1 THE ACCOUNTING CYCLE
1.1 Accounting cycle:
• Entity: any business that conducts operations and is involved in trading.
It can sell goods or render services, with or without the objective of
making a profit.
• Types of entities:
- Sole proprietor: a sole proprietor does not gave to comply with strict
laws and regulations stipulating how the accounting records should
be kept and financial statements prepared.
- Partnership: a partnership involves more than one owner and they
share in profits/losses in a specific ratio.
- Close corporations: CC’s are regulated by the Close Corporations’
act. The CC has members and profits are shared to members as a
profit distribution.
- Companies: financial statements must be prepared in terms of the
Companies Act. In some cases, some companies may need to be
audited by an external auditor.
• The Accounting cycle:
- Recording of transactions and processing documentation.
- Correcting of errors
- Complying with accounting principles
- Preparing financial statements
1.2 Recording transaction and processing documentation:
• Source documents:
- Must include adequate information on recording the transaction
- nature, amount, date and parties involved should be included
- pre-numbered to ensure control
- external -> creditor invoice
1
, - internal -> cheque
• Journals:
- are the first recording of documents
- Purchases journal
Purchases return journal
Cash payment journal
Cash receipts journal
General journal
Sales journal
Sales return journal
• The general ledger:
- A ledger is a collection of accounts, for example all assets, liabilities,
income, expenses.
- There must be a date, the details, amount and reference to the
journal.
- Convenience account ->a summary of certain items, for example
Debtors control account
• Accounting systems:
- Objective: all similar transactions are processed together by an
accounting system. These systems provide information for decision
making and reporting.
- Requirements:
Ø Relevant and accurate information must be available in time;
Ø There must be internal to ensure reliable information and to
safeguard assets;
Ø the system must be adaptable to accommodate adjustments
• Specific systems:
- Purchases and creditors system:
Ø Objectives
All purchases must be authorised
There must be controls to ensure ordered goods re actually
received
2
, Invoiced prices agree to authorised prices
All obligations recorded accurately
Creditors have paid on time
Ø Source documents
Requisitions
Goods received note (GRN)
Monthly creditor statements
Cheque requisitions
Order form
Invoice
Cheque counterfoil
Bank statement (BS)
Ø Journals:
Purchase journal
Purchase return journal
Cash payment journal
Ø General ledger
Creditor control
VAT control
Bank
Inventory
- Sales and debtor system
Ø Objectives
All sales are recorded timeously
Correct amount invoiced
Payments recorded
Control over collected money
Ø Source document
Delivery note
Invoice
Debtor monthly statement
Receipt
Bank deposit slip
Bank statement for direct payments
3
, Ø Journal
Sales journal
Sales return journal
Cash receipts journal
Ø General ledger
Debtor control
VAT control
Allowance for credit losses of debtors
Bank
Sales
Bad debts
Ø Debtors: a client may be granted credit after a credit review of
their financial position. He will then be granted a
postponement of payment, for 30/60 days
Ø monthly statements must be sent to the debtor indicating the
name of debtor, date and details of invoice, opening and
closing balances, payments received and an age analysis of
debt
• Bad debts:
- Steps before writing off bad debt:
Ø Send monthly statements to clients
Ø Phone client and request payment
Ø Debt collector will attempt to collect money
Ø A lawyer will be appointed to collect outstanding debt
- Two scenarios:
Bad debts recovered in current year - Bad debts written off in the previous year and
Dt Bad debts (P/L)) recovered in the current year
Cr Debtors (SFP) Dt bank (SFP)
Dt Bank (SFP) Cr bad debts recouped (P/L)
Cr Bad debts (P/L) (This is income)
4
1.1 Accounting cycle:
• Entity: any business that conducts operations and is involved in trading.
It can sell goods or render services, with or without the objective of
making a profit.
• Types of entities:
- Sole proprietor: a sole proprietor does not gave to comply with strict
laws and regulations stipulating how the accounting records should
be kept and financial statements prepared.
- Partnership: a partnership involves more than one owner and they
share in profits/losses in a specific ratio.
- Close corporations: CC’s are regulated by the Close Corporations’
act. The CC has members and profits are shared to members as a
profit distribution.
- Companies: financial statements must be prepared in terms of the
Companies Act. In some cases, some companies may need to be
audited by an external auditor.
• The Accounting cycle:
- Recording of transactions and processing documentation.
- Correcting of errors
- Complying with accounting principles
- Preparing financial statements
1.2 Recording transaction and processing documentation:
• Source documents:
- Must include adequate information on recording the transaction
- nature, amount, date and parties involved should be included
- pre-numbered to ensure control
- external -> creditor invoice
1
, - internal -> cheque
• Journals:
- are the first recording of documents
- Purchases journal
Purchases return journal
Cash payment journal
Cash receipts journal
General journal
Sales journal
Sales return journal
• The general ledger:
- A ledger is a collection of accounts, for example all assets, liabilities,
income, expenses.
- There must be a date, the details, amount and reference to the
journal.
- Convenience account ->a summary of certain items, for example
Debtors control account
• Accounting systems:
- Objective: all similar transactions are processed together by an
accounting system. These systems provide information for decision
making and reporting.
- Requirements:
Ø Relevant and accurate information must be available in time;
Ø There must be internal to ensure reliable information and to
safeguard assets;
Ø the system must be adaptable to accommodate adjustments
• Specific systems:
- Purchases and creditors system:
Ø Objectives
All purchases must be authorised
There must be controls to ensure ordered goods re actually
received
2
, Invoiced prices agree to authorised prices
All obligations recorded accurately
Creditors have paid on time
Ø Source documents
Requisitions
Goods received note (GRN)
Monthly creditor statements
Cheque requisitions
Order form
Invoice
Cheque counterfoil
Bank statement (BS)
Ø Journals:
Purchase journal
Purchase return journal
Cash payment journal
Ø General ledger
Creditor control
VAT control
Bank
Inventory
- Sales and debtor system
Ø Objectives
All sales are recorded timeously
Correct amount invoiced
Payments recorded
Control over collected money
Ø Source document
Delivery note
Invoice
Debtor monthly statement
Receipt
Bank deposit slip
Bank statement for direct payments
3
, Ø Journal
Sales journal
Sales return journal
Cash receipts journal
Ø General ledger
Debtor control
VAT control
Allowance for credit losses of debtors
Bank
Sales
Bad debts
Ø Debtors: a client may be granted credit after a credit review of
their financial position. He will then be granted a
postponement of payment, for 30/60 days
Ø monthly statements must be sent to the debtor indicating the
name of debtor, date and details of invoice, opening and
closing balances, payments received and an age analysis of
debt
• Bad debts:
- Steps before writing off bad debt:
Ø Send monthly statements to clients
Ø Phone client and request payment
Ø Debt collector will attempt to collect money
Ø A lawyer will be appointed to collect outstanding debt
- Two scenarios:
Bad debts recovered in current year - Bad debts written off in the previous year and
Dt Bad debts (P/L)) recovered in the current year
Cr Debtors (SFP) Dt bank (SFP)
Dt Bank (SFP) Cr bad debts recouped (P/L)
Cr Bad debts (P/L) (This is income)
4
