Basic Accounting Concepts

1. Basic Accounting Concepts SaajidaDhooma CA(SA)

2. Outline of today’s course work • Theory of Accounting • The Accounting Equation • The Accounting Cycle • General Journal • General Ledger • Trial Balance • Annual Financial Statements

3. Why is Accounting relevant to Forensic Investigations? • Should there have been any suspicious/fraudulent activity that has occurred within the company and there is a need to look through the financial aspects it is critical that you are aware of the correct terminology and where to find the relevant information within the financial framework

4. Theory of Accounting

5. What is Financial Accounting? • It is a process of identifying and recording financial transactions of an individual/ business -example • Purchasing Stock • Selling • Running Expenses • Once all the transactions are recorded we use this information to draw up financial statements - this is called reporting on the financial information • These financial statements are then used by USERS for decision making

6. Users of Financial Information • INTERNAL USERS • Owners – to determine whether the business is profitable and financially viable over a long period of time. • Managers – to ensure that the business operates efficiently • Employees – to determine whether their employer is able to provide stable employment and remuneration

7. Users of Financial Information • EXTERNAL USERS • Customers – to determine if the business can provide them with the product for a long period of time. • Competitors – to maintain that competitive edge. • Lenders – to determine if the business will be able to repay loans and interest on it • Government – to determine if the business should be registered and the amount of tax that should be paid • Suppliers – to determine if the business is able to make payments for goods purchased on credit. • Investors – to determine if the business is a viable for investment in it and to assess the risk and returns on an investment in the business.

8. Four Characteristics Accounting Information must have to be regarded as Useful • 1. Comparability - information presented must be comparable to those presented by other organisations and also various accounting periods so that users can identify trends in the performance and financial position of the business • 2. Understandability – information must be readily understandable to all users. • 3. Relevance – information presented must be relevant to the needs of the users in order to make economic decisions • 4. Reliability- information must not be misleading and should be free of material error and bias.

9. Fundamental Accounting Concepts • 1. Going concern • Assumption that business will continue for the foreseeable future with no intention to shut down • 2. Matching Concept • Revenue and Expenses/Costs are recognised and recorded in the period they occurred irrespective of the timing of the receipt of cash or payment. Revenue and expenses are also matched – expenses relating to earning that revenue shown in the same period • 3. Consistency Concept • Once an accounting method is chosen to record a type of transaction, the same method applied across similar transactions and method will not change from year to year • Prudence Concept • Always choosing the most conservative option when recording information reflecting the least favourable position/net income

10. Basic Forms of Business • 1. Sole Trader • 2. Partnership • 3. Close Corporation • 4. Company • Private Company • Public Company

11. Types of Business Activity • 1. Service Business • The business provides a services, for which it charges a fee, like salons, accountants, lawyers. • 2. Manufacturers • The business buys raw materials that is converted into finished products. • 3. Wholesalers • Wholesalers are often termed middlemen, as they buy in bulk from manufacturer and then supply the goods in smaller quantities. • 4. Retailers • Retailers buy goods from wholesalers and sell them at a mark-up to consumers in smaller quantities.

12. Fields of Accounting

13. What have we covered thus far? • What is Financial Accounting • Users of Financial Accounting • Characteristics of Accounting Information • Types of Business Activity • Fields of Accounting

14. The Accounting Equation

15. Elements of Financial Statements

16. What Are Your Assets & Liabilities Currently?

17. Your net worth In accounting terms, net worth is called Owners Equity

18. 2 Types of Assets in Business

19. 2 Types of Liabilities in Business

20. Components of the Accounting Equation

21. Exercise 1 & 2 • Exercise 1 – word doc - as a group • Exercise 2 – word doc – individual work

22. Exercise 3 • Gail is a qualified hairdresser, who has set up a hairdressing salon at her home. She is not certain about the accounting classifications. You are required to assist her in correctly classifying the following items. You must view all transactions from the salon’s point of view. Classify each of the following items as either an asset (A); liability (L); income (I) or expense (E). • 6.1 Money borrowed from her husband to set up the salon • 6.2 Receipts from customers • 6.3 Stock of shampoo, conditioners, colour rinses and treatments • 6.4 Water and electricity used in the salon • 6.5 Wages of her assistant • 6.6 Amounts owed to the suppliers of stock • 6.7 Hairdryers , flat irons and other equipment bought for the salon • 6.8 Amount owed to Gail by customers • 6.9 Call charges for the telephone used in the salon • 6.10 Amount paid for tea, coffee, sugar and milk for the clients

23. Answers • 6.1 Money borrowed from her husband to set up the salon (L) • 6.2 Receipts from customers (I) • 6.3 Stock of shampoo, conditioners, colour rinses and treatments (A) • 6.4 Water and electricity used in the salon (E) • 6.5 Wages of her assistant (E) • 6.6 Amounts owed to the suppliers of stock (L) • 6.7 Hairdryers , flat irons and other equipment bought for the salon (A) • 6.8 Amount owed to Gail by customers (A) • 6.9 Call charges for the telephone used in the salon (E) • 6.10 Amount paid for tea, coffee, sugar and milk for the clients (E)

24. What do we refer to when we say Annual Financial Statements?

25. Annual Financial Statements Comprise Off

26. Basic Principle of Accounting Image from Investor Academy

27. Example 1(Example 3, page 24, Basic Accounting for Non Accountants) • K Masondo is the owner of Mars Services, which offers a carpet cleaning service. As at the 31 March, they own equipment of R120 000, clients owe R50 000 for services rendered and Mars Services owes R25 000 to a supplier for parts purchased. Mars also has R8000 cash in the bank • REQUIRED • Complete the BAE for MARS and determine the owners equity

28. Solution • Step 1 – Identify the assets • Equipment – R120 000 • Debtors – R50 000 • Cash at bank – R8 000 • Step 2 – Identify the liabilities • Creditors – R25 000 • Step 3 - Substitute these values in the BAE and solve • A = O + L • 120 000 + 50 000 + 8000 = OE + 25 000 • 178 000 = OE +25 000 • OE = 178 000 – 25 000 • R153 000

29. Exercise 4Exercise 3, chapter 3, page 25 – Basic Accountants for non Accountants • In each of the following independent situations determine the following: • 1. The assets of a business which has OE of R20 000 and liabilities of R10 000 • 2. The OE of a business which has assets of R50 000 and liabilities of R32 000 • 3. The owners contribution during the year if the business has assets of R60 000, liabilities of R15 000 and OE (excluding capital contributed by the owner during the year) of R25 000

30. Exercise 4 Solution • In each of the following independent situations determine the following: • 1. The assets of a business which has owner’s equity of R20 000 and liabilities of R10 000 • Assets = R30 000 • 2. The owner’s equity of a business which has assets of R50 000 and liabilities of R32 000 • Owners’ equity = R18 000 • 3. The owner’s contribution during the year, if a business has assets of R60 000, liabilities of R15 000 and owner’s equity (excluding capital contributed by the owner during the year) of R25 000 • Capital invested = R45 000 – R25 000 = R20 000

31. Exercise 5Exercise 4, chapter 3, page 25– Basic Accountants for non Accountants • Calculate the missing figures using the BAE • 1. 2. • Bank = 20 000 Capital = 750 000 • Vehicles = 25 000 Mortgage Bond = 250 000 • Equipment = 35 000 Bank = ? • Capital = ? Machinery = 900 000 Debtors = 50 000

32. Exercise 5 Solution • 1. Bank= 20 000 • Vehicles = 25 000 • Equipment = 35 000 • Capital = ? • Capital R80 000

33. Exercise 5 Solution continued… • 2. Capital = 750 000 • Mortgage loan = 250 000 • Bank = ? • Machinery = 900 000 • Debtors = 50 000 • Bank R50 000

34. The Double Entry Principle • DR CR • ……..ACCOUNT Each Asset / Liability / Equity / Income / Expense account will have a T account. RULE : EVERY DR MUST HAVE A CORRESPONDING CR The sum of all DR = sum all CR The accounting equation A= O + L based on the double entry system Equation always must balance!

36. Exercises– word doc • Exercise 6 – word doc • Exercise 11, page 41- Basic Accounting for Non Accountants • Exercise 7 – word doc • Illustrative example, page 36 – Basic Accounting for Non Accountants

37. Exercise 8Exercise 9, page 40, Basic Accounting for Non Accountants • You are the bookkeeper for XYZ Consulting. These are transactions for February 20.6, first month of business • The owner contributed R50 000 cash and Furniture & Equipment costing R29 000 • Paid R1000 by cheque for rent • Bought Stationery on credit, invoice issued R2500 • Rendered a service and charged R3500 to Ms Shozi. She will pay the following month • Bought a vehicle costing R90 00. Paid R30 000 deposit. Balance payable over 4 years • Received cash R5200 for services rendered • Physical stock count revealed that unused stationery amounted to R500 • Paid first instalment on vehicle R1250 • The owner withdrew cash R1600 for personal use • REQUIRED • Record the transactions in the accounting equation for the month of February 20.6

38. The Accounting Cycle

39. 1st Step In Accounting Cycle • Transaction/ Event Occurs • Examples • Sale of goods for cash – source document – receipt • Bought stock on CR –source document – invoice • Paid for the stock bought on CR – source document – cheque counterfoil/eft slip/card • Sold goods on credit – source document – sales invoice • Paid electricity bill – source document – cheque counterfoil ,eft slip • Return goods to suppler – source document – credit note

40. 2nd Step In Accounting Cycle • Record transactions in Books of Original Entry • Cash Receipts Journal • Cash Payments Journal • Sales Journal & Sales returns Journal • Purchases Journal & Purchases returns Journal • General Journal – you are required to learn how to record in this journal only

41. 4 Accounts that are not normal • Pre paid Expenses • Asset account • We pay in advance for an expense that we still going to incur • Accrued Expense • Liability account • We incurred an expense in current year and have not yet paid it • Accrued Income • Asset account • Income is due to us but has not been received as yet in the current year • Income received in Advance • Liability account • Received income before any service done for customer or stock sold

42. Recording transactions in General Journal • Exercise 9

43. 3rd Step Posting to the General Ledger • The journal entries recorded during the 2ndstep provide information about which accounts are to be debited and which to be credited • The debit and credit values of journal entries are transferred to ledger accounts one by one in such a way that debit amount of a journal entry is transferred to the debit side of the relevant ledger account and the credit amount is transferred to the credit side of the relevant ledger account. • Once all amounts are transferred the account that has entries on debit and credit side must be balanced to arrive at a final balance for that account – either a DR or a CR balance • Exercise 10

44. 4th Step Trial Balance • The TB is drawn up using the General Ledger. All balances are placed on 1 document reflecting the final balance per account. • Adjusted trial balance is formed once adjusting entries are passed against the trial balance. Eg Accrued income, prepaid expenses, accrued expenses, deferred income. • Exercise 11 – reflection of the TB of the company we worked with thus far.

45. Statement of Profit or Loss and Other Comprehensive Income for the month ended 31 January 2010

46. Statement of Financial Position as at 31 January 2010

47. FINALLY!! • Can we see how the accounting cycle works now from source document to a basic financial statement?

48. Brief Introduction to

49. What is Inventory/Stock? • Current Asset • Held for sale in ordinary course of business • In the process of production • Materials/supplies to be used in production process • Measure at the cost (including cost to incurred to bring stock to location and condition for sale eg transport, tariffs, customs less discounts

50. 2 Methods of recording Inventory/Stock