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Discussion class
ACN101M
ACCOUNTING CONCEPTS,
PRINCIPLES AND
PROCEDURES
IMPORTANCE of module
• This module - foundation of all your studies
in accounting
• Ensure that you understand and know
everything contained in this module as
everything is important
• Not only required for the examination, but
you WILL need it in future modules or in your
everyday walk of.
CONTENTS
Topic A: THE BASIC PRINCIPLES AND SPHERES OF ACCOUNTING
– STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING
– STUDY UNIT 2: THE NATURE OF ACCOUNTING THEORY
– STUDY UNIT 3: THE FINANCIAL POSITION
– STUDY UNIT 4: THE FINANCIAL PERFORMANCE (RESULT)
– STUDY UNIT 5: THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING
PROCESS
Topic B: COLLECTING AND PROCESSING THE ACCOUNTING DATA OF
ENTITIES
– STUDY UNIT 6: PROCESSING ACCOUNTING DATA
– STUDY UNIT 7: ADJUSTMENTS
– STUDY UNIT 8: THE CLOSING-OFF PROCEDURE, DETERMINING
PROFIT IN A TRADING CONCERN AND PREPARING
FINANCIAL STATEMENTS
CONTENTS
Topic C: ACCOUNTABILITY FOR CURRENT AND NON-CURRENT
ASSETS
– STUDY UNIT 9: CASH AND CASH EQUIVALENTS
– STUDY UNIT 10: TRADE RECEIVABLES
– STUDY UNIT 11: INVENTORY
– STUDY UNIT 12: PROPERTY, PLANT AND EQUIPMENT
– STUDY UNIT 13: OTHER NON-CURRENT ASSETS
Topic D: ACCOUNTABILITY FOR CURRENT AND NON-CURRENT
LIABILITIES
– STUDY UNIT 14: CURRENT LIABILITIES
– STUDY UNIT 15: NON-CURRENT LIABILITIES
Topic E: ACCOUNTING REPORTING
– STUDY UNIT 16: FINANCIAL STATEMENTS OF A SOLE PROPRIE-
TORSHIP
– STUDY UNIT 17: NONPROFIT ORGANISATIONS
– STUDY UNIT 18: INCOMPLETE RECORDS.
2008 TERMINOLOGY 2009
Mortgage loan Mortgage
Set of financial statements Complete set of financial statements
Enterprise Entity
Income statement for the year ended…. Statement of comprehensive income for the year
ended…..
Profit for the period Total comprehensive income for the year
I/s bold Revenue, but not gross profit
Balance sheet as at…. Statement of financial position as at …..
(Balance sheet–equity) (Statement of financial position – equity)
Asset replacement reserve Other components in equity (+note)
Other financial liabilities Other current liabilities
(Statement of changes) (Statement of changes)
Total (column) Total equity
(Statement of changes) (Statement of changes)
Profit for the period Total comprehensive income for the year
Statement of changes
“Bold” Balance at (beginning) and (end)
R R R
Transaction
New balances = +
Example 0.1 – Capital contributions
R R R
Transaction +130 000 +130 000
R R R
Balance b/d +130 000 +130 000
Transaction
New balances 130 000 = 130 000 + 0
Example 0.2 – Acquisition of loans
R R R
Balance b/d +130 000 +130 000
Transaction +25 000 +25 000
New balances 155 000 = 130 000 + 25 000
Example 0.3 – Purchase of assets for cash
Current assets
Trade receivables
Cash and cash equivalents
Total assets
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
GOLDEN RULES
• The balance ``brought down'' (b/d) must be used
to prepare the trial balance.
• Asset and expense accounts have debit (Dr)
balances brought down (b/d) and are entered on
the debit side of the trial balance.
• Equity (capital), liability and income accounts have
credit (Cr) balances brought down (b/d) and are
entered on the credit side of the trial balance.
TRIAL BALANCE AS AT 28 FEBRUARY 20.1
Dr Cr
R R
Bank 54 200
Equipment 100 000
Furniture 2 000
Debtors control 4 000
Capital 130 000
Drawings 1 000
Loan 25 000
Creditors control 200
Wages 800
Advertisements 200
Fees 7 000
162 200 162 200
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18 F Fox received commission on a property transaction 1 350
29 Paid the following by cheque:
(i) Salaries 8 350
(ii) Leo Limited (on account) 100
30 Received payment from D Dunn on his account 1 500
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
30
+24 000 +17 700 = +20 000 -2 300 + +24 000
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6
9
10
13
18
29
30
+25 700 0 +16 000 = +20 000 -2 300 + +24 000
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9
10
13
18
29
30
+25 700 0 +23 200 = +20 000 +4 900 + +24 000
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10
13
18
29
30
+25 700 +8 318 +23 200 = +20 000 +13 218 + +24 000
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13
18
29
30
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13
18
29
30
+25 700 +8 318 +23 200 = +20 000 +13 118 + +24 100
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18
29
30
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13 -1 234 -1 234
18
29
30
+25 700 +8 318 +21 966 = +18 766 +13 118 + +24 100
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18 F Fox received commission on a property transaction 1 350
29
30
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13 -1 234 -1 234
18 +1 350 +1 350
29
30
+25 700 +8 318 +23 316 = +18 766 +14 468 + +24 100
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18 F Fox received commission on a property transaction 1 350
29 Paid the following by cheque:
(i) Salaries 8 350
30
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13 -1 234 -1 234
18 +1 350 +1 350
29 -8 350 -8 350
30
+25 700 +8 318 +14 966 = +18 766 +6 118 + +24 100
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18 F Fox received commission on a property transaction 1 350
29 Paid the following by cheque:
(i) Salaries 8 350
(ii) Leo Limited (on account) 100
30
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13 -1 234 -1 234
18 +1 350 +1 350
29 -8 350 -8 350
-100 -100
30
+25 700 +8 318 +14 866 = +18 766 +6 118 + +24 000
Basic accounting equation
(Study guide, Revision Exercise 2, p.36)
The following transactions during January 20.1 relate to F Fox, an attorney:
Amount
Date Transactions
R
20.1
F Fox deposited as opening capital 20 000 20 000
Jan 3
Paid rent for January 20.1 2 300
4 Bought law library on credit from Book Limited 24 000
5 Bought a computer for cash from Leo Limited 1 700
6 Provided services for cash 7 200
9 Debited D Dunn with fees for services rendered 8 318
10 Leo Limited repaired equipment on credit 100
13 F Fox drew a cheque for private use 1 234
18 F Fox received commission on a property transaction 1 350
29 Paid the following by cheque:
(i) Salaries 8 350
(ii) Leo Limited (on account) 100
30 Received payment from D Dunn on his account 1 500
Revision exercise 2, SG, p36 - Solution
ASSETS = EQUITY + LIABILITIES
Date Libr. & Equipm. Debtors Bank Capital I&E Creditors
R R R R R R
20.1
Jan 3 +20 000 +20 000
-2 300 -2 300
4 +24 000 +24 000
5 +1 700 -1 700
6 +7 200 +7 200
9 +8 318 +8 318
10 -100 +100
13 -1 234 -1 234
18 +1 350 +1 350
29 -8 350 -8 350
-100 -100
30 -1 500 +1 500
+25 700 +6 818 +16 366 = +18 766 +6 118 + +24 000
F Fox
STATEMENT OF FINANCIAL POSITION AT 31 JANUARY 20.1
ASSETS Note R
Non-current assets 25 700
Equipment 1 700
Library 24 000
Dr VAT Output Cr
20.4 R 20.4 R
Mar 31 Debtors control Mar 1 Balance b/d 2 925
(Lion overcharge 31 Bank (Cash sales) CRJ2 2 779
corrected) SRJ2 7 Debtors control (Cr sales:
VAT control (Balance) J2 6 131 L=280 + W=140) SJ2 420
Creditors control
(Tiger discount on paymt) CPJ2 14
6 138 6 138
Dr
Solution: SG, Excercise6.2
VAT Input Cr
20.4 R 20.4 R
Mar 1 Balance b/d 2 715 Mar 31 Creditors control PRJ2 98
31 Bank CPJ2 1 120 VAT control J2 5 627
Debtors control CPJ3 21
Creditors control PJ2 1 785
Creditors control J2 84
5 725 5 725
Dr VAT Output Cr
20.4 R 20.4 R
Mar 31 Debtors control SRJ2 2 715 Mar 1 Balance b/d 2 925
VAT control J2 1 120 31 Bank CRJ2 2 779
Debtors control SJ2 420
Creditors control CPJ2 14
6 138 6 138
Dr VAT Control Cr
20.4 R 20.4 R
Mar 31 VAT Input J2 5 627 Mar 31 VAT Output J2 6 131
Balance c/d 504
6 131 20.4 6 131
Apr 1 Balance b/d 504*
ADJUSTMENTS
• The life of an entity is divided into equal periods
(financial periods), usually 12 months, and the
profit or loss is determined for that period.
• The closing off of accounts and the determina-
tion of the profit, are recorded under the above
assumption.
• This does not always happen and the accounts
(and eventually statements) have sometimes to
be adjusted to ``correct'' the balances in
accounts before the final accounts and financial
statements can be prepared.
ADJUSTMENTS (continued)
• For more accurate financial statements at the
end of a financial period, additional entries,
which do not originate from source documents,
may therefore be necessary.
• These adjustment entries are necessary in order
to comply with the accrual basis of accounting
as well as the realisation and matching
principles.
5 Steps relating to effect adjustments
Step 1: Identify the accounts that must be adjusted.
Step 2: Determine how the accounts would be
affected and what the balances of these
accounts should be.
Step 3: Calculate the amount(s) involved in the
adjustment.
Step 4: Record the necessary adjustments in the
general journal and past the entries to the
ledger(s)
Step 5: Ensure that the new balances of the accounts
are now correct.
GOLDEN RULE
• One entry or ``leg'' of the adjustment journal
always affects a nominal account and thereby
the trading or profit or loss account.
• The other entry or ``leg'' of the journal always
affects a statement of financial position account.
SHORT-TERM ADJUSTMENTS
The apportionment of income and expenditure to
consecutive periods within a year eg. Income received
in one period but which is earned in an earlier or a
later period. The same applies to expenses which are
incurred in another period:
• Prepaid expenses
• Accrued expenses
• Consumable inventory adjustments
• Income received in advance
• Accrued income
• Credit losses (Bad debts)
• Allowance for settlement discount.
LONG-TERM ADJUSTMENTS
Depreciation -
• Business entities buy tangible assets (property,
plant and equipment) which are not for resale,
but are used in the operation of the business.
• As these assets are used, they decrease in value.
• This decline in value is charged against the
profits of the business and is spread
(apportioned) over the expected useful life of
the asset.
• The apportionment of the cost of the asset
usually takes the form of depreciation entries.
TRAIL BALANCE
Prepared as many times as it is required, but at
least every month.
•At the end of the financial year, as many as three
trial balances are prepared.
– Pre-adjustment trial balance
– Post-adjustment trial balance
– Post-closing trial balance
TRAIL BALANCE
• Pre-adjustment trial balance
– to test the correctness of the entries after the posting from the
subsidiary journals to the general ledger
– to test whether the requirements of the double-entry principle
have been met.
• 11 months rent = R6 600, thus the outstanding rent is R600 (R6 600 ÷ 11 = R600)
Dr Rent income Cr
20.2 R 20.2 R
June 30 Profit & Loss 7 200 June 30 Balance b/d 6 600
Accrued income 600
7 200 7 200
ADDITIONAL INFORMATION:
(b) Stationery on hand on 30 June 20.2 amounted to R50.
Dr Stationery Cr
20.2 R 20.2 R
June 30 Balance b/d 350 June 30
Dr Stationery Cr
20.2 R 20.2 R
June 30 Balance b/d 350 June 30 Inventory: Stationery J1 50
Profit or Loss J2 300
350 350
ADDITIONAL INFORMATION:
(c) R600 commission was received in advance.
Dr Commission income Cr
20.2 R 20.2 R
June 30 June 30 Balance b/d 5 600
Dr Commission income Cr
20.2 R 20.2 R
June 30 Income received in June 30 Balance b/d 5 600
advance J1 600
Profit or loss J2 5 000
5 600 5 600
ADDITIONAL INFORMATION:
(d) An additional amount of R150 must be written off as irrecoverable.
The depreciable amount is the cost of the asset less its residual value. The
residual value is the expected value (eg scrap value, trade-in value) of the asset
at the end of its useful life.
Statement of Fin. Position
The carrying amount at the end of the fifth year (R150 733) is deemed to be the disposal
(scrap) value of the asset.
According to this method the carrying amount will, mathematically, never become nil.
Production unit method
• Production for:
– year 1 = 500 units,
– year 2 = 550 units,
– year 3 = 300 units,
– year 4 = 200 units and
– year 5 = 450 units.
• The total number of units expected to be
produced by the machine = 2 000 units.
Production unit method
Acquisition of PPE during the year
• Suppose a machine is purchased six months
before the end of the year. The provision for
depreciation for the first year must be
determined for the portion of the year, which
in this case is (6 ÷ 12) or 50%.
Example:
– If the cost price of the machine, bought 6 months
before the year end, is R460 000 and the
depreciation rate is 20% per year, the depreciation
to be provided for the first year will be:
R460 000 X 20% X 50% = R46 000.
Disposal of PPE – SG Exercise 12.3, p249
Profits and losses on disposal of assets must be disclosed separately in the statement
of comprehensive income.
Trade-in an asset – TB Example 12.11
A new machine (ACN) is purchased for R20 000.
An old machine (CNA), which cost R10 000 and
on which depreciation amounting to R8 000 has
been provided for, is traded in on the new
machine. A trade-in value of R2 500 is received
and the balance of the purchase price of the
new machine is paid in cash.
Require:
1. Journal entries
2. Ledger accounts.
A new machine (ACN) is purchased for R20 000.
Machinery realisation
Details Fol R Details Fol R
Machine CAN (cost) 10 000 Accumulated depreciation b/d 8 000
Profit on sale of non- Creditor 2 500
current asset 500
10 500 10 500
Creditor
Details Fol R Details Fol R
Machinery realisation 2 500 Machine ACN b/d 20 000
Bank 17 500
20 000 20 000
Machine ACN
Details Fol R Details Fol R
Creditor 20 000
Bank
Details Fol R Details Fol R
Creditor 17 500
Financial statements
(sole proprietorship)