N4 Financial Accounting SCHOOL FOR SMALL BUSINESS MANAGEMENT CC 9781485710165_ntd_acc_n4_stb_eng_za.indb 1 2020/05/23 14:04 Pearson South Africa (Pty) Ltd 4th floor, Auto Atlantic Building, Corner of Hertzog Boulevard and Heerengracht, Cape Town, 8001 za.pearson.com © Pearson South Africa (Pty) Ltd All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Every effort has been made to trace the copyright holders of material produced in this title. We would like to apologise for any infringement of copyright so caused, and copyright holders are requested to contact the publishers in order to rectify the matter. First published in 2020 ISBN 9781485710165 (print) ISBN 9781485718536 (epdf) Publisher: Amelia van Reenen Managing editor: Ulla Schüler Editor: Peter Lague Proofreader: Book design: Pearson Media Hub Cover design: Pearson Media Hub Cover artwork: Typesetting: Robin Taylor Printed by xxxx printers, [city] Acknowledgements: 9781485710165_ntd_acc_n4_stb_eng_za.indb 2 2020/05/23 14:04 Contents Module 1: Introduction ................................................1 Unit 1.1: Accounting theory, principles and concepts .....................................2 Unit 1.2: The recording of transactions from source documents .................. 32 Unit 1.3: Bank reconciliation ............................................................................83 Unit 1.4: Control accounts ..............................................................................122 Module 2: Accounting entries for a trading concern according to the perpetual inventory system .....................................137 Unit 2.1: Results of sole traders: Activities and financial status .................. 138 Module 3: Accounting entries for a trading organisation according to the periodic inventory system ........................................199 Unit 3.1: Recording inventory transactions in ledger accounts ................... 201 Unit 3.2: Adjusting columns of journals to accommodate the periodic inventory system .............................................................. 211 Unit 3.3: Calculation of cost of sales ............................................................. 217 Unit 3.4: Trading inventory as year-end adjustment .................................... 219 Unit 3.5: Closing transfers .............................................................................. 221 Unit 3.6: Financial statements ........................................................................228 Module 4: Departmental accounts according to the periodic inventory system .............................231 Unit 4.1: Aim of departmental accounts .......................................................232 Unit 4.2: Adaptation of source documents ...................................................233 Unit 4.3: Adaptation of books of original entry ...........................................234 Unit 4.4: Adaptation of departmental purchases and sales accounts .........236 Unit 4.5: Departmental trading statement ................................................... 243 Unit 4.6: Departmental Statement of Profit or Loss .....................................246 9781485710165_ntd_acc_n4_stb_eng_za.indb 3 2020/05/23 14:04 Module 5: Organisations without a profit motive ..253 Unit 5.1: Aim of organisations without a profit motive .............................. 254 Unit 5.2: Special items – Ledger Accounts typical to NPOs .......................... 257 Unit 5.3: Special funds ....................................................................................263 Unit 5.4: Concepts in respect of income and expenses as well as receipts and payments .................................................................... 273 Unit 5.5: Analysis Cash Book .......................................................................... 275 Unit 5.6: Trading account per activity .......................................................... 280 Unit 5.7: Statement of Profit or Loss ............................................................. 282 Unit 5.8: Adjustments of accounts to provide for a profit section .............285 Unit 5.9: Statement of Financial Position of non-trading organisations .... 289 Module 6: Statement of Cash Flow .........................301 Unit 6.1: Aim of a Statement of Cash Flow ...................................................302 Unit 6.2: Users of a Statement of Cash Flow .................................................303 Unit 6.3: Cash flow items and setting out Statements of Cash Flow........... 304 Unit 6.4: Non-cash flow items ........................................................................306 Unit 6.5: Procedure for drafting a Statement of Cash Flow ........................ 307 Unit 6.6: Special items in the Statement of Cash Flow .................................310 Glossary .....................................................................322 9781485710165_ntd_acc_n4_stb_eng_za.indb 4 2020/05/23 14:05 Module Introduction 1 Learning outcomes After studying this module, you should be able to: ■ Briefly describe the basic accounting theory, principles and concepts ■ Accounting theory, principles and concepts ■ Identify the different forms of organisations by explaining the similarities and differences between each ■ Sole Trader ■ Partnership ■ Non-profit companies ■ Profit companies ■ Personal liability companies (Inc) ■ State-owned companies (SOC) ■ Private company (Pty Ltd) ■ Public company (Ltd) ■ Close Corporation (can no longer be registered by the CICP) ■ Identify the business activities of these organisations (mentioned above) and indicate the difference between each i.r.o generating profit ■ Service activities ■ Trading activities ■ Manufacturing activities ■ Activities with no profit motive ■ Identify the source documents and the accounts involved with each transaction, and to determine which account must be debited or credited as well as explaining the influence of the relevant transaction on the accounting equation ■ The accounting transactions of service and trading activities with relation to the usage of source documents, the double entry principle and influence of the double entry transactions on the accounting equation 1 9781485710165_ntd_acc_n4_stb_eng_za.indb 1 2020/05/23 14:05 Unit 1.1: Accounting theory, principles and concepts LEARNING OUTCOMES ■ Describe the basic accounting concepts, principles and policy ■ Demonstrate an understanding of the concept ‘financial accounting’ Exam tip Collect two recent DHET exam question papers. Start working through them to assess your strong points. Introduction Every day, millions of nancial transactions take place all over South Africa. For a large entity such as a KFC outlet or a public TVET college, it would be impossible to remember which transactions took place, if no proper record-keeping was done. But it does happen that proper nancial records are sometimes not kept. For example, in South Africa, we regularly hear that the Auditor-General is unhappy with some municipalities, since no proper records of payments were kept. Yet, if a transaction is not recorded, how will the owner of a business or the municipality know how much income was received or whether suppliers have been paid? Sub-unit 1.1.1: Accounting theory LEARNING OUTCOMES ■ Briefly describe the basic accounting concepts, principles and policy 1. The concept ‘financial accounting’ Financial accounting is basically a method to communicate nancial information and activities about an entity to those who have an interest in the nancial affairs of that entity. It consists of three elements: ■ identify or select activities that are labelled as transactions ■ record the transactions in an orderly and systematic way ■ compile accounting reports and communicate the information to interested parties or users. 2 Module 1: Introduction 9781485710165_ntd_acc_n4_stb_eng_za.indb 2 2020/05/23 14:05 There are various accounting reports or nancial statements, for example: Module 1 ■ statement of prot or and other comprehensive income (previously known as the income statement) ■ statement of nancial position (previously known as the balance sheet) ■ explanatory notes (to the statement of nancial position) 2. The concept ‘bookkeeping’ The bookkeeper uses the information that was captured on source documents and records it in the journals and ledger accounts of the entity on a daily basis. At the end of each month the bookkeeper compiles a trial balance. This process is repeated every month and as such, bookkeeping has a monthly cycle. Bookkeeping is an important occupation since bookkeepers do all the preparatory Did you know? work that is needed by chartered accountants. Bookkeeping is only part of the total 3. Objective of financial accounting accounting process. The objective or purpose of nancial accounting is to provide information about: ■ the nancial performance or results for the year of the entity ■ the nancial position on the last day of the year of the entity. Financial performance answers the following questions: ■ Did the entity make a prot or a loss? ■ What is the monetary value of the prot or loss? ■ What was the income of the entity for the year? ■ What were the expenses in producing that income? Financial position answers the following questions: ■ What is the type and value of the assets the entity possesses? ■ How much does the entity owe