Unit 1 Topic 5 Unit 1 Accounting concepts: capital, assets and liabilities In order to be able to read this information you need to understand the concepts that accountants use. What are accounting concepts? Accounting concepts are the terms used in the language of accounting. It helps finances - money or us fo understand where or how the money ofthe business has been spent and funds where money has come from. This information needs to be presente capital — wt particular way that makes it easy for the owner to see what has happened to their business that are used to tuna business cuistomers with/a product or serviee. For example, a hairdresser needs the following assets: hairdriers, basins, chairs, mirrors, ete. Anhairdressing business has many assets ‘limber of different assets and the listithatifollowsigives'a'few inciuding hairdriers, basins, chairs and the examples: money the business makes. =HTopic 5 Unit 1 ities — the debts of the business loan money borrowed from a financial institution such as a bank suppliers — businesses that a business buys items from credit—buy now and pay later interest - money earned on the money you save with a bank : ‘Money in the bank—cash. = Liabilities are the debts of a business. Liabilities can be loans, where the business has borrowed money from a bank of another person. They can also. be amounts of money owed to suppliers, where the business has bought ———_£7i~ duno Tuo Su aaP BHT WCoCE oey fot BENE Ts ‘means that the owner has to take out a loan. Thé disadvantage 6f borrowing) | Savannah Jackson has decided to start a play school which she will run from home. She has put R50 000 of her own money into the business and she has borrowed R20 000 from the bank. She has come to ask you some questions about how to get her business going. 1. What is the correct accounting term for the R50 000? a) 2. What is the correct accounting term for the R20 000? a 3. How much money in total does Savannah have to start her business? (2) 4. Make a list of eight possible assets Savannah would need to buy in order to run her play school 8) 5. Take the list of assets that Savannah may need and investigate how much these assets would cost her to buy. 3) 6. In your opinion, do you think she has enough money to start her business? Give two reasons for your answer. (2) 7. Do you think it is a good idea to borrow money from the bank to start a business? Give a reason for your answer. (2)Unit 2 Topic 5 Unit 2 Income and expenses What is income? goods - products that businesses sell, for example, * selling products to customers, such asa shop selling bread. Food and clothing + providing a service to clients, such asa hairdresser cutting hair. services - services ‘= renting property to other people, for example renting a house out toa family. are provided to ‘* putting money into a bank account where it earns interest. a fee. They ar the non-tangible The correct accounting terms for the income earned above, would be: Products where a skill is used to meet a customer's . need. Examples of . service businesses Rent income - income from renting property are laviyers, "Interest income - income given by banks or financial institutions. doctors and painters income - money ‘earned by the ‘Epa UDE TCE ETT EOE HESS ETN CTO business is expenses ~ running expenses that businesses and people have! However, businesses may have wosetine different expenses depending on the type of business they do. Férexampleya business eran es eg Nick Reed runs a business that coaches cricket and sells cricket ‘out part of his building to a doctor. He gives you the following information + He coaches 50 boys a week and charges R100 per session per boy. + He has received R50 000 for selling kit that cost him R20 000 to buy. + He has to pay three coaches who help him and he pays them cach R200 per week, * Other expenses come to R1S 600 for the month. * The doctor pays rent of R2 500 per month. He also rents Example of expenses of a hairdresser Answer the following questions: 1. Name three ways in which Nick earns an income. 8) 2. Calculate his total income for the month. Q) 3. Calculate his total expenses for the month. (2) 4, Make alist of eight items that would be included as other expenses for the month. (8)Topic 5 Unit 3 Unit 3 Profits and losses What is a profit? Profit is the reason why people start businesses. It is the amount of money profit-the amount __ left over after all the expenses have been paid. Profit can be used to measure by which income whether the business is successful. A profit is made when the income of the is greater than expenditure business is more than its expenses. Profit is calculated as follows: loss the amount by which expenditure Income ~ Expenses = Profit is greater than income pi What is a loss? The opposite of a profit is a loss, in other words, when the expenses of running the business are more than the income earned by the business. Worked example Sam Mfeka started a plumbing business. Solution He wants to know whether he has made a income profit or a loss for the month of May. He Plumbing jobs 34500 gives you the following information: Rent income 3450 * Money received for plumbing jobs TOTAL INCOME 37950 ~ R34 500 a Money received for rent- R3 450 Materials 12 450 Money paid for materials needed to ‘Wages 3.200 provide the service — R 12 450 Advertising 600 Money paid for wages — R3 200 Vehicle expenses 2130 Money paid for advertising ~ R600 Stationery 500 Money paid for equipment* - R5 000 interest on loan 270 Money to pay back loan** ~R 2000 TOTAL EXPENSES 19150 Money paid for motor expenses — PROFIT (Income - expenses) 18 800 R2130 Money paid for stationery ~R'500 Equipment isan asset not an expense ae **Louns are liabilities not expenses. However, Money paid for interest on loan — the interest payable on the loan is an expense R270 because it is the cost of borrowing moneyEXS is getem Practise accounting concepts Blake’s Builders has the following information information to answer the questions that follow: Advertising 1500 |Loan Bank 7/000 | Material costs Capital 70 000 | Rent income 3.000, ‘Income from building 45.000 | stationery 500 services Water and electricity 7000 | Vehicles 55.000 Equipment 30 000 | Wages 13 500 1, Identify the three assets that Blake has in his building business. 2, Calculate the total value of these assets. 3. Make a list and calculate the liabilities of Blake’s Builders. 4, Name two income accounts. 5. Calculate the total income that the business has earned. 6, Make a list of the expenses and calculate the total expenses. 7. Did Blake’s Builders make a profit or a loss? Show the calculation to support your answer. n his financial records. Use the 15 000 = 3) (2) (2) (2) a (6) 2) Unit 3 Topic 5Topic 5 Unit 4 deposit -put money into the bank account bank account ‘current account a bank account used for daily ‘transactions, also called a cheque account ‘Tran, Date CCYY- MM-DD_ 2015-06-01 2015-06-21 2015-06-25 2015-06-25 2015-06-26 2015-06-27 2015-06-28 2015-06-29 2015-06-30 Unit 4 Banking, savings and budgets Banking in businesses All business owners should start their business by opening a bank account in the name of the business. Because there are different types of bank accounts to choose from, it is important to meet with the bank manager to decide what type of account would best suit the needs of the business. Businesses need to have a bank account so that they can easily deposit or withdraw money. In the past, many businesses paid for the items they bought for their business by cheque. However, cheque fraud has become a big problem and now many businesses prefer to use the internet to do their payments and banking. In school accounting, however, we assume that businesses use a cheque account and that most of the payments are made by cheque. This kind of account is called a current account. Bank statements are documents prepared by the bank showing money that they have received into and paid out of the account. Siac Interpret banking information Why do you think it is important for an owner of a bu an account in the name of the business rather than using his personal bank account? 2) 2. Look at the sample bank statement for Olley’s Plumbers below. How much money did Olley’s Plumbers have in its bank account at the beginning s toopen up BANK and at the end of June? @ BANK STATEMENT FOR OLLEY’S PLUMBERS FOR JUNE 2015 ‘Transaction Description/Narrative Payments Deposits Balance Statement Opening Balance R 15.00.00 Internet payment R 350.00- R 14 650.00 Deposit R 85000 1550.00 ‘Bank charges R200 R 15498.00 Deposit 50000 R15.998,00 Deposit R.662.00 _R 16620.00 Payment 425.00 R17 045.00 ‘Cheque payment R 635.00 R 16410.00 Bank charges R 10.00 R 16 400.00 ATM withdrawal R 120.00 R 16 280.00 2015-06-30 Closing Balance R16 280.00Unit4 topic > 3. Explain why the balance of the bank account increases or decreases when there is a: a) deposit b) bank charges © cheque payment. @ 4, Name three advantages of using internet payment. @) 5. Calculate the following: a) the total amount of money deposited into the bank account during June qa) b)_ the total amount of money paid out of the bank account including bank charges. a) Saving money in a bank Savings are money that is put away for something that may be needed in the future. People are able to save when they do not spend all the money they earn. Saving is important because it helps us to plan for the future. By saving a little bit of money each month, people are able to make more money. A bank pays you interest so that the value of your money increases over time. Different types of bank accounts offer you different rates of interest. Banks use the money that people save with them to make loans to other people. When you borrow money from a bank, you have to pay the bank a certain amount of interest every month. Examples of different savings accounts: + Notice deposit —you earn interest and your money is available after you have given the required period of notice Call deposit - you earn interest and your money is available whenever you need it + Fixed deposit — an account where an amount of money is invested for a fixed period (i.e. you cannot use the money) at a fixed interest rate. Budgets To achieve financial success and security it is important for individuals, families and businesses to prepare a budget so that they can live within their means and not overspend. A budget is a plan of how much money you expect to receive and how you expect to spend the money. Budgets will be discussed in more detail in Topic 7. ooTopic 5 Unit Unit 5 Financial records and transactions Why keep financial records? Business owners must know how their business is doing financially so that they can plan properly. To make sense of the financial information, the business needs to keep accurate and up-to-date financial records. This will tell the owner how much money has come in, how much money has been spent and what the money was spent on. The information will help the owner to make sound business decisions. What are financial records? Financial records give a formal account of different financial activities of a business. Examples of financial records are: * Documents - such as contracts, receipts, cheques * Bank statements received from the bank Income Statements - which calculate the business’ profit * Balance Sheets - which show how much a business is worth. ‘There are different people who are interested in reading the financial records of a business. Some of them are: + The owners ~ they need to know whether the business is financially worthwhile * The bank manager ~ as each business needs to have a bank account ‘+ The employees - need to know whether they are earning an acceptable salary or wage. Who prepares the financial records? Business owners are mostly too busy to keep their own financial records. They employ bookkeepers to record the daily information. Bookkeeping is an portant part of accounting. The information that a bookkeeper enters has to be done accurately and on time so that the decisions made by the owner are based on up-to-date information.Se What is a transaction? In accounting we refer to any busi transactions are * buying stock that the business is going to sell * paying the wages of someone who works for the bu * receiving money from customers ‘© buying stationery from a supplier. ess. A transaction is recorded on a piece of paper known as a source document. ‘There are different source documents to record the different transactions that can take place in a business, The bookkeeper records the transactions so that the owner can use the information to make decisions about how to run the transaction - a business deal sourcedocument =arecord of a ‘transaction that took place in the business business. Money paid for Received rent from nes the nail lady — receipt shampoos ~ cheques Paid the water and electricity bill ~ internet transfer Interest earned on money in the bank ~ bank statement Paid the salary of the ney received from eae other hairdresser — customers ~ till slip cheque Examples of transactions in a business Explain transactions and the importance of financial records 1, Draw a spider diagram to show as many different types of transactions as you can think of that take place in Durban Dry Cleaners. 6) 2. Give two reasons why it is important to make sure that the records of the business are accurate and up to date. 2) 3. Name one piece of financial information that the following people would want to know about Durban Dry Cleaners: a) Customers a) b) Owner 2) ©) Bank manager 2 ocSummary Unit 1 Accounting concepts: capital, assets and liabilities * Capital is money, assets or both put into the business by the owner. * Assets are the possessions of the business. * Liabilities are the debts, for example, money the business owes to suppliers, the bank or other people. Unit 2 Income and expenses + Income is the money a business earns. * Income can be earned by: * selling products providing a service letting property saving money in an account that earns, interest. + Expenses are the running costs of a business. + Examples of expenses are water and lectricity, wages, products and advertising Unit 3 Profit and losses * Profit = Income * Ifyour income is greater than your expenses, you make a profit. * If yourincome isles than your expenses, you make a loss. Unit 4 Banking, sa budgets + Every business should open a bank account in the name of the business. + There are different kinds of bank accounts: © current account (also called cheque account) savings account (notice deposit, call deposit, fixed deposit). ‘+ Businesses can save when there is money left over after all the costs have been paid. + Budgets are a plan for the future to see how much money is likely to be received and paid out. gs and Unit 5 Financial records and transactions * Financial records are used to keep track of the business transactions so that the owner can make good financial decisions about the business. + A bookkeeper usually records the transactions. + Transacti take place every day. + There are many different kinds of transactions, for example, buying stock, selling stock, and paying accounts or wages. sare the business deals that