and Be’ACCOUNTING HANDBOOK AND STUDY GUIDE SUMMARY OF CONTENTS FOREWORD 2 INTRODUCTION 4-7 i tinanciat accountinc 8-215 |. Basie Concapts of Financial Accounting 8 2. The Accounting Cycle 19 3. Source Documents 25 4. Journals 30 5. ledgers 55 6 Trial Balance 83 7. Financial Statements and Notes 86 8, Analysis and Interpretation of Financial Statements © 105 9. Year-End Procedures ® 120 10. Reconciliations ® 134 11. GAAP and IFRS ® 152 12 Inventory ® 154 13. Fixed Assets 166 14 VATO 75 15. Partnerships 182 16. Non-Profit Companies (Clubs)® 190 17. Closed Corporations ® 200 18 Companies ® 203 19. Analysis of Published Financial Statements ® 212 MANAGERIAL ACCOUNTING 216-256 1. Ethics ® 216 2, Internal Control ® 221 3. Budgeting ® 226 4. Cost Accounting 235 By] ctossary oF ACCOUNTING TERMS 256-262 3 © tate Books Cobusiness. INTRODUCTION ‘Accounting is known as the language of business. Accounting allows us fo gather, record, summarise, analyse and report all of he financial activities of a ‘A. OVERVIEW OF FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING Accounting is separated into Financial Accounting and Managerial Accounting. FINANCIAL ACCOUNTING AIM To prepare Financial Statements to To provide useful information that helps o accurately summarise the financial business fo plan and meke dec information of a business. UseRs: External: Governments, Banks, Credit Internal: Owners, Managers, Employees Lenders and Shareholders EREPARATION. © Must comply with various standards. © Noneed to comply with standards + Prepared in accordance with Generally | Prepared according to what managers Accepted Accounting Principles request (GAAP) and International Financial Reporting Standards (IFRS) DOCUMENTS Financial Statements Internal Reports DETAILS: Summarised information Detailed information REPORTS Prepared quarterly and annually Prepared whenever requested, or on a monthly basis Focus All aspects of the business Specific information requested by different departments of the business at different times TIME PERIOD Activities that have already taken place [in the past) Activities that have already taken place {in the past), or that are expected to happen (inthe future) © tate Books CoNs AN KOM A ada xe K meee OMe Ss} itis important to understand the advantages and disadvantages of each form of ownership when forming © busin PARTNERSHIP Calero Na) ua) 990 D CORPORATION COMPANY eos NAME ENDING = cE Proprietary Limited Limited (ud) (Pry) Ltd SET-UP Easy Easy Easy ~ however Expensive- Expensive - the setting up of /— requiring a requiring o new CCs isno Memorandum == Memorandum longer allowed of Incorporation of Incorporation ‘OWNERS Orly 1 Owner 2-20Pariners 1-10 Members Limited te 50 7 to.an ‘Shareholders unlimited number of Shareholders LEGAL ENTITY Not recognised Not recognised Recognised as Recognised Recognised 0s aseparate asaseparate | aseparate legal asa separate asa separate legal entity- legal enfity~ entity - Owners’ legal entity legal entity — ‘Owners affairs Owners’ affairs affairs are Owners! affairs Owners’ affcirs combined wih combined with | separate ‘ore separate are separate the business. the business UABILTY ‘Ownerisliable Parinersare Limited Liobility Limited Liability Limited Liability for all the lidble for cll the - Members not - Shareholders - Shareholders business's debts business's debts liable for all the not liable for all not liable for all business's debis the business’s the business's debts debts ‘CONTINUITY No continuity No continuity Confinuity~—Continvity~ Continuity ~ ~ the ane ~ the ‘os the b m, 5 the ae the secs does not does not continues fo exist continues to continues to. continue fo exist continue to exist ifone Member exist ifone exist ifone if the Owner fone Partner dies ‘Shareholder Shareholder dies dies dies dies CONTROLOF — Decisions made Decisions made Decisions made Decisions made Decisions made BUSINESS bythe Owner byall orsome by alllorsome by one or mere _ by three or Partners Members Directors more Directors INCOMETAX Owner pays —Partnerspay —* CC pays 28% + Company + Company Income Tax Income Tax Income Taxen pays 28% pays 28% con the Profit on the Profit Net Profit Income Tax Income Tax received from —_received from ‘on Net Profit ‘on Net Profit the business | the Parmarship | » Mombors pay 15%on —* Shareholders + Shareholders Dividends pay 15%on pay 15% on received Dividends Dividends received received ‘CAPITAL ‘Only the Owner All Partners: All Members Business. fae Business issues Assets contributed — can contribute can contribute can contribute Shares privat Shares publicly. a 5 Capital Copital Capital fo raise ey to raise Copital COMPLEXITY OF — Low Medium Medium High High BOOKKEEPINGFINANCIAL ACCOUNTING BASIC CONCEPTS OF FINANCIAL ACCOUNTING SUMMARY OF CONTENTS EEN Five Basic account TYPES 9-10 1, Asset Accounts 9 a. Current Asset Accounts, 5. Non-Current Asset Accounts 2. Owner's Equity Accounts 9 3. licbility Accounts 9 @. Current Liability Accounts b. Non-Current Liability Accounts 4. Income Accounts 9 5. Expense Accounts 9-10 i accountinc quarion n |. The Accounting Equation using T Accounts 2. The effects of transactions on the Accounting Equation DOUBLE-ENTRY SYSTEM 12-14 |. increasing and decreasing the balance of an Account 12 2. Recording a trensadiion using Debits and Credits 13 4, General Steps fo record a transoction . Transaxtions that affect more than Wwo Accounts 13-14 By common Transactions 14-18 |, Transactions by an Owner 4 «. Copital 4 b. Drawings 15 2. Paying cash for Expenses/Assets and receiving cosh for Income eared 15 @. Paying for Assets and Expenses wih cosh 5. Receiving cash for Income earned 16 3. Credit Transactions 16 4. Selling Inventory on credit b. Purchasing items on credit 7BASIC CONCEPTS OF FINANCIAL ACCOUNTING Bookkeeping is the process of recording the financial information of a business. Businesses classify and record financial information in a standardised way. 4: |Fw baste Account types'are aied jo'claiaily rianaal information, © The Accounting Equation shows the relationship between Assets, Liabilities ond Owner's Equity. the Accounting Equation is the foundation on which Double-Eniry Accounting is basod. © The Double-Eniry Bookkeeping System is used by bookkeepers to record financial information. acon Five basic Account types are used to classify financial information. 1. ASSET ACCOUNTS ‘Asset Accounts show items that have value ond are owmed by the business. Asset Accounts can be further divided into Current Asset Accounts and Non-Current Asset Accounts. ‘a. Current Asset Accounts (< 1 year) The business expeds to receive cash for the Assets within one year. Bank Account, Trading Stock Account, Debtors Control Accoun! b. Non-Current Assets Accounts (> 1 year) The business expects to keep the Assets for longer than one year. Equipment Account, Vehicles Account, Lond and Buildings Account, Fixed Deposit Account Non-Current Assets can be further divided into Fixed Assets and Financial Assets. 2 2. OWNER’S EQUITY ACCOUNTS Owner's Equity Accounts show the value of the Assets that belong to the Owner's) of the business. ‘An Owner can increase Owner's Equity by contributing Assets to the business (this is known as Capital] and can decrecse Owner's Equity by taking Assets out of the business (this is known as Drawings). Income increases Owner's Equity and Expenses decrease Owner's Equity. Ovmor's Equity = Assets — Liabilities 3. LIABILITY ACCOUNTS Licbility Accounts show amounts the business must pay. Liability Accounts can be further divided into Current Liability Accounts and Non-Current Liability Accounts. ‘. Current liability Accounts (<1 year) The business has less than one year fo pay the amount owed. Creditors Control Account b. Non-Current Liability Accounts {> 1 year) Tho business has more than one year to pay the amount owed. Loan Account, Mortgage Bond Account INCOME ACCOUNTS Income Accounts show the amounts the business earns. * The main Income Account of a Service Business is the Current Income Account, which is used to record the amounts earned from services. * The main Income Account of a Trading Business is the Sales Account, which is used to record the amounts. eamed from Inventory sold, Sales Account, Current Income Account, Interest Income Account, Rent Income Account 5. EXPENSE ACCOUNTS Expense Accounts show the costs of running the business. Interest Expense Account, Salaries ond Wages Account, Cost of Sales Account, Advertising Account ° © tata Bool CoTHE ACCOUNTING CYCLE This chapter provides you with an overview of the steps in the Accounting Cycle. You should refer back fo this chapter as a reference when working through the chapters that follow. The Accounting Cycle is a representation of the different steps that a bookkeeper follows to record all the financial information of a business during the Accounting Period. The steps of the Accounting Cycle are followed fo make sure that all the financial information related to the business is recorded and is accurate. The Accounting Period is the name given to the time period from when the Accounting Cycle starts to when it ends. The Accounting Period of a business is usually quarterly (once every four months) or annually (once a year). A. OVERVIEW OF THE BASIC ACCOUNTING CYCLE 4 GENERAL LEDGER, Monthly ‘% The full Accounting Cycle covered in Grades 10—12is on page 22. the Boks CC 20SOURCE DOCUMENTS A Source Document is the first document used to record a transaction. Source Documents are an important tool for Internal Control. Each Source Document contains the key information about a transaction, such as the name, date, document number, the reason for the transaction and the amount. The buyer keeps the original Source Document and the seller keeps the duplicate Source Document for the transaction. It is important that both the buyer and seller keep their Source Documents so that they have proof of the detils ofthe transaction. Ask for a Receipt the next time you buy something at the shops. ae Lu ocd uoc ais JOURNAL TYPE OF TRANSACTION SOURCE DOCUMENT A Cash received “Receipt, Deposit Slip, Duplicate Receipt, Cash Register Roll (CRR], Cash Invoice, Bank Statement (B/S), Cash Register Tape (CRT}), Till Slip, proof of online payment (EFT) 8B Cash paid ‘Cheque, Cheque Counterfoil, Bank Statement (B/S), proof of online payment (EFT) © Potty Cash used Potty Cash Voucher D Inventory sold on credit "Duplicate Invoice E Items purchased on credit - Original Invoice F Customers return items purchased on ‘Credit Note (C/N) credit fo the business @ G ems purchased on credit by the Debit Note (D/N) business are returned fo the suppliers @ H Salaries of employees / Payslip Wages of employees © Journal Voucher 1 Any other type of transaction th recorded in the General Journal © the Boks CC 26JOURNALS Journals are used to record transactions in a standardised format. They are the books of first entry. All transactions are recorded on Source Documents and then transferred fo the relevant Journals on a daily basis, in the order in which they occur. A bookkeeper records transactions in the Journals to capture all the information for each transaction. The Journals are then posted to the General Ledger at the end of the month to show how the transactions recorded affect the Accounts of the business. Notice that the details of any transaction can be found in a Journal. @ 1. DIFFERENT TYPES OF JOURNALS There are various types of Journals, which are used to record different lypes of fransactions. The different Journals make it easy io find and record transactions, by grouping transactions of he same lype together. Each Journal has specific columns fo record all the important information for a transaction, The main differences between the layouts of the various Journals are the names of the columns used fo record the effects of the Iransactions on the Accounts of the business. Each Journal has @ unique code called a Folio Reference (Fal). The Folio Reference makes it easy fo find and to refer to a specific Journal TABLE OF JOURNALS JOURNAL ‘CASH RECEIPTS JOURNAL (CR) 2S Momorise the table below! Dy MN Receipt, Deposit Slip, Duplicate Receipt, Cash Register Roll (CRR), Cash Invoice, Bank Statement (B/S), Cash Register Tape (CRT), Till Slip, proof of online payment (EFT) B_ CASH PAYMENTS JOURNAL Cosh paid ‘Cheque, Cheque Counterfil, Bank (cP) Statement (B/S), proof of online payment (EFT), sop orders, debit orders "© PETTY CASH JOURNAL (PCJ) Petty Cash used Petty Cash Voucher D_ DEBTORS JOURNAL (DJ)@ Inventory sold on credit Duplicate Invoice E CREDITORS JOURNAL (CJ) @ tems purchased on credit Original Invoice F DEBTORS ALLOWANCES Customers return items purchased Credit Note (C/N) JOURNAL (DAN) © con credit fo the business G CREDITORS ALLOWANCE Items purchased on credit by Debit Note (D/N) JOURNAL (CAN) © the business are retuned fo the suppliers SALARIES JOURNAL (SJ) / Salaries of employees / Paystip WAGES JOURNAL (WJ)@ Wages of employees | GENERAL JOURNAL (GJ)® — Any transaction that does not Journal Voucher belong in one of the above Journals, is recorded in the General Journal. © Make sure you know the layout of each Journal and how to record a transaction in a Journal. 31 © tert Hooks CoLEDGERS The General Ledger contains all he Financial Activities of a business regarding Assets, Liabilifes, Owner's Equity, Income and Expenses. This formation is posted from the various Journals at th ind of each month, The Subsidiary Ledgers record additional details from specific Control Accounts in the General Ledger. se pg 79 for more information on the Subsidiary Ledgers. @ @ General Subsidiary Journals ledgers ei crcsaod Al the Journals are posted to the General Ledger at the end of each month fo show the effect of the transactions recorded on the Asset, Owner's Equity, Liability, Income and Expense Accounts. ‘OVERVIEW OF THE JOURNALS POSTED TO THE GENERAL LEDGER JOURNAL A. CASH RECEIPTS JOURNAL (CRI) ACCOUNTS TO BE DEBITED Bank Account & ‘Memorise the table below! ACCOUNTS TO BE CREDITED Various Accounts Exception - Cost of Sales Exception ~ Discount Allowed p CASH PAYMENTS JOURNAL Various Accounts Bank Account (Py) Exception ~ Discount Received © PETTY CASH JOURNAL (PC!) ® Various Accounts Petty Cash Account D DEBTORS JOURNAL (DJ) @ Debtors Control Account ‘Cost of Sales Account Sales Account Trading Stock Account E CREDITORS JOURNAL (CJ) @ Various Accounts Creditors Control Account DEBTORS ALLOWANCES Debtors Allowances Account Debtors Control Account Accounts JOURNAL (DAJ) @ Trading Stock Account Cost of Sales Account G SREDITORSALLOWANCES reo Cono Account Vorous Acounts HH SALARIES JOURNAL (SJ)/ Salaries /Wages Account Creditors for Salaries/Wages WAGES JOURNAL (WJ) @ All Contribution Expense Accounts All deductions from Gross Salaries/Wages Accounts | GENERAL JOURNAL (GJ) © Depends on entries Depends on entries © Make sure that you know how to post each Journal tothe General Ledger. the Boks CC 56ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS © Financial Indicators are used to better understand the Financial Statements of a business. Financial Indicators are percentages or ratios that are calculated using the amounts found on the Financial ‘Statements of a business. “You shoul look at mor Financia indatr boor you make 1b shows tht ey ih Tankopt to bd yo how wl 308 SGeoNr dil ths yoo They freee) fk Grom oc Berge by 2531 vost iy OVERVIEW OF THE FINANCIAL INDICATORS Its important to look at different Financial Indicators when analysing Financial Statements. The Financial Indicators are divided into six main categories. manag Gece ond 1. Gree Prof Mg 1. Sahay tlio 2. Net Ass Overs Ezuiy) 2. Gross ran Con of Ses {Debi oko kl Gearingrao) {seamen nae —[ 4. epaatng Proton Stee fom) | opevaranensse_] 1 1 5. tion Sle Rete on Ove LL Eimenniad 2. Ratu on Pras Equity Interpretation z —S of Financial 3. Pama sorngt Statements 4 Remon Shactblen! Eqiy ROB | 2. rage Ob clon atid 1. Sto more ele 5. Retmon Cpl employed OCE] 2. hock hlding paid ‘4, Aoarge Cedors' payment paid rele ng es =—— you are asked a question about the Liquidity of a company in a fest, you must include comments about the © ficiency of the company. The same is true if you are asked « question about the Profilebilty of a company ~ make sure you include comments about the company’s Efficiency. the Boks CC 106YEAR-END PROCEDURES © A bookkeeper completes « number of tasks at the end of the Accounting Period. The tasks that are completed are known as Year-End Procedures. Year-End Procedures are completed at the end of the Accounting Period to: + ensure that al the information has been recorded and is accurate * prepare Final Accounts to summarise the business's Profitability for the Accounting Period and Financial Position at the end of the Accounting Period + reverse specific entries fo prepare the books for the start of the new Accounting Period. In this chapter, the focus is on the different Adjustments recorded (Step 7), Final Accounts prepared (Step 9) and Reversals recorded (Step 13) at the end of the Accounting Period. 12 ANALYSIS OF FINANCIAL STATEMENTS [es Menthy 5 POST-CLOSING RECONCILIATIONS TRIAL BALANCE i) ADJUSTMENT TRIAL BALANCE . 7 ‘ADJUSTED TRIAL BALANCE ADJUSTMENTS ESS gP se Pg 22 |for the details of the Accounting Cycle. 121 © fea Bool CoSee © [Ris importent that a business keeps a record of the amount of VAT collected and the amount of VAT paid. ‘* VATis collected when items or services are sold. ‘+ VATis paid when ifems or services are purchased from VAT vendors. INPUT TAX AND OUTPUT TAX Basins alle tems oF servis Business receives VAT 1 opt a 2. Output Tax 1. Input Tox ‘The VAT that a business pays is called Input Tax. All he Input Tax amounts are recorded on the Debit side of the VAT Input Account SARS owes the business the amount of VAT that the business pays. VA input ___&R The VAT Input Account is also referred to as the Input Tax Account. 7 2. Output Tax The VAT that a business charges for its items or services is called Output Tax. All the Output Tax amounts are recorded on the Credit side of the VAT Output Account. The business owes SARS the amount of VAT that the business collects Dk___VaTOvtput_ck ae ce ‘The VAT Ouput Account is also referred to.as the Output Tax Account. ¢ What effect will the following two transactions have on the VAT Input and VAT Quput Accounts of a business? 1. JENNY pays cash for Equipment that costs R5 386 (excl. VAT). 2. SANDILE receives R4 000 incl. VAT] for services. 1. VAT amount = Price (excl. VAT) x 14%, VAT amount = 5 386 x 14% = 754 (rounded off lo nearest rand) Total paid = 5 386 +754 = R6 140 DR Bank a DR Equipment R DR VAT Input ce A z = As = ae = 6140 5.386 754 The business pays VAT, so the VAT Input Account will increase by R754. @ 2. VAT amount = Price (inl, VAT) x71, VAT amount = 4 000.x3'4 = 491 (rounded off to nearest rand) Total received = Rd 000 = 3 509 + 491 DR Bonk R DR__Gorrent income CR DR___VATOutpet__ CR A EB = ' = + te + 4000 3509 41 The business collects VAT, so the VAT Output Account will increase by R491. rhe Boks CC 178NON-PROFIT COMPANIES (CLUBS) © Non-Profit Companies are formed by people who have a common purpose fo benefit society. The main aim of a Non-Profit Company is to improve society. However, its still important for o Non-Profit ‘Company to generate enough Income lo cover its Expenses. Non-Profit Companies do not have any Owners. All Assels and any Surplus (Profit) belong fo the Non-Profit Company, ‘See pg 7 for an overview of the different forms of ownership. @ Pear noes ee school, the focus is on the bookkeeping of a Sports Club. {A Sports Club is an example of a Non-Profit Company, The Accounting Cycle is the same for a Club as itis for the other forms of ownership. DOCUMENTS OF A CLUB A Club uses an Analysis Cash Book to record all its cash transactions. ‘A General Journal is used to record all he other types of transactions. A Club usually does not have as many transactions as a For-Profit business, so itis not necessary fo have all the different types of Journals that a For-Profit business has. A Club prepares a Statement of Receipts and Payments, a Statement of Income and Expenditure and a Balance Sheet Statement at the end of the year. Read the cartoon below carefully to learn the different terms used for a Club. DAY 1 DAY 2 DAY 3 DAY 4 Hi everyone as yeu know have propred the We wil need cround The book of « Cb ro ‘woore dl harlocay consiton tht indades: RY lon gach year fran similar to the books of FeSm the now Scr ‘Our Cb nome fhe Gb the impor Soe oder Gib we wants We ‘Ris ana objectives Troy teen ne Scion wl bonelt oor dion Cio omer, sollte come onmoniy lar eo ho bership Fes . Silt: he dub & Tebow cf wha we need To oficere ChB cio doesnot eed {eiman, vee to meny fore, Weill airman ereary itetneed o Cash Book for - celta Sisco wenohos Sena meron % Gonerlouralo cra Spence How the Clb will be Rook teers record all he monreash fected ivan fe red serie ansacions, Prt Chb Bota about the cee: called a Surphs and a We to need Annvel Gover poy parte tSwrncald De as Zoreore keep sir Metin th be Ceti spears the eno he Besoting coords held onins 0h of Sees chsocber hw Frc wl Khe och yor pik ese thetclowng Financ : eS Bsctrinen || iowa Renan, — oy — eS erie Broat # we ‘more income to cover Balance Sheet wt © fea Bool CoCOST ACCOUNTING © The focus inthis section is on a Manufacturing Business. @ Cost Accounting includes capturing costs, organising costs and reporting costs. The purpose of Cost Accounting is fo gain a better understanding of the costs of a business. Costs are the Expenses incurred by a business. A business needs to know the costs involved for each item that it manufactures. Unlike Trading Businesses which buy producls at a low price and sell them for a higher price, Manufacturing Businesses make products which they then sell ais Meee) The costs of a Manufacturing Business are separated into Production Costs and Period Costs. Production Costs are also known as Manufacturing Costs. @ The diagram below shows some of the different costs involved in manufacturing a table, ro a 1. Production Costs Pa ker) Deep ae ken i. Direct Materials Costs i. Indirect Materials Costs i. Selling and six amex Distribution Costs ‘wooden table to glue, nails, machinery steo! legs, aluminium lubricants, cleaning © Marketing edging equipment © Advertising . oo aCe Indirect Labour Costs Delvery © Storage Costs © Factory supervisor ‘Administration Costs '* Handling Costs © Quality controllers * Bookkeeper . * Cleaners S Seaet i. Direct Labour Costs © Security guards : Reoeptonist Salaries and Wages * Internal Accountant of people who are Olher Factory Costs © External working with their © Rent Accountant hands or operating ‘© Water and electricity + Rent of office the machines to © Insurance manufacture the © Maintenance product * Depreciation of Machinery Safety and Environmental Controls rhe tos CC 236