CHAPTER 1: NATURE &
FUNCTION OF
ACCOUNTING
Notes by Jolize Stephens
FRK 111
1. Double-Entry System
Debit side Credit side
Employment of Generation of
funds funds
- Debit side and credit side must balance
2. Accounting Equation
Assets = Equity + Liabilities
ASSETS Credit
Debit
Increase Decrease
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EQUITY Credit
Debit
Decrease Increase
LIABILITIES Credit
Debit
Decrease Increase
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3. Different Financial Statements
- Statement of Financial Position
- Statement of Profit or Loss and Other Comprehensive Income
- Statement of Changes in Equity
- Statement of cash flow
- Notes to financial statements
- Director’s report
4. Underlying Assumptions of
Financial Statements
Concept Explanation
Accrual concept Earnings during the financial must
be recorded even though you
have not received the money yet.
Going concern concept Assume the entity will still exist in
the future after publishing financial
statements.
Realisation concept Income must be earned before it
can be recognised.
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5. Different Measurement bases
Applicable to Financial
Statements
1. Historical cost Amount paid at acquisition for an
asset.
2. Current value Amount an entity currently would
have to pay to acquire an asset
like that previously purchased.
2.1. Fair value
Realisable value
2.2. Current cost Cost of an asset that is equal at
the measurement date.
6. Accounting Cycle
1. Occurrence of transactions
2. Journals
3. Ledgers & Monthly trial balance
4. Pre-adjustment trial balance
5. Adjustments
6. Post-adjustment trial balance
7. Closing process
8. Post-closing trial balance
9. Financial statements
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CHAPTER 2: FINANCIAL
POSITION AS REFLECTION
IN THE STATEMENT OF
FINANCIAL POSITION
Notes by Jolize
FRK 111
1. The Conceptual Framework
1.1) Assets Read detail in the
textbook!!!
1. Definition requirements of assets:
1.1. A present economic resource
1.2. Controlled by the entity
1.3. As a result of past events
2. Recognition criteria of assets:
2.1. Relevance
2.2. Faithful representation
3. Conclusion
Non-current Assets (> 12 Current Assets (< 12 months)
months)
- Land - Inventory
- Buildings - Debtors
- Vehicles - Cash & Cash equivalents
- Equipment (Favourable bank balance,
- Machinery cash float, petty cash)
- Furniture
- Financial assets - Income receivable
(investments) - Prepaid expenses
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1.2) Liabilities Read detail in the
textbook!!!
1. Definition requirements of liabilities:
1.1. A present obligation
1.2. To transfer an economic resource
1.3. Because of past events
2. Recognition criteria of liabilities:
2.1. Relevance
2.2. Faithful representation
3. Conclusion
Non-current Liabilities (> 12 Current Liabilities (< 12 months)
months)
- Long-term loans - Creditors
- Mortgage bonds - Bank overdraft
- Debentures - Expenses payable
- Income received in advance
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1.3) Equity
- It is the remaining interest in assets after liabilities have been
deducted from assets.
- Owner’s interest in assets.
Influences of Equity
EQUITY Credit
Debit
Drawings - Capital
- Owner’s
contributions
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2. Statement of Financial Position
The Total Assets &
FITNEX LIMITED Total equity and
Liabilities must
Statement of Financial Position as at 31 December 2021 balance!!
ASSETS
R
Non-current assets XXX
Machinery
XXX
Buildings
XXX
Current assets XXX
Debtors XXX
Inventories XXX
XXX
Total Assets XXX
EQUITY AND LIABILITIES
Equity XXX
Capital
XXX
XXX
Non-current liabilities XXX
Long-term loan
XXX
XXX
XXX
Current liabilities
Creditor XXX
XXX
Expenses payable XXX
XXX
Total Equity and Liabilities XXX
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CHAPTER 3: FINANCIAL
PERFORMANCE AS
REFLECTION IN THE
STATEMENT OF PROFIT
AND LOSS AND OTHER
COMPREHENSIVE INCOME
Notes by Jolize
FRK 111
1. Statement of Profit or Loss and Other
Comprehensive Income for a Trading
Entity
FITNEX TRADERS
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December
2021
R
Sales XXX
Cost of Sales (XXX)
Gross profit
XXX
Other income XXX
Rent income XXX
Other expenses (XXX)
Water & Electricity (XXX)
Insurance (XXX)
Fuel (XXX)
Salaries (XXX)
Stationary (XXX)
Finance costs XXX
Interest income
XXX
Interest expense
(XXX)
Profit for the year XXX
Expenses must be
indicated with
BRACKETS!!
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2. Statement of Profit or Loss and Other
Comprehensive Income for a Service
Provider
FITNEX
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December
2021
Income XXX
Services rendered
XXX
Rent income
XXX
Expenses (XXX)
Water & Electricity (XXX)
Depreciation (XXX)
Fuel (XXX)
Salaries & wages (XXX)
Finance costs XXX
Interest income
XXX
Interest expense
(XXX)
Profit for the year XXX
Expenses must be
indicated with
BRACKETS!!
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3. Elements - Statement of Profit or Loss
and Other Comprehensive Income
1. Profit
- Increase equity
- Income > Expenses
2. Loss
- Decrease equity
- Income < Expenses
3. Income
- Increase assets
- Decrease liabilities
- Increase in equity
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4. Conceptual Framework for
Income
1. Definition requirements of income: Read detail in the
textbook!!!
1.1. Increase in assets
1.2. Decrease in liabilities
1.3. Result in an increase in equity
2. Recognition criteria of income:
2.1. Relevance
2.2. Faithful representation
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5. Conceptual Framework for
Expenses
1. Definition requirements of expenses: Read detail in the
textbook!!!
1.1. Decrease in assets
1.2. Increase in liabilities
1.3. Result in a decrease in equity
2. Recognition criteria of expenses:
2.1. Relevance
2.2. Faithful representation
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CHAPTER 4: THE
RECORDING PROCESS
Notes by Jolize
FRK 111
1. Transactions
Cost = Purchase Price + Expenses incurred to get asset to a
condition & location ready for use.
Determining Cost, Profit or Selling Price
E.g. Inventory costs R1500 and there is a mark-up of 20% on cost
% R
Cost 100% R1500
Profit 20%
Selling Price 100 + 20 = 120%
1. Use the following formula:
𝑾𝒂𝒏𝒕%
× 𝑯𝒂𝒗𝒆 (𝑹) = 𝑾𝒂𝒏𝒕 (𝑹)
𝑯𝒂𝒗𝒆%
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2. Determine Selling price
𝟏𝟐𝟎%
× 𝑹𝟏𝟓𝟎𝟎 = 𝑹𝟏𝟖𝟎𝟎
𝟏𝟎𝟎%
3. Determine Profit
3.1. R1800 – R1500 = R300
OR
20%
3.2. × 𝑅1500 = 𝑅300
100%
1.1) Cash Transactions
Cash receipts Credit
Debit
Bank Sales
Cost of sales Inventory
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Debit Cash payments Credit
Inventory Bank
Debit
Petty cash payments Credit
What petty cash Petty cash
are used for e.g.
petty cash
voucher
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1.2) Credit Transactions
Debit
Credit sales Credit
Debtors control Sales
Cost of Sales Inventory
Credit sales – Returns
from debtors
Debit Credit
Debtors allowances Debtors control
Inventory Cost of Sales
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Debit Credit purchases Credit
Inventory Creditors control
Credit purchases –
Return of goods
Debit Credit
Creditors control Inventory
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1.3) Extra-Ordinary Transactions
Debtors’ account previously written off, but
they came later to pay
Debit Credit
Credit losses Credit losses
recovered
1.3.1. Discounts
Debit Credit
Bank Sales
Cost of Sales Inventory
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1.3.2. Management of Debtors
Debit Cancelled payments Credit
Debtors control Bank
Debit
Interest charged Credit
Debtors control Interest income
Credit losses Credit
Debit
Credit losses Debtors control
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Debit
Write-off (insolvency) Credit
Bank Debtors control
Credit losses
1.3.3. Management of Debtors
Additional capital contributions
Debit Credit
Bank OR the Capital
specific asset
Withdrawal of Inventory
Debit Credit
Drawings Inventory
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Cash withdrawals
Debit Credit
Drawings Bank OR Petty
cash
Payments for personal expenses with resources of the
entity
Debit Credit
Drawings Bank
Asset which was
withdrawn
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2. Different Inventory Systems
Perpetual inventory system Periodic inventory system
Purchase inventory on credit Purchase inventory on credit
Inventory Creditors Purchases Creditors
control control
Sold goods & received cash Sold goods & received cash
Bank Sales Bank Sales
Cost of sales Inventory
Goods returned & received a Goods returned & received a
credit note credit note
Creditors Inventory Creditors Purchases
control control returns
Debtor purchased inventory Debtor purchased inventory
with SP of R with SP of R
Debtors Sales Debtors Sales
control control
Inventory
Cost of Sales
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Owner withdrew inventory Owner withdrew inventory
purchased purchased
Debtors Debtors Sales Debtors
Allowances control returns control
Inventory Cost of Sales
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NB
3. Source Documents
Transaction Primary source document
Direct deposits into bank account Bank statement
Cash sales Cash register roll
Instore settlement of debt by a debtor Duplicate receipt
Cash purchases of goods & services - Proof of payment
- Customer’s debit or credit card
voucher
Payments to creditors - Proof of payment
- Customer’s debit card voucher
Expenses paid in cash - Proof of payment
- Customer’s debit card voucher
Purchases of an asset with cash - Proof of payment
- Bank statement
Payment for goods, services, or - Proof of payment from the bank’s
expenses via EFT website
Petty cash payments Petty cash voucher
Credit purchases of goods & Original credit invoice
services
Returned goods purchased on credit Original credit note
Credit sales of goods or services Duplicate credit invoice
rendered on credit
Returns of goods from debtors Original credit note
Extra-ordinary items - Notes
- Journal narrations
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CHAPTER 5: VAT
Notes by Jolize
FRK 111
1. Quick Summary
1. VAT Input
- VAT vendor claims VAT input amount from SARS.
2. VAT Output
- VAT vendor owe VAT output amount to SARS.
3. VAT Control account
- Used at the end of a VAT cycle to determine whether the entity
owes SARS money.
4. Zero-rated supplies
- 19 basic food items
- Petrol
- Diesel
- Paraffin
- Exports
- International transport services
- Farming inputs
- Certain grants from the government
- Going concern sales
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5. Exempt supplies
- Certain financial services
- Educational services
- Residential accommodation
- Public roads
- Rail transport
6. Provision for items, VAT paid by VAT vendor but will not be
refunded by SARS
- Refreshments & entertainment for personnel/customers.
- Certain motor vehicles e.g. double cabs, combi’s, etc.
- Club memberships
2. Who must register for VAT?
1. Compulsory
- > R 1 million of taxable supplies within 12 months.
2. Voluntary
- > R 50 000 of taxable supplies in the previous year.
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3. VAT Process
NB
Purchases Sales
Invoice VAT Cost GP% Sales VAT Invoice
price input price output price
(incl. (excludes (incl.
VAT) (excludes VAT) VAT)
VAT)
115% 15% 100% 100% 15% 115%
Example
The cost of an asset is R50 with a profit mark-up of 10% on cost.
1. Calculate the VAT input
𝑊𝑎𝑛𝑡%
× 𝐻𝑎𝑣𝑒 (𝑅) = 𝑊𝑎𝑛𝑡 (𝑅)
𝐻𝑎𝑣𝑒%
15%
× 𝑅50 = 𝑅7.50
100%
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2. Calculate the purchase price
115%
× 𝑅50 = 𝑅57.50
100%
3. Calculate the Selling price
% R
Cost 100% R50
Profit 10%
Selling Price 100 + 10 = 110%
110%
× 𝑅50 = 𝑅55
100%
4. Calculate the VAT output
15%
× 𝑅55 = 𝑅8.25
100%
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- VAT input = ASSET
- VAT output = LIABILITY
- VAT output > VAT input → Entity owes SARS.
- VAT input > VAT output → SARS owes the entity.
4. VAT Transactions
VAT when recording Credit losses
Debit Credit
Credit losses Debtors control
VAT input
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Drawings
Debit Credit
Drawings VAT output
Inventory/
Purchases
VAT ≠ levied if owner withdraws cash
Debit card payments
Debit Credit
Inventory VAT input
Bank
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VAT control account - Example
Steps:
1. Record a credit balance of R500 on 1 September 20.4
2. Do transfers from VAT input & VAT output accounts
3. VAT output transfer
4. Close-off
Credit balance means – an entity is liable to pay R730 over to SARS.
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