ACCOUNTING 1 (ACN101- M) THE NATURE AND FUNCTION OF ACCOUNTING doc

http://wikistudent.ws/Unisa ACCOUNTING 1 (ACN101- M) STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING DEFINITION: • Accounting can be defined as the orderly & systematic recording of the monetary values of financial transactions of a business • The reporting of results • Providing financial information as a basis for decision making 3 main processes define the accounting process: 1. IDENTIFYING: Selecting evidence of economic / financial activity (transactions) 2. RECORDING transactions to provide a permanent history of the businesses financial activities 3. COMMUNICATING the recorded information to interested users by use of accounting reports IE Financial Statements The Nature Of Accounting: Accounting is used to convey the financial situation of an enterprise. It is therefore essential that the recipient of such information is able to understand it. Both words and figures are used to convey this information. “Accounting is a language which is used to convey financial information to users” 1 http://wikistudent.ws/Unisa Forms Of Ownership: 1. Sole Trader / Proprietor 2. Close Corporation 3. Company 4. Partnership 5. Non – profit Organizations Users of Financial Information: Financial information is required / used for analysis by: 1. INVESTORS: The Shareholders with a Financial Interest in the business 2. CREDITORS: The lenders of money, merchandise and services also have a Financial Interest in the business 3. EMPLOYEES: Regarding job security and wage negotiations and predictions for future employment 4. GOVERNMENT: Regarding taxes, and also for statistical purposes. Also used as an indication for Macro- Economic planning 5. MANAGEMENT: In order to plan and set new goals for future economic growth FIELDS OF ACCOUNTING: Financial Accounting VS Management Accounting • Recording transactions and preparing financial statements regarding the entity as a whole • GAAP (Generally Accepted Accounting Practices) standards ensure comparability of financial statements between businesses • Provides financial information for specific purposes • Used by management for decision making • Used to assist management reach financial goals 2 http://wikistudent.ws/Unisa STUDY UNIT 2: THE NATURE OF ACCOUNTING THEORY p.13 ACCOUNTING PRINCIPLES: 1. Accrual Principle : (WHEN?) The transaction must be recorded in the financial period it occurs, whether or not the cash has been received or paid 2. Consistency: (SAME) Once a method has been chosen it must be maintained. If said policy is changed, this must be reflected in the financial statements of the business 3. Prudence: (MODERATION) When there is uncertainty about the value of an element of event, use the effect that has the most Unfavorable effect on the business 4. Materiality: (SEPARATE MATERIAL TRANSACTIONS) All material transactions should be recorded separately in the financial statements. Immaterial transactions must be aggregated. (Material means substantial / of relatively large importance.) IE: Buying a building = Material Transaction Buying a stapler = Immaterial Transaction 5. Matching: This refers to the Double Entry system Expenses that create an income (IE – buying goods for resale), must be recorded in the same financial period. 6. Realisations: An income / expense / transaction, should only be brought into account once it is relatively certain that that the collectability / payability of that transaction is certain. ACCOUNTING POLICY & DISCLOSURE THEREOF: A set of decisions that determine how the enterprise will treat the same type of transactions to achieve consistency, which has to be disclosed in the financial statements. EG: The enterprise needs to disclose on which basis it deals with the depreciation of property and equipment etc. GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP) This is a foundation that acts as a general framework to encompass accounting concepts, principles, methods and procedures. 3 http://wikistudent.ws/Unisa According to GAAP there are two main underlying assumptions with regards to financial statements: 1. The Accrual Basis* 2. The Going Concern * The four main qualitive characteristics are: 1. Understandability 2. Relevance 3. Reliability 4. Comparability The elements of financial statements are: • Elements to measure FINANCIAL POSITION: 1. Assets 2. Liabilities Balance Sheet Accounts 3. Equity • Elements to measure PROFITABILITY / FINANCIAL RESULT 1. Incomes Nominal Accounts (Expenditure Accounts) 2. Expenses 4 http://wikistudent.ws/Unisa STUDY UNIT 3: THE FINANCIAL POSITION p.21 THE FINANCIAL POSITION: The Assets & Interests of the entity at a GIVEN TIME (BALANCE SHEET) ASSETS = INTEREST 1. EQUITY + 2. LIABILITIES “Owners financial interest ” “Creditors financial interest” .:. ASSETS = EQUITY + LIABILITIES AND EQUITY = ASSETS - LIABILITIES NET WORTH: The enterprises NET WORTH is the difference between the values of the assets owned, less the liabilities it has incurred. ASSETS – LIABILITIES = NET WORTH (“EQUITY”) 5 http://wikistudent.ws/Unisa STUDY UNIT 4: THE FINANCIAL RESULT p.29 THE FINANCIAL RESULT: The PROFIT or LOSS incurred by the enterprise OVER A SPECIFIC PERIOD. (INCOME STATEMENT) FINANCIAL RESULT = INCOME – LESS EXPENDITURE = NET PROFIT / LOSS ASSETS = EQUITY + LIABILITIES (Capital + Income – Expenditure) 6 http://wikistudent.ws/Unisa STUDY UNIT 5: THE DOUBLE ENTRY SYSTEM p.39 ENTERING INFORMATION INTO THE LEDGER: 1. What is the effect of the transaction going to be on the BAE? 2. Identify the accounts involved 3. Determine which should be credited and which should be debited 4. Ensure the debited amount = credited amount 5. Indicate date of transaction 6. Indicate name if CONTRA ledger account 7. Indicate the folio number of the subsidiary journal TRANSACTIONS AFFECTING ASSETS & INTERESTS: p40 • Capital Contributions: T.Tom draws 13 000 from his personal bank a/c and deposits as capital for Fix N Mat ASSETS = EQUITY + LIABILITIES Bank = Capital +130 000 = +130 000 • Acquisition of Loans: Fix N Mat obtains a loan from ABC Bank for R25 000 ASSETS = EQUITY + LIABILITIES Bank = Capital + Loan: ABC Bank +25 000 = + +25 000 • Purchase of Assets for Cash: Fix N Mat bought Equipment from XY Furnishers for R100 000, paid by cheque ASSETS = EQUITY + LIABILITIES Bank Equipment = Capital + Loan: ABC Bank -100 000 +100 000 = • Buying goods on credit: Fix N Mat bought furniture on Credit from Joc Limited, R2000 ASSETS = EQUITY + LIABILITIES Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd) +2 000 = +2 000 • Payments to Creditors: Fix N Mat paid Joc Ltd ‘s account of R2 000 ASSETS = EQUITY + LIABILITIES Bank Furniture = Capital + (Loan: ABC Bank + Joc Ltd) -2 000 = -2 000 7 http://wikistudent.ws/Unisa TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46 • Income: CASH Fix N Mat provided services for client S. Silver and received cash cheque of R1 000 ASSETS = EQUITY + LIABILITIES Bank Furniture = (Income / Expenditures) + 1 000 = + 1 000 • Income: CREDIT Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS = EQUITY + LIABILITIES Debtors Control = (Income / Expenditures) C. Canon = + 6 000 = + 6 000 • Expenditure: CASH Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS = EQUITY + LIABILITIES Debtors Control = (Income / Expenditures) C. Canon = + 6 000 = + 6 000 • Expenditure: CREDIT Fix N Mat placed an advert in the paper R200, payment due in 30 days ASSETS = EQUITY + LIABILITIES Debtors Control = (Income/ Expenditures) + Creditors = Advertising Cape Ads = - 200 + +200 • Payments received from Debtors C. Canon settled his account in part, R2 000 ASSETS = EQUITY + LIABILITIES (Bank + Debtors) = (Income/ Expenditures) + Creditors C.Canon + 2 000 - 2000 8 http://wikistudent.ws/Unisa BASIC FORM OF A BALANCE SHEET p50 FIX N MAT BALANCE SHEET AT 28 FEB 20.1 ASSETS R INTERESTS R Fixed Assets Equipment Furniture Current Assets Debtors Bank 100 000 2 000 4 000 54 200 Equity Capital Net profit Withdrawals Fixed Liabilities Loan: ABC Bank Current Liabilities Creditors 130 000 6 000 (1 000) 135 000 25 000 200 160 200 160 200 9 http://wikistudent.ws/Unisa STUDY UNIT 6: THE ACCOUNTING PROCESS p.59 The basic form of a T- Account: DR NAME OF ACCOUNT CR DATE DETAILS FOL AMOUNT DATE DETAILS FOL AMOUNT CLASSIFYING LEDGER ACCOUNTS INTO GROUPS: • ASSETS: “A resource controlled by the enterprise from which future economic benefits are expected to flow” NON CURRENT (Not be converted into cash within the next financial year) - Property, Plant and Equipment - Professional Library - Investments CURRENT ASSETS - Debtors - Inventory sold - Petty Cash - Bank - Prepaid Expenses - Accrued Income (Income earned but not yet received in cash) • INTERESTS “ Investors and Creditors financial stake in the enterprise” EQUITY (The owners financial interest) - Capital - Net profit / Loss - Drawings LIABILITIES FIXED LIABILITIES: (Payable over MORE than a year) - Mortgage loans - Banks Loans - Vehicle Finance CURRENT LIABILITIES: (Payable within one year) - Trade creditors - Bank Overdrafts - Accrued expenses (Expenses owed but not yet paid) - Prepaid income 10 [...]... Inventories Trade and other receivables Debtors Cash and Cash Equivalents NOTE 3 R 11 0 500 11 0 500 22 350 8 000 10 10 0 10 10 0 4 250 Total Assets 13 2 850 EQUITY AND LIABILITIES Capital and Reserves Capital 11 8 15 0 11 8 15 0 Current Liabilities Trade and Other Liabilities Creditors Total Equity and Liabilities 14 700 14 700 14 700 13 2 850 http://wikistudent.ws/Unisa NOTES TO THE FINANCIAL SYSTEMS 28 1 Accounting. .. -19 500 19 500 (-) R 91 000 91 000 - R 11 0 500 11 0 500 - 91 000 91 000 (-) 11 0 500 11 0 500 (-) No Depreciation was written off during the financial year GROSS PROFIT PERCENTAGE Gross profit is calculated separately because it gives an indication of how much profit was made from selling goods The Gross profit is normally expressed as a percentage of either the selling price or the cost price of. .. do not see the ledger accounts – what has happened to the capital account during the course of the year.) http://wikistudent.ws/Unisa 27 VICIOUS CIRCLE RECORDS STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JANUARY 20 .1 R Capital: Balance at the beginning of the year Net Profit Drawings 10 3 400 17 750 (3 000) Balance at the end of the year 11 8 15 0 THE BALANCE SHEET Assets, Equities and Liabilities... CLOSE the TRADING ACCOUNT, the account is balanced on the DR side of the TRADING ACCOUNT and CR to the PROFIT & LOSS ACCOUNT.) Theses transactions are all done in the GENERAL JOURNAL PROFIT AND LOSS ACCOUNT: P164 Closing transfers for Nominal Accounts All the NOMINAL ACCOUNTS are closed off to the PROFIT & LOSS ACCOUNT DR All Incomes CR All Expenses, DR Trading A/C (Gross Profit Amount) CR Profit and. .. ENDED 28 FEB 20 .1 CAPITAL: R Balance at the beginning of the month 13 0 000 Net Profit for the month 6 000 Drawings (1 000) Balance at the end of the month 13 5 000 http://wikistudent.ws/Unisa THE BALANCE SHEET (P74 13 FIX N MAT BALANCE SHEET AT 28 FEB 20 .1 ASSETS R 10 2 000 10 2 000 NOTE Fixed Assets Property, Plant & Equipment 3 Current Assets Trade and other receivables Debtors Cash and cash equivalents... 8 000 91 000 19 500 10 10 0 14 700 13 2 850 13 2 850 http://wikistudent.ws/Unisa 25 FINANCIAL STATEMENTS P165 The financial statements are prepared separately from the accounting records The accounting records = ledger accounts & journals 1 INCOME STATEMENT: FINANCIAL RESULT (Trading Account & Profit & Loss) VICIOUS CIRCLE RECORDS INCOME STATEMENT FOR THE YEAR ENDED 31 JAN 20 .1 Notes Income Cost Of Sales... the smaller side and is the balance of the account This the balance c/d (Balance to be Carried Down to next month) Totals on both side now correspond Now carry the balance down directly under the totals on the OPPOSITE side The is the balance b/d (Brought Down from previous month) Thus the closing balance of the previous month becomes the opening balance of the next month THE TRIAL BALANCE A list of. .. expenditure and add all incomes These income and expenditure accounts are closed off to the PROFIT AND LOSS ACCOUNT (Income – Expenses = Net Profit) • PROFIT & LOSS ACCOUNT BOTH OF THESE GO TO INCOME STATEMENT TO CALCULATE FINANCIAL RESULT MARK UPS 1 MARK UP ON COST PRICE = 10 0 X (COST OF SALES AMOUNT) 10 0 + (% Mark up) 1 IE: Goods sold @ R75 000, work out COS on COST PRICE, 25% Mark Up 10 0 X R75 000 12 5 1 =... balances on a SPECIFIC DATE The purpose of the Trial Balance is to test the accuracy of accounting (the double entry system), test the accuracy of arithmetic and to serve as a basis for preparing: 1 The Income Statement (showing the financial result) 2 The Statement of Changes in Equity 3 The Balance Sheet (financial position) http://wikistudent.ws/Unisa 12 FINANCIAL STATEMENTS (p 71) FIX N MAT INCOME STATEMENT... http://wikistudent.ws/Unisa 14 STUDY UNIT 7: PROCESSING ACCOUNTING DATA p.93 The first books of entry are the journals, to which source documents are posted and from which ledger entries are extracted 1 CASH JOURNALS • A: Cash Receipts Journal: Doc No Day Rec CRR 1 1 2 Details T.Tom Service Fee / Sales Analysis Of Receipts 13 0 000 1 000 Bank 13 0 000 1 000 Sundry Accounts Current Income Amount Fol Details 13 0 000 Capital 1 000 . http://wikistudent.ws/Unisa ACCOUNTING 1 (ACN1 01- M) STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING DEFINITION: • Accounting can be defined as the orderly & systematic recording of the monetary values of financial. balance of the next month THE TRIAL BALANCE A list of ledger balances on a SPECIFIC DATE . The purpose of the Trial Balance is to test the accuracy of accounting (the double entry system), test the. 20 .1 CAPITAL: Balance at the beginning of the month Net Profit for the month Drawings Balance at the end of the month R 13 0 000 6 000 (1 000) 13 5 000 12 8 00 2 00 http://wikistudent.ws/Unisa THE BALANCE