ACCOUNTING 1 (ACN101- M) STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING DEFINITION: Accounting can be defined as the orderly

y & 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 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 MacroEconomic 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

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. 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 1. PERPETUAL / CONTINUOUS INVENTORY SYSTEM This system is ideally suited for businesses that sell easily identifiable items that are bar-coded. Inventory purchased is recorded directly into the INVENTORY ACCOUNT at cost price. At the time of sale, this same cost price is then transferred from the INVENTORY ACCOUNT to the COST OF SALES ACCOUNT. _ In the perpetual Inventory system, INVENTORY = ASSET 1. When Inventory is purchased, INVENTORY is DR at COST PRICE, CR BANK / CREDITORS 2. When the Inventory is sold, CR SALES (=INCOME) at SALE PRICE, DR DEBTORS / BANK 3. When Inventory is sold, CR the INVENTORY ACCOUNT (Asset Decreases), and

COST OF SALES (= EXPENSE) is DR 18 http://wikistudent.ws/Unisa Cash purchase of inventory: DR Inventory (Asset Inventory Increases) CR Bank (Cash decreased to purchase inventory) Transaction recorded in CPJ at COST Credit Purchase of Inventory: DR Inventory (Asset Inventory Increases) CR Creditor (i.e. Jason47) AND Creditors Control Transaction recorded in PJ at COST Returning Merchandise to Creditor DR Creditor M. Jackson AND Creditors Control CR Inventory Purchases returns Journal Cash Sales: DR Bank (Cash increased with money paid for sale) THE SELLING PRICE AMOUNT CR Sales (Sales is an Income that increases Equity) THE SELLING PRICE AMOUNT DR Cost of Sales (Cost of Sales is an expense that decreases equity) COST PRICE AMOUNT CR Inventory (Inventory is an Asset that must decrease, as Inventory has been sold) COST PRICE AMOUNT Transaction recorded in CRJ NOTE: THE DIFFERENCE BETWEEN SALES AND COST OF SALES = GROSS PROFIT Credit sales: DR Debtor (ie Paul glazby) AND Debtors control THE SELLING PRICE AMOUNT CR Sales (Income increased) DR Cost of sales (Cost of sales = Expense that is increased) CR Inventory (Inventory is an Asset that must decrease, as Inventory has been sold) COST PRICE AMOUNT

Transaction recorded in Sales Journal Sales return: (Credit sale) DR Inventory (Inventory, which is an asset, has been returned, thus inventory has increased again) CR Debtor (Ie Paul Glazby) AND Debtors Control DR Sales Return (The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR Cost of Sales (Cost of sales =expense, but this expense must be reversed if goods are returned) The COST PRICE of the merchandise sold is recorded at the TIME OF SALE. This allows the business to determine the GROSS PROFIT of EACH SALE, ie PERPETUALLY!!TRADING ACCOUNT The TRADING ACOUNT determines GROSS PROFIT. DR Sales CR Trading Account (SALES is now closed) DR Trading Account (COST OFSALES is now closed) CR Cost of Sales These transactions take place in the GENERAL JOURNAL. CARRAIGE & RAILAGE COSTS PERPETUAL: DR Inventory Expense Drawings Donations CR Bank Inventory PERIODIC DR Carriage on Purchases A/c Drawings Donations CR Bank Purchases Purchases Delivery Costs Inventory taken by owner Inventory /Stock Donations For personal use

2. PERIODIC INVENTORY SYSTEM p149

_ In the Periodic Inventory system, PURCHASES = EXPENSE All purchases made during the financial year are recorded in the Purchases Account, whose total will give you cost price of inventory purchased for the year. To work out the cost price of INVENTORY SOLD: Cost Price of opening inventory + Cost Price of Inventory Purchased that year (PURCHASES TOTAL) Cost Price of left over Inventory (As per Physical Stock take) Accounting entries on PERIODIC SYSTEM: 1. Opening Balance of INVENTORY ACCOUNT (Asset from physical stock take) is held all year 2. Inventory Purchased is DR @ Cost in PURCHASES A/C and CR Bank / Creditor. 3. When goods are sold CR SALES and DR Bank / debtor 4. Physical Inventory count taken @ cost price of said inventory. (E.g. R20 000)This amount DR to INVENTORY A/C and CR to TRADING A/C 5. DR TRADING A/C with opening inventory amount, and CR the INVENTORY ACCOUNT Purchases (CASH) DR Purchases CR Bank Returning Credit Purchase DR M. Maartens AND Creditors Control CR Purchases RETURNS Purchases Returns Journal @Cost Price

Sales (CASH) DR Bank

CR Sales Recorded in CRJ @ Selling Price

Sales (CREDIT) DR A.Ahmed AND Debtors control CR Sales Recorded in Sales Journal @ Selling Price

Sales returned (CREDIT) DR Sales Returns The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR A. Ahmed AND Debtors Control Recorded in SALES RETURNS JOURNAL

Sales Returns (CASH) DR Sales Returns The Sales must be decreased, and equity is decreases as any profit made on transaction is now lost) SELLING PRICE AMOUNT CR Bank Recorded in CASH PAYMENTS JOURNAL Physical Inventory Count at END of financial Year (This is subtracted from the combined total of opening inventory and total Purchases to give Cost of Inventory sold for year) DR Inventory (This is an Asset that is created with remaining inventory on hand at end of year) CR Trading account (this is a Nominal Account used to determine Gross Profit) Recorded in General Journal

Determining GROSS PROFIT (Periodic inventory) p152 Opening Inventory (Cost) PLUS Purchases (Cost) 10 000 90 000

Inventory available for Sale (Cost) LESS Closing inventory (Cost) Cost Of Sales GROSS PROFIT* (BALANCING FIGURE) Sales

100 000 (20 000) ( 80 000) 20 000 100 000

CLOSING OFF NOMINAL ACCOUNTS At the end of the financial period, the nominal accounts are closed off by means of closing journals, to the TRADING ACCOUNT and/ or PROFIT & LOSS ACCOUNT- (NOMINAL) DR Trading A/C with GROSS PROFIT AMOUNT CR Profit & Loss with GROSS PROFIT AMOUNT DR All Incomes (or any Nominal A/C with a CR Balance) CR Profit & Loss Similarly DR Profit & Loss CR All Expenses (or any Nominal A/C with a DR Balance) The difference between the DR and CR side of Profit and Loss the determine NET PROFIT, which is then: DR Capital (If its a Profit, do the converse if its a loss) CR Profit & Loss

THE TRADING ACCOUNT To calculate Gross Profit: 1. Calculate COST OF GOODS SOLD: Opening Inventory + Purchases (@Cost) Closing Inventory (@Cost) = COST PRICE of goods sold during the financial period. 2. GROSS PROFIT: Sales Cost of Goods Sold = Gross Profit CLOSING INVENTORY DR Inventory A/c with amount physically counted CR Trading A/c with same amount. CLOSING JOURNAL ENTRIES:

Closing transfers to TRADING ACCOUNT. P 160 Closing an account basically means transferring the balance to the opposite side. All the NOMINAL ACCOUNTS are closed off to the PROFIT & LOSS ACCOUNT. DR All Incomes CR All Expenses, DR Trading A/C (Gross Profit Amount) CR Profit and Loss (Gross Profit amount) 23 CLOSING PROFIT AND LOSS TO CAPITAL ACCOUNT DR Profit and Loss (NET Profit amount) CR Capital A/c (NET Profit Amount) CLOSING DRAWINGS DR Capital

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) INCOME STATEMENT FOR THE YEAR ENDED 31 JAN 20.1 Notes R Income 2 Cost Of Sales Opening Inventory Net Purchases Closing Inventory Gross Profit Other Operating Income: Rent Income Discount Received LESS: EXPENSES Selling, Administrative & General Expenses Stationery Wages Water & Electricity Bad Debts Discount Allowed Net Profit for Year

NOTES TO THE FINANCIAL SYSTEMS 1. Accounting Policy: The annual financial statements have been prepared on the historical cost basis and comply with generally accepted accounting practice.

2. Income represents net sales to third parties 3. Property, Plant and Equipment Equipment Furniture Property, Plant and Equipment
Cost LESS: Accumulated depreciation = Carrying amount: Beginning of month Additions DURING THE YEAR Depreciation Cost Accumulated Depreciation Carrying amount: End of month

Equipment
19 500 (----) 19500

Furniture

TOTAL

12000 31 500
(-)

31 500

GROSS PROFIT PERCENTAGE Gross profit is calculated separately because it gives an indication of how much profit was made from selling goods. The Gross profit is normally expressed as a percentage of either the selling price or the cost price of goods sold. EG: Gross profit x 100 = 29 000 x 100 Selling Price 1 76 000 1 = 38,2% or Gross profit x 100 = 29 000 x 100 Cost Price 1 47 000 1 = 61,7%

PERPETUAL

PERIODIC

Stock purchased entered into

INVENTORY A/C

Stock purchased entered into PURCHASES A/C

Carriage on Purchases and Railage DR into INVENTORY A/C Cost of sales can be determined at any period

Railage / Carriage on Purchases entered into separate RAILAGE / CARRIAGE ON PURCHASES A/C Cost of Sales determined in Trading Account or by means of calculation.
COST OF SALES CALCULATION:

Opening Inventory (balance) PLUS total purchases for year LESS Closing Inventory (as per stock take) = Cost of Goods Sold

SALE OF STOCK:

SALE OF STOCK:

Dr Bank (Cash sale) or Debtors (Credit Sale) Cr Sales SALE PRICE Dr Cost of Sales Cr Inventory COST PRICE DONATIONS OF STOCK DR Donations (Donations, an expense, increases) CR Inventory (Stock, an Asset, decreases DRAWING OF STOCK DR Drawings CR Inventory (Stock, an Asset, decreases

DR Bank / or debtors CR Sales SALE PRICE Stock is balanced at end of financial period DONATIONS OF STOCK DR Donations (Donations, an expense, increases) CR Purchases (Stock, an EXPENSE, decreases DRAWING OF STOCK DR Drawings CR Inventory (Stock, an EXPENSE, decreases