FINANCIAL STATEMENTS NOTES (CHAPTER 1-7)
Module 1 : Recording business financial transactions
General ledger is a collection of accounts which are classed as being owner’s equity, assets or liability.
Small businesses in South Africa take the form of:
- Sole proprietorship
- Partnership
- Close Corporation
Accounting is the language of business – Monthly (bookkeeping) & Yearly (Accounting) cycles
Accounting equation – Must always balance:
OE = A – L
A = OE + L
The 3 main elements of financial statements: assets, liabilities & owner’s equity
ASSETS:
1) the resources controlled by the firm, as a result of past events, and from which future economic benefits re
likely to flow to the business.
2) Those items that are cash already, or are likely to be converted into cash at some point
3) All the cash on hand as well as all the items that will be exchanged for cash at some time in the future
4) All the cash or potential inflows of bash to the business
5) Something that you own, or something that you are owed by someone else
Non-current: not expected to be turned into cash within one year (land & buildings, vehicles, machinery, long term
investments, fixed deposits and other available for sale financial assets.
Current: Cash or likely to be turned into cash within one year (trading inventory, trade receivables, bank, petty cash,
cash float, vat INPUT – VAT OWED BY BUSINESS TO SARS)
LIABILITIES: Debts of the business.
Non- current: Long term debts, not expected to be settled within one year (mortgage loans, long term loans.
Current: Short term debts, expected to be settled within one year (Trade payables, short term loans, bank
overdrafts, vat output (owner owes SARS the vat).
OWNER’S EQUITY: Owner’s wealth in the business
1) Drawings and capital (proprietary accounts): transactions between sole trader and the business will be recorder
via these accounts. Capital account – when owner make contributions of cash or other assets to the business.
Drawings account – when owner withdraws valuables from business.
2) Expenses accounts shows decreases in equity, income accounts records increases in equity
Net profit: Income – expenses
,Trial balance: List of the totals or balances on accounts in the general ledger extracted at month end.
At year-end:
1) business will draft the statement of profit or loss and other comprehensive income to summarize the
business performance over the year (determine the profit)
2) Draw up statement of financial position to summarize the business position at year end (statement of
business assets and liabilities)
Module 2 : Depreciable assets
Depreciation:
1) Adjustment of the value of the non-current asset to a value which is generally referred to as the net
realizable value at end of financial year.
2) The adjusted value of the asset is known as the carrying value (book value)
3) Expense account
4) Annual depreciation is shown as an expense in the statement of profit & loss and other comprehensive
income while the non-current asset is shown in the statement of financial position at its carrying value.
Two methods used for depreciation:
Straight line (fixed instalment) – Calculation on cost price of asset using pre-determined rate of depreciation
Diminishing (reducing) – Deducting the accumulated depreciation on the asset from the original cost of the asset
, Two general ledger accounts are used to record depreciation:
Depreciation (expense account) – Debit this account and close off against the profit and loss account at end of
financial year.
Accumulated depreciation (also known as provision for depreciation and a negative asset account) – Credit this
account with the depreciation amount.
Asset register: The internal office memorandum ( or journal voucher) serves as the source document for the entry.
The support document is the asset register.
Four steps of asset disposal:
1) Take initial COST PRICE out of the books
Dt Asset disposal / Cr Asset account
2a) If disposal mid-way through the year
Write additional depreciation off on the asset being sold (covering the period from the beginning of the
financial year to date the sale takes place)
2b) Take out the accumulated depreciation out of the books
Cr Asset disposal / Dt Accumulated depreciation account
Module 1 : Recording business financial transactions
General ledger is a collection of accounts which are classed as being owner’s equity, assets or liability.
Small businesses in South Africa take the form of:
- Sole proprietorship
- Partnership
- Close Corporation
Accounting is the language of business – Monthly (bookkeeping) & Yearly (Accounting) cycles
Accounting equation – Must always balance:
OE = A – L
A = OE + L
The 3 main elements of financial statements: assets, liabilities & owner’s equity
ASSETS:
1) the resources controlled by the firm, as a result of past events, and from which future economic benefits re
likely to flow to the business.
2) Those items that are cash already, or are likely to be converted into cash at some point
3) All the cash on hand as well as all the items that will be exchanged for cash at some time in the future
4) All the cash or potential inflows of bash to the business
5) Something that you own, or something that you are owed by someone else
Non-current: not expected to be turned into cash within one year (land & buildings, vehicles, machinery, long term
investments, fixed deposits and other available for sale financial assets.
Current: Cash or likely to be turned into cash within one year (trading inventory, trade receivables, bank, petty cash,
cash float, vat INPUT – VAT OWED BY BUSINESS TO SARS)
LIABILITIES: Debts of the business.
Non- current: Long term debts, not expected to be settled within one year (mortgage loans, long term loans.
Current: Short term debts, expected to be settled within one year (Trade payables, short term loans, bank
overdrafts, vat output (owner owes SARS the vat).
OWNER’S EQUITY: Owner’s wealth in the business
1) Drawings and capital (proprietary accounts): transactions between sole trader and the business will be recorder
via these accounts. Capital account – when owner make contributions of cash or other assets to the business.
Drawings account – when owner withdraws valuables from business.
2) Expenses accounts shows decreases in equity, income accounts records increases in equity
Net profit: Income – expenses
,Trial balance: List of the totals or balances on accounts in the general ledger extracted at month end.
At year-end:
1) business will draft the statement of profit or loss and other comprehensive income to summarize the
business performance over the year (determine the profit)
2) Draw up statement of financial position to summarize the business position at year end (statement of
business assets and liabilities)
Module 2 : Depreciable assets
Depreciation:
1) Adjustment of the value of the non-current asset to a value which is generally referred to as the net
realizable value at end of financial year.
2) The adjusted value of the asset is known as the carrying value (book value)
3) Expense account
4) Annual depreciation is shown as an expense in the statement of profit & loss and other comprehensive
income while the non-current asset is shown in the statement of financial position at its carrying value.
Two methods used for depreciation:
Straight line (fixed instalment) – Calculation on cost price of asset using pre-determined rate of depreciation
Diminishing (reducing) – Deducting the accumulated depreciation on the asset from the original cost of the asset
, Two general ledger accounts are used to record depreciation:
Depreciation (expense account) – Debit this account and close off against the profit and loss account at end of
financial year.
Accumulated depreciation (also known as provision for depreciation and a negative asset account) – Credit this
account with the depreciation amount.
Asset register: The internal office memorandum ( or journal voucher) serves as the source document for the entry.
The support document is the asset register.
Four steps of asset disposal:
1) Take initial COST PRICE out of the books
Dt Asset disposal / Cr Asset account
2a) If disposal mid-way through the year
Write additional depreciation off on the asset being sold (covering the period from the beginning of the
financial year to date the sale takes place)
2b) Take out the accumulated depreciation out of the books
Cr Asset disposal / Dt Accumulated depreciation account
