest /or charges to be levied on debtor :allways first to the debtors control –never direct to bills receivable only total.

• Chapter 11 INVENTORY: • ONCE A SALE IS completed-that very second the goods should be included with any inventory count done ie: goes in that period even if not received in warehouse yet. • If goods are sold-they may immediately not be included in any inventory count at all. • THE RESULTS of a mistake in Evaluation of Inventories causes o OVER 2 YEARS : The Cost of sales + Gross Profit + Profit + Equity Is Incorrect both yrs. because last years closing inventory is used as opening inventory this year. o BUT : Profit ADDED UP for BOTH years together in one Number will be correct though.! (somehow mathematicly) • Estimating inventory: damaged fire/ check count is accurate/quaterly no stocktake 1. STEPS to CALCULATE the ESTIMATE for inventory: 1. calc Average Gross profit for last 3 accounting periods-for "Sales" ,NOT 'cost of sales.'(but it must be a stable % over the years or method wont work) 2. Use Avg Gross Profit .% of Sales to Estimate the Gross Profit : from (sales * Avg %) i. Cost of Sales:deduct gross profit you got from sales =cost of sales ii. Value of Closing Inventory = {(a) opening inventory +(b) purchases} –(minus)-cost of sales. 3. OR one can use the Avg Gross Profit % on Cost of Sales:

i. ii. iii. • • •

• •

cost of sales * (100 + % : 'GrPr. on cost') =Sales so cost of sales =SALES * 100/(100+%) Value of Closing Inventory = {(a) opening inventory +(b) purchases} –(minus)-cost of sales.

NOTE to remember: opening inventory –minus- cost of sales OR closing inventory ='the other one' : both ways works. gross profit % on sales =profit/sales * 100 gross profit % on cost of sales=profit/ cost of sales * 100 terms in exam :cost of purchases= all cost (incl. import duty etc.)

terms in exam :cost of sales = also with inventories +/chapter 12 :property plant & equipment: • intangible assets incl. deferred expenses-pre-paid expenses. • capitalised means :incl cost eg transport in assets total cost price. Depreciation: • remember to deduct scrap value to get depreciable value which is used to calc. depreciation-NOT incl. scrap value in this calc.- must deduct it first.! • methods: o Straight Line Method: (Cost - Scrap/Residual value) Over/ fixed time or years usage estimated

o o

Diminishing balance/ or 'Accellerated' method: (Cost - Scrap/Residual value) Over/ % value left over (amount auto. decreases over time as value decreases)-means decrease greater in fist years than later yrs. Production Method: (Cost - Scrap/Residual value) Over/ estimated no. of units production from the asset in its.lifetime.

•

remember pro rata depreciation for : o 1-all sold assets o 2-all bought assets. Scrapping/selling/trading in an asset: • scrapping: o if no loss /depreciation = 0 you can write it off direct against acc. depr. account o but if there is a loss: must transfer to realisation account to calculate loss o loss goes to "loss on scrapping(not sale) of machinary account" • selling: Remember to Add all costs of disposal to "Realisation acc." – for profit/loss on machine.

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212ACCOUNTING Notes ACN-101-M CHAPTER 1

Trading it in as partial payment on the purchase of a new asset b. Trading in uses same method as selling outright:exept: i. You record the Trade- In SEPARATE to the New Purchase ii. Put new purchase in new Dr machinary acc, & cr Creditors with its actual purchase price( not less any trade in yet!!!). iii. Even if machine paid for in (only cash+trade in)-you still Go the creditor routeallways!!! ie :first credit machines sale to the "creditors name account"- then work this off against "bank" and "machine realisation" account-ALLWAYS –even if Paid Immediately! iv. EXTRA: Dr- Creditor (trade-in price) -CONTRA- Cr "Realisation of Machinary acc." (as an Income) with trade-in amount only now!!! v. If paid cash –just use a creditor system as above and record cash payment AFTER whole process completed but for same date! To remember: o do each realisation of machinary account separate to each other with specific name –according to acc. lecturer at Pta unisa. o allways first work out the pro rata depreciation and ADD it to acc. depreciation before you move it to reasisation account. o move 3 things to realisation acc. , NOT just 2.: see next line: o remember to move money/cash/debtor/off creditor/ to realisation account As well before calc. profit /loss. o The depreciation account gets cleaned out/cleared/transferred every year to the profit & loss account! IT DOES NOT ACCUMULATE:ckeck in exam for this!!!!!!!!!! chapter 13 :other non-current assets:investments& loans o intangible assets: amortisation Investments: o investments are not revalued: only put in notes or in brackets behind original figure in the balance sheet ,the -1(directors valuation xxxxx) if unlisted or -2- (market value xxxxx)if listed o add all brokers fees & stamp duty to the cost price of all investments:including shares. o

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213ACCOUNTING Notes ACN-101-M CHAPTER 1 allways ever first put money in "Bank account" then from here a fixed deposit or other investment is done/ paid for/withdrawn!!!!- NEVER directly. o for interest from a fixed deposit: o if re-invested in same account :can go direct, no need to travel through "current bank" account: dr fixed deposit ---cr interest :fixed deposit :income. o if NOT re-invested: go straight to current account Dr –not first into fixed deposit account! LOANS: Bank cr --- dr "loan xyz(Ltd)" interest: bank dr ---- cr "interest :loan : income" dividends& shares: o all profit straight from shares account to Profit/ loss on sale of shares account----not go through a realisation account! even if only half of shares sold –then write that there and transfer the profit immediately.!!!! o dividends:separate from shares account: "dividend income account" & bank only o goes to profit& loss acc. at end of year(cleared out!) Chapter 14 a provision for a product guarantee is a current liability normally, unless for more than 12 mnths . Bills payable: o interest all goes to creditors ONLY never directly to 'bills' - then full inclusive amount goes to bills as one shot,never piecemeal . o for a renewed bill- must allways first get written back to creditors,then a new bill re-started. o a bills payable MUST allways first go to creditors-then get transferred to bills payableo so if for a recon you have a bills payable journal–you must subract it from creditors control and it probably was taken off creditors ledger( daily posting here) so nothing goes to 'recon' BUT is not in creditors control yet-(end month only). o all interest expense if 10 % pa over a 60 day bill (d/d) must get paid –even if you pay your bill after only 5 days,you still pay all the interest!!!! loans: o remember current portions of loans you owe in next 12 months- go to current liabilities. creditors control reconcilliation: o if you have dr & cr balance all from the creditors ledger/list given in a test :YOU MUST subtract the dr from the cr for the start balance of the creditors ledger/list in the reconcilliation it does not come off creditors controlaccount though- it is probly still from last months balance or something.ONLY for sake of balance sheet is the dr added back on the cr- NOT SUBTRACTED. o if question says certain amounts were transferred to debtors ledger from creditors ledger:you must put this back in the creditors control: SO Cr it to put back the dr that was probly taken off last months total already and is now missing - to re-add it to creditors. o if transfer came visa-versa : from debtors ledger to creditors ledger: you must still put it in cr side of creditors control : ASLO . o if a wong posting from source document to ledger:both different ledger accounts must be corrected-control & creditors ledger separately. chapter 15:n-c liabilities:debentures/loans o debentures – money received first goes to a "application for debentures account". o this is then either re-payed( bank –Cr- , -Dr-(as expense) app. for . debent. acc.) for extras or tranferred to debenture account :( dr debentures ---cr app. for . deben.acc) o interest is completely separate from debentures accounts. mortgage bonds: o land account gets : deposit/cash + second separate entry :mortgage bond:xyz bank. o "mortgage bond 17%" account is separate from o

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214ACCOUNTING Notes ACN-101-M CHAPTER 1

chapter 16 fin. statements fo a sole proprietor. o as per normal chapter 17- non-profit organisations B.A.E of Non-Profit Organisations ASSETS = FUNDS + LIABILITIES. DIFFERENCE IN ACCOUNTS BETWEEN: NORMAL ENTITY Non- PROFIT ENTITY entrance fees account(close off to acu.fnds.acc.) Capital Account Accumulated Funds Account Profit and Loss Account (Yr.End) Income and Expenditure Account Membership fees account Accrued membership fees account Membership fees paid in advance special: non-expendable fund account special: expendable funds account Income Statement Income and Expenditure Statement Restourant: Trading statement equity statement Receipts & Payments statement

DIFFERENCE IN TERMS Used Profit Surplus Loss Deficit Equity Funds Accounting Treatment of various Sources of Finance Entrance Fees Capitalised: First :"Entrance fees Acc"/"Bank Acc." End of Year Close-off to "Accumulated Funds

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215ACCOUNTING Notes ACN-101-M CHAPTER 1

Membership Fees

Acc." Revenue (Budget / No.members=annual fees) Fees paid in Advance : to "Income Received in Advance(Membership fees)" Account" + 'Trade& Other Payables' MUST be written back out of 'in advance' acc. in new year back into "Membership fees" account as pay Fees in Arrears to "Accrued Income(Membership Fees)" Account.+'Trade & Other Receivables' But in new year rereverse to act as a Debtors Account Bad debts can be written off against "membership fees" acc as it being a debtor account-from the accrued expenses on the Dr side of it allways.

Doantions & Bequests: o Entrance fees: o Capitalised normally–Ie:First go straight to "Entrance fees" account- then at Fin .Year End with:ClosingEntries/Procedure closed-off to "Accumulated Fund account" (like :Capital account). o DO NOT GET ADDED TO REVENUE in 'Income and Expenditure Statement' Membership fees: o Annual Fee = Estimated Budget for Following Year / divided by / Number of members o check accrued fees & advance paid fees writing back o receipts & payments statement: o investments are payments& loans receipts. special funds account o special funds is an equity('funds') type account – CR positive balance – all assets = cr+ o for buying an asset from a special funds account: you first move the funds to the accumulated funds accountfrom the special funds account.----then the second part of this is you go cr bank (normal current account) and Dr the asset account you purchase o for a donation :it first goes to normal "bank" _Contra_ "Special fund star fund" then on same day from "bank" to "fixed deposit account" o also to buy an asset-can first transfer to normal bank account from fixed deposit, then ONLY buy it from normal bank account. o for an expense paid from special fund- do not first transfer to accumulated fund-just pay diectly from special fund( details as 'contra' in special fund = eg:"painting tennis courts" account , etc. etc. o all interest works same as any other interest mechanism.-totally apart from investments unless should specially get paid back into same investment account.-so it goes to bank :fixed deposit(interest on investment) or bank:current (interest on investment))( all in same special funds account, never in normal 'bank" account) + CONTRA – normal interest on special funds:star fund " account o ACCRUED INCOME ALSO GETS REVERSED out of special funds accounts in the new year: , as well as being put in here at end of fin. year.---CONTRA---normal "interest : star fund : income" account, also show separate in income statement as same name "accrued interest:star fund:income."etc. o put a small narration behind every details in brackets. Shortened Notes ch 18:

18.3 Calculation of Profits / Loss from incomplete records. • Remember To : •

•

add all contributions & subtract all DRAWing :in final profit for year calculation.

to include all "pre-paid expenses' &"income received in advance" in trade & othe receivables/payables in the statement af assets and liabilities..

STEP 1

a)

STATEMENT OF ASSETS and LIABILITIES. Do No. 1 OF 2 of : b) (put a small calculation of equity at bottom/top) c) put all amounts added up in (brackets behind each total!)!!! :for points!!!!!

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216ACCOUNTING Notes ACN-101-M CHAPTER 1 d)

also clearly show all calculations at bottom – with headings etc.

STEP 2: second Assets and Liabilities Statement for end of period to officially show up capital etc. b) remember to minus depreciation ETC.in brackets c) CALCULATE totals to be calculated –(PUT AMOUNTS ADDED IN BRACKETS BEHIND for points)could even make a whole list of all A+E+L totals up. d) (put a small calculation of equity at bottom/top) STEP 4: Do the calculation for the Profit :ADD ALL Drawings ,& MINUS all CONTRIBUTIONS.=Net profit for year

18.4 Conversion from a Single Entry into a Double Entry System .

18.4.2 Where minimal records are kept

Step 1 :Make Assets& Liabilities (& calc.Capital )list up Beginning of Period.(preferably a Statement of Assets& Liabilities+ equity incl. Make a list of all assets and liabilities as at the beginning of the financial period. The final capital must be determined first: Assets R Furniture and fittings (less depreciation =10% * 16500= 1650 ) Inventory Sundry debtors . Bank Petty cash Liabilities Loan: DJ Bank Sundry creditors

14850 9 600 11 200 3 000 400 total: 40 700 (13 600) 5 000 8 600

Capital 27 100 In order to determine the estimated net profit for the year,drawings must first be subtracted:

Step 2 : Reconstruc :Ledger :BANK Account Reconstruct / Prepare a summary of the bank account for the year by using cheque counterfoils, deposit slips and bank statements as reference. Step 3 : Reconstruct :Ledger :Petty cash account – Estabish if float or petty cash in use :summrise all receipts& payments and determine all cash on hand as petty cash. Step 4 :CASH / CREDIT : Sales & Purchases and Debtors & Creditors Ledger + Control Accounts in one. to get SALES & PURCHASES TOTALS only!!!!! Step 4.2 : Use balances b/d as Sales & Purchases . After provision has also been made in the control accounts for both opening and closing balances in respect of debtors and bills receivable, and of creditors and bills payable, these accounts can be balanced. The balancing figure on the debit side of the debtors control account then represents sales, and the balancing figure on the credit side of the creditors control account will represent purchases. Step 5 :SEPARATE CALCULATION NEATLY :

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217ACCOUNTING Notes ACN-101-M CHAPTER 1 Adjustments:for accruals & prepayments for income statement. DEPRECIATION ANY OTHER CALCULATION NEEDED FOR THE :Financial Statements.STEP 6 :First INCOME statement , then st. of changes in equity, then balance sheet with the profit & equity totals from ... these last two No second list of assets & liabilities is done because the second equity total is worked out in the Statement of changes in equity: Only equity at start is needed!!! : +profit + contributions – drawings = answer!!

to remember: 1. 2.

All Debtors Control: To dr side" a. ONLY DEBTORS FROM LAST YEAR + BILLS RECEIVABLE(NOT as c/d or b/d-only for this years must they be a c/d or b/d) go on the dr side because they are not include in 'sales ' for this year which is the figure you are going for. b. also r/d cheques to dr side to decrease the "paid " amount on the cr side already,because they are probably included in your debtors total you got for the year now again anyway,already,so to decrease sales by amount paid already. c. also dishonoured bills receivable –on dr side because they already in d. also Interest on debtors accounts(NOT include in sales – dr to minus from sales) to dr side e. Refunds from debtors in respect of overpayments -already paid : SPECIAL PROBLEM :

i.

3. 4.

5. 6. 7.

Goes to dr side to reduce "sales worked out afterwards balancing figure" before it is/gets calculated because it is not to be part of "sales" figure that gets worked out on this side now(acts as a minus if on same side)

f. Cash sales only goes in cr side of debtors control,although it belongs in both sides, because the "balanceing figure " you work out for the dr side is= sales and will now auto. include this amount!!!! ------same for creditors control + cash purchases!!!. ALSO debtors at end of period: go to cr side ,not dr side, to get them to appear as sales on the dr side : they should go on dr side and just be added to any sales total you get out later to make up the full sales total - but this method also works and is the one used by unisa. Also discount received as above, Also Bills payable.( go at bottom as a c/d with the debtors amount for this year – go separately remember first debtors,then bills receivable-c/d & b/d one at a time bad debts go on opposite side: = cr side because you add them to the "debtors total " from this year which goes to cr side as a cd/ bd/ amount( even if debtors is negative- it still goes to the cr side to minus from "any debtors that were there"

8.

ALL Creditors control a. go opposite to this only.

9.

LOANS:remember to check if loans PAID amount is DIFFERENT to loans ORIGINAL VALUE: to calculate the interest for "FINANCE CHARGES" in the Income Statement.!!!!!

10. Creditors control:SPECIAL PROBLEM (basicly problem is about:-to increase "purchases" total : on Cr side(opposite) –to decrease "purchases" total :on Dr side(same side) a. Discount Received (SPECIAL PROBLEM)(ONLY funny -odd side = TO DR side - NOT cr)

i.

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goes to Debit Side to end up showing up in Cr side "purchases" worked out total later when it is calculated : ( to get "total purchases amount" –ie :IT WAS deducted-Now add it to total ON Dr SIDE TO GET the increase in the "original" PURCHASES total on the CR side you are looking for ,since discount was only received when the payment was made to creditors weeks later,not at date of PURCHASES when you work it out later- YOU ADD IT TO DR TO GET CR PURCHASES TOTAL-NOT TO CR immediately ! ALTHOUGH IT E IT SHOULD go on both sides (more was owed

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218ACCOUNTING Notes ACN-101-M CHAPTER 1

b.

c.

and then-it was also taken off creditors as a discount) –IT WILL APPEAR NOW ON CR SIDE BY ITSELF )-Although it also still goes to income statement as a "Other Income" Bills Payable : i. last years: on cr side with last years creditors: not for this years :sales" figure so gets minused like this. ii. this years :Include all as a cd/ bd balance at bottom on the dr side,toghether with the " creitors total " from this year ,but separate one below the other! seen as a normal creditor etc etc. Refunds from creditors in respect of overpayments -already received: SPECIAL PROBLEM :

i.

Goes to Cr side to reduce "purchases worked out afterwards balancing figure" before it is/gets calculated because it is not to be part of "sales" figure that gets worked out on this side now(acts as a minus if on same side) d. 'Interest income' paid on creditors accounts- SPECIAL PROBLEM : 1. Put on Cr side to reflect as a part of total creditors-ie it also reduces "purchases" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total creditors and total payment payed or one of the two} since it was recorded earlier. (included as paid out! –now we must reduce "purchases" balance ) 2. If interest income is still to be added to "creditors "-ie completely left out till now somehow-see no.(f) below-last no. this part. e. If ANYTHING is still to be added to "creditors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE CR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'creditors') and below(as balance :b/d total) to achieve correct "Total Purchases Amount " etc. 11. Debtors Control: SPECIAL PROBLEM (Some points below)(basicly:problem is about-to increase "Sales" total : on Cr side(opposite) –& to decrease "Sales" total :on Dr side(same side) i. Dishonoured Bills receivable + Noting charges: 1. To Dr side as a normal re-addition to debtors control after a 'dishonouring'no –they go to cr side with all this years debtors, ii. R/D cheques 1. To Dr side as a re-addition to the debtors control( again added due to r/d) iii. 'Interest income' collected on debtors accounts- SPECIAL PROBLEM : 1. Put on Dr side to reflect as a part of total debtors-ie it also reduces "sales" by this amount which is calculated on same side later!, underneath this,since this amount is now included in {either Total debtors and totall payment received or one of the two} since it was recorded earlier.charged out! 2. If interest income is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts to achieve correct "Total Sales Amount " etc. iv. Bill receivable discounted: 1. To Cr side as a "payment already received " v. Discount ALLOWED (ONLY funny -odd side=TO Opposite side=CR side - NOT dr) vi. goes to Credit Side to end up showing up in Dr side "sales" worked out total later when it is calculated : ( to get "total sales amount" –ie :IT WAS deducted-Now add it to total ON Cr SIDE TO GET the increase in the "original" SALES total on the DR side you are looking for ,since discount was only allowed when the payment was received from debtors weeks later,not at date of SALES when you work it out later- YOU ADD IT TO CR TO GET DR SALES TOTAL-NOT TO DR immediately ! ALTHOUGH IT LOOKS LIKE IT SHOULD have–IT WILL APPEAR NOW ON CR SIDE BY ITSELF by 'mathematical cancellation' Special trick to get itto work out like this –could also have been added straight to dr side and ALSO to worked out at end balancing figure then to then all = "Sales" ,this is easier way!!! )-Although it also still goes to Income statement as a "Distribution and Other Expenses" vii. If ANYTHING : 1. is still to be added to "debtors "-ie completely left out till now somehow- then add it to the BALANCING FIGURE THEY GIVE YOU ( to GO AT BOTTOM as b/d) and ALSO ON THE DR SIDE BEFORE BALANCING –IT GOES IN BOTH parts ,top(as entry to add to 'debtors') and below(as balance :b/d total) to achieve correct "Total Sales Amount " etc. viii. Bad Debts:SPECIAL PROBLEM 1. Bad debts go to CR side to "mathematicly increase" Dr side "Sales total" when one calculates it later.

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219ACCOUNTING Notes ACN-101-M CHAPTER 1 12. LOANS:remember to check if loans PAID amount is DIFFERENT to loans ORIGINAL VALUE: to calculate the interest for "FINANCE CHARGES" in the Income Statement.!!!!!

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