Financial Accounting N4 Sample Chapter

N4 Financial Accounting
SCHOOL FOR SMALL

BUSINESS MANAGEMENT CC
9781485710165_ntd_acc_n4_stb_eng_za.indb 1 2020/05/23 14:04

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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

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

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

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 financial 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 financial 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 financial information
and activities about an entity to those who have an interest in the financial 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

There are various accounting reports or financial statements, for example:
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■ statement of profit or and other comprehensive income (previously known as
the income statement)
■ statement of financial position (previously known as the balance sheet)
■ explanatory notes (to the statement of financial 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 financial accounting is to provide information about:

■ the financial performance or results for the year of the entity
■ the financial position on the last day of the year of the entity.
Financial performance answers the following questions:

■ Did the entity make a profit or a loss?
■ What is the monetary value of the profit 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 other entities, e.g. SARS, etc.?
■ What is the amount of capital of the entity?
4. Users of financial information

Various users need accounting and financial information. Some of these are listed
in Table 1.1, together with whether the users are internal or external and why they
require the information.
Table 1.1: Users of accounting and financial information
User Internal/External Why information is needed
Management Internal users to plan future expansions, etc.
Government/SARS External user to calculate tax obligations of the entity
Lenders External users to assess the ability of the entity to repay loans
Suppliers External users to assess the ability of the entity to pay for
purchases
Employees Internal users to be sure that the employer can provide stable
employment and remuneration
Unit 1.1: Accounting theory, principles and concepts 3

5. The profit motive
An entrepreneur or group of entrepreneurs will start a business with the primary
objective of making a profit. When a profit is made, the business can continue
rendering a service or trading activities. As profits increase over time, the business
will be able to expand its operations.
The primary objective of a business is not to employ people. Only when the
owners believe that a profit can be made, will staff be appointed. As profits realise,
will the staff enjoy job security. When profits increase a lot, will the business expand
and appoint more people.
Profit refers to the situation when the income covers all the expenses incurred for
the financial period and there is still money left. The basic formula for profit is:
Sales
Profit = _______________
Income – Expenses
There are three basic categories of industries based on their output in the economy:
■ Manufacturing concerns, i.e. small and large factories making products.
■ Trading concerns, i.e. businesses buying already manufactured products and
selling these products to retailers or to customers.
■ Service undertakings that render a service to clients.
Remember, all businesses involved in trading activities

are buying products (including importing products)
and resell these products to retailers and customers
at a higher price. The secret in business is to add an
amount (called mark-up) that will cover all expenses,
as well as leave an extra amount for profit. In a
trading business we have two types of profit:
■ gross profit
■ net profit.
If the mark-up is too small, the owner will not be able

to pay for all the expenses and will make a loss. Soon
he or she will be out of business. If the mark-up is too
Taxis are an example of a service
big, the owner will not be able to sell all the products,
since they will be more expensive than the products of his or her competitors. Over
time, the business will go bankrupt.
6. International developments and standards

If each entity were to develop and prepare financial reports according to its own
accounting rules or its own interpretation of accounting principles, they would be
unable to understand one another’s accounting reports.
In South Africa, the accounting standards were known as GAAP ( Generally
Accepted Accounting Practice). GAAP was a set of principles regulating the way in
which financial transactions were reported. The objective was to prepare financial
statements that were understandable and reliable, as well as to be able to compare
the information of different organisations.
Over the years most countries have developed their own accounting standards,
resulting in accounting words and concepts sometimes having different meanings in
different countries.

When different countries use different accounting terms, it poses a dilemma for
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international investors and other users of accounting information to understand one
another. Table 1.2 contains some examples.
Table 1.2: Examples of GAAP and IFRS terms
GAAP terms used in South Africa IFRS terms used in rest of world
Debtors Accounts receivable
Creditors Accounts payable
Sales Revenue
Balance Sheet Statement of Financial Position
A few years ago, the South African body of accountants adopted the International
Financial Reporting Standards (IFRS). The IFRS is constantly updated to ensure
that all member countries speak the same accounting language.
7. Early accounting history

Basic accounting transactions were recorded more than 5 000 years ago. There
was no need for a sophisticated system in those days, since only a few trading
transactions took place. More advanced forms of accounting only developed
thousands of years later during the 12th century BCE. At this stage there was
widespread trading among communities.
Rome was the centre of this trading movement. The Romans were the most
developed of societies at the time. Rome imported foods from outside their kingdom
and sold it to other regions at great profit. This eventually led to a better way of
recording transactions.
An Italian, Benedetto Cotrugli, in 1458 wrote a book on commerce. A chapter in
his book discussed some basic bookkeeping aspects.
7.1 Friar Luca Pacioli: The ‘father of accounting’

The ‘double entry system’ was the first step to modern accounting. The first person
to give the double entry system a thorough academic base was Luca Pacioli.
Between 1472 and 1475, he became a Franciscan friar (a priest in the Roman
Catholic Church). On 10 November 1494 (just two years after Columbus discovered
America) he wrote the first book on the double-entry accounting system. Although
Friar Luca is often called the ‘Father of Accounting’, he did not invent the system.
He merely described the method used by merchants in Venice to do their books.
However, he added various aspects to lay down various accounting principles, such
as the following:
■ The accounting cycle as we know it today. Luca Bartolomeo de Pacioli
was born in 1445 in Italy.
■ The use of journals and ledgers. He warned that a person should not go
to sleep at night until the debits equalled the credits. His ledger included
assets (including receivables and inventories), liabilities, capital, income and
expense accounts.
■ Friar Luca proposed that a trial balance be used to prove a balanced ledger.
His impact on accounting was so great that in 1994 (when South Africa became a
democracy) accountants from around the world gathered in the Italian village of San
Sepulcro to celebrate the 500-year anniversary of Luca’s book.

8. Relationship between the owner and his or
her business
From a practical or business operational viewpoint it is important to separate the
business from its owners (or owner). This implies that the owner must keep his or
her personal transactions separate from that of the business. Furthermore, the owner
must have a separate bank account for the business. In this way it will be easier to
determine if a net profit has been made for the year, and so on.
In the next unit (dealing with legal business formats), we will look at what
legislation stipulates regarding the relationship between the owners of an entity and
the entity itself in the event of legal disputes, bankruptcy, and so on.
9. Principle of increasing and decreasing wealth

The principle of increasing and decreasing wealth is looked at from the viewpoint
of the entrepreneur. An entrepreneur needs money to start a business. The money
that the entrepreneur gives to the business, is called capital. The capital contributed
or invested in the business, is not a loan that the business must pay back to the
entrepreneur. This money now belongs to the business. The objective is that the
business will make a net profit. At a later stage the entrepreneur may give additional
capital to expand the business, which also increases capital. The capital amount
indicates the wealth or share of the owner in that business.
However, when the entrepreneur takes money or stock from the business for
personal use, the wealth or share of the owner in the business decreases. If the
business is sold in later years, the entrepreneur should make a good profit on the
sale of the business. This profit then belongs to the entrepreneur. However, if the
business goes bankrupt, the owner will lose all the capital invested in the business.
In summary: Increasing the wealth or share of the entrepreneur in the business
happens when:
■ contributing capital in the business
■ contributing additional capital at a later stage
■ making an annual net profit.
The wealth or share of the entrepreneur in the business decreases when he or she
Did you know?
withdraw anything from the business or makes an annual net loss.
You, as the accountant,
work for the business.
You do not work for
the owner. You must
10. Account names
always approach Every organisation or entity works with many accounts, e.g. electricity, telephone,
transactions in a test salaries, wages, stationery, suppliers, and so on. These different accounts are grouped
or an exam from the
viewpoint of the entity
into five categories. Some categories have many different accounts (e.g. assets and
(i.e. the business) and expenses), while other categories only have a few different accounts (e.g. owner’s equity).
not from the viewpoint
of the owner. The
business accounts must
be seen and treated
as separate from the
personal accounts of
the owner or owners.

10.1 The five accounting categories
Module 1
Assets
Owner’s equity
Expenses Income
Liabilities
Group 1: Assets
Assets refer to the possessions of an organisation. Examples of assets include:
■ land and buildings
■ debtors (people who owe the organisation money)
■ equipment.
There are two types of assets, namely:

■ fixed assets (also known as non-current assets)
■ current assets.
Fixed assets (non-current assets)

Fixed assets or non-current assets refer to those assets that the business buys for
generating an income. These assets are not for resale and the intention is usually to
use them for longer than one financial year. Examples of non-current assets are:
■ fixed deposit (i.e. money invested at a financial institution for a period of more
than one year to earn interest)
■ furniture and fittings (items such as cabinets, desks and chairs, as well as water
basins, built-in cupboards and mirrors).
Current assets
Current assets refer to those assets that can be changed into cash within one
financial year. The value of these assets changes or fluctuates on a daily basis during
a financial year. Examples of current assets are:
■ cash in the bank
■ debtors
■ trading stock or stock.
Group 2: Owner’s equity

Owner’s equity is the worth of the owner in the business, i.e. the claim of the owner
on the business. The value of the owner in the business depends on his or her capital
contributions to the business, the amount the owner withdraws from the business,
known as drawings, and the profit ploughed back into the business.
Capital contributions by the owner

An entrepreneur needs capital to start a business. Capital is the money and/or
other assets (e.g. equipment and vehicles) that the owner invests in the business to

start it, as well as to expand it at a later stage. The owner may make several capital
Did you know?
contributions over the lifespan of the business, for example:
Owner’s equity
■ to start the business (known as start-up capital)
and capital are not
synonyms. Capital is ■ to expand the business at a later stage.
one element of owner’s
equity. The account name for a capital contribution is simply Capital.
Drawings
The entrepreneur has the right to take money and products from the business for
personal use, as long as it is recorded. Examples of drawings are:
■ pay the home telephone account with a business credit card
■ use business cash pay for fuel for his or her daughter’s car
■ take products from the business for use home in his or her home.
Drawings is the account name for all of the above and other situations in which the
owner takes cash or products for personal use.
Group 3: Liabilities
Liabilities refer to money that the business owes to other parties, i.e. financial obligations
that must be paid back. There are two types of liabilities or financial obligations:
■ non-current liabilities (long-term liabilities)
■ current liabilities (short-term liabilities).
Non-current liabilities
These are financial obligations or debt that the business will pay back over a long
period of time exceeding 12 months, e.g. 5 years for vehicles such as a delivery van
(account name is Vehicle Financing) or 20 years for land and buildings (account
name is Mortgage Loan).
Current liabilities
These are financial obligations or debt that the business must pay back within
12 months, e.g.:
■ when the business buys goods on credit from suppliers (account name is
Creditors Control)
■ to pay SARS outstanding taxes on profits (account name is ‘SARS’)
■ when the business receives an overdraft facility from the bank (account name is
Bank Overdraft).
Group 4: Income
The objective of every business is to make a profit. This implies that a business must
receive an income:
■ from providing a service (account name is usually Current Income, but an
educational institution may also call it Fees)
■ from selling products or goods (account name is Sales). Sales occur when the
business sells goods to customers (sale of trading stock).
Besides current income and/or sales, other income accounts are:

■ Rent Received (also known as rent income)
■ Interest Received (also known as interest income)
■ Discount Received.
The effect of income accounts is that they increase the owner’s worth in the business.

Group 5: Expenses
Module 1
Expenses are the cash items the business must pay on a regular basis to ensure that
the business can continue operating. Typical examples are:
■ Advertisements
■ Donations
■ Insurance
■ Licence fees
■ Rates and Taxes (expense paid on fixed property such as land an buildings)
■ Rent paid (also known as rent income)
■ Stationery
■ Salaries and Wages
■ Water and Electricity
There are two different stock systems for businesses. The one that you used in
high school is known as the perpetual inventory system. Under this system, trading
stock is an asset, which either increases or decreases assets. Chapter 3 in this
book deals with the second system, namely periodic inventory system. Under this
inventory system, we do not use the term or the account Trading Stock. Purchases
is the account name for goods that are bought to sell to customers. Purchases are
by convention an expense account under the periodic stock system. The effect of
expense accounts is that they decrease the owner’s worth in the business.
When we buy equipment (e.g. a cash register) for use in the business, it is not for
resale purposes and therefore it is not part of purchases.
11. Ledger accounts or T-accounts

Since Grade 8 you have learned that all accounts have the lay-out of a T-shape. This
means that each account has two sides, namely a debit side and a credit side:
■ debit (abbreviated as ‘Dr’) means left side
■ credit (abbreviated as ‘Cr’) means right side.
Dr Cr
Date Details Fol. Amount Date Details Fol. Amount
Mar 1 Balance b/d 75 00
Debit or Dr means left Credit or Cr means right
For example, the Vehicles Account will look as follows:
Dr Vehicles Cr
Date Details Fol. Amount Date Details Fol. Amount

11.1 The double-entry system
The double-entry system means that when a transaction takes place, two accounts
will be involved. For example:
■ The owner gives R50 000 as capital contribution.
The two accounts involved are the Bank (pay per cheque) and Capital (capital
contribution). The one account will be debited, and the other account will be credited:
■ Debit means that the entry will be recorded on the left side of the account.
■ Credit means that the entry will be recorded on the right side of the account.
Keyword How do you know which side to use to record an accounting entry? The accounting
Equation An equation equation will help you in this regard.
means that the left side
has the same value as The basic accounting equation
the right side of the
equation. There is a very important relationship between Assets, Owner’s equity and
Liabilities, known as the accounting equation:
Assets (A) = Owner’s equity (O) + Liabilities (L)
Do you agree that the following statements are all true?
Assets = Owner’s equity + Liabilities

200 = 200 + 0
500 = 0 + 500
300 + 300 = 0 + 0
–450 = –450 + 0
Do you agree that the following statements are all untrue?
Assets = Owner’s equity + Liabilities

200 = –200 + 0
500 = 0 + 0
–300 +300 = 300 + 0
–450 = 450 + 0
We can illustrate the application of the basic accounting equation as follows:
Assets (A) = Owner’s equity (O) + Liabilities (L)
+ – – + – +
Dr Cr Dr Cr Dr Cr
Let’s call this the Golden Rule in accounting (learn the above by heart).

=
Module 1
+ – (over the bridge: signs swop)
– + – +
■ When an asset account increases, the account is debited.
■ When an asset account decreases, the account is credited.
■ When an owner’s equity account decreases, the account is credited.
■ When an owner’s equity account increases, the account is debited.
EXAMPLE 1 The owner gives a cheque of R50 000 as capital contribution
The two accounts involved are the Bank (business receives cash) and Capital (capital
contribution).
■ Bank (asset) increases with R50 000 ▶ Dr
■ Capital (owner’s equity) increases with R50 000 ▶ Cr
EXAMPLE 2 Business pays a supplier R20 000 by EFT after invoice was
received
The two accounts involved are the Bank (business pays per EFT) and Creditors Control
Keyword
(creditor is paid).
EFT An abbreviation
■ Bank (asset) decreases with R20 000 ▶ Cr for ‘electronic funds
■ Creditors Control (liability) decreases with R20 000 ▶ Cr transfer’, which is
when the Internet
is used to make
payments from one
Now you know how to apply the basic accounting equation for the three basic bank account to
account categories. But what about expenses and income? How do we decide which another.
one to debit and which one to credit?
Expenses and income

have a special relationship or effect on Owner’s equity
Owner’s equity (O)
Expenses Income always
– +
always decrease increases
Owner’s equity Owner’s equity
Expenses (E) Income (I)
– +

EXAMPLE 3 The business pays for pens and files per cheque, R300
The two accounts involved are the Bank (business pays per cheque) and Stationery (pens
and files).
■ Stationery (expense decreases owner’s equity) with R300 ▶ Dr
■ Bank (asset) decreases with R300 ▶ Cr
EXAMPLE 4 The business receives rental from tenant, R5 000
The two accounts involved are the Bank (business receives cash) and Rent Income (for
renting office space).
■ Bank (asset) increases with R5 000 ▶ Dr
■ Rent income (income increases owner’s equity) with R5 000 ▶ Cr
Remember the process:

■ Identify the two accounts involved.
■ Identify the two account categories.
■ Decide if the account is increasing or decreasing, then apply the Golden Rule.
■ Decide if second account is increasing or decreasing, then apply the Golden Rule.
ACTIVITY 1.1 Formative assessment
Required
Nick Twala started a tyre sales and tyre fitting shop on 1 February 20__.
Open the required ledger accounts as you complete the transactions. Enter the
transactions in these accounts. Use your own account folio numbers as well as ledger
paper. Indicate the effect on the accounting equation.
February 20__
Nick Twala deposited all his savings of R300 00 in the Bank Account of the business as
start-up capital.
3 The business bought an electronic tyre testing machine per cheque, R80 000.
5 Bought a counter, desk and chairs on credit from Office Suppliers, R40 000.
8 Purchased different tyres brands per cheque, R45 000.
10 Paid the local municipality for electricity and water per cheque, R3 500.
12 Cash tyre sales from a large truck business. Issued receipt, R75 000.
15 Cash sales as per cash register roll, R15 000.
18 Paid wages per cheque, R3 500.
22 Paid Office Suppliers per cheque as partial payment of their account, R20 000.
28 Paid Telkom per cheque, R2 100.
28 Used a business cheque to pay for his wife’s cell phone, R1 200.

Sub-unit 1.1.2: Forms of ownership
Module 1
LEARNING OUTCOMES
■ 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 companies (Pty Ltd)
■ Public companies (Ltd)
■ Close corporations
Introduction
The economy is divided in three main sectors:
■ Primary sector – refers to the products that are extracted from natural
resources, for example agriculture, forestry, fisheries, mining, and so on.
■ Secondary sector – refers to the different manufacturing industries, i.e.
processing natural resources into usable products, for example wood is used to
manufacture school desks, vegetables are processed as frozen foods, diamonds
and platinum are used to make wedding rings, and so on.
■ Tertiary sector – refers to the provision of various services, for example
education, technology, health, communication services, financial services, and Keyword
so on. Forms of
ownership refers to
In these three sectors we find hundreds of thousands of different businesses, for the ownership model,
i.e. who is going to
example jewellery shops, motor dealers, cell phone shops, private schools, and so own the business, who
on Each one of these businesses must have a specific legal status, known as a form is going to receive the
of ownership. The following are some of the factors that must be considered when profits, who will take
deciding which form of ownership will be selected: the risk if the business
■ Number of owners fails, and so on
‘Forms of ownership’
■ Legal requirements or formalities
is the legal term for
■ How capital will be raised legal status.
■ The personal liability of each owner
■ Who will manage the entity
■ How profits or losses will be shared
Note
■ Continuity, i.e. what happens after the death of an owner.
Separate legal entity
means that the
Some businesses are separate legal entities which are seen as a separate legal person business has a legal
with its’ own name. They can trade as a separate person apart from its owner or status separate from
owners. In these cases, the business can even sue and be sued, as well as enter into that of the owner
contracts with other entities. or owners.

Note 1. Sole trader
A sole trader is a A sole trader or sole ownership is a business owned by one person. It is easy to start,
business owned by
one person.
since there are no legal start-up requirements. Most informal or small businesses are
sole ownerships.
Unlimited liability
(there is no limit) Characteristics
means that the owner
or owners could ■ Formation: No legal start-up requirements (sometimes the local municipality
lose their personal may require a trading licence, e.g. when working with meat, etc.)
possessions to repay ■ Number of owners: One
any debt should the ■ Legal status: No legal status
business go bankrupt ■ Liability: Unlimited liability
or being sued.
Advantages
■ A sole ownership is very easy to start.
■ The owner can make decisions quickly, since he or she does not need to consult
other co-owners.
Disadvantages
■ A sole ownership has unlimited liability.
■ Since there is only one owner contributing money, the size of the business and
its expansion potential is limited.
Note 2. Partnership
A partnership is a A partnership is a business owned by a minimum of two and a maximum of
business owned by a
20 owners, also called partners. There are no legal start-up requirements. However,
minimum of two and
a maximum of twenty it is advisable to have a partnership contract or agreement, outlining at least
partners, but with the following:
jointly and severally ■ what each partner is contributing towards the business
liability (a special form ■ how they will share the profits
of unlimited liability).
■ how they will divide the management tasks between them.
Jointly and severally
liability means that
the partners could Characteristics
lose their personal ■ Formation: No legal start-up requirements (a partnership agreement is
possessions to repay advisable).
any outstanding debt
■ Number of owners: Minimum of 2 and a maximum of 20 partners.
should the business
go bankrupt. ■ Legal status: No legal status.
■ Liability: Jointly and severally liability.
Note
The concept of jointly and severally liability has some unique aspects. For example, it
could happen that a partner who contributed the least capital and as such received
the smallest share of the profit could, if the partnership went bankrupt, lose the most
personal assets of all the partners. This would happen if the partners with the majority
capital contribution have too few personal assets to pay the debt, while the partner who
made the lowest capital contribution has sufficient personal assets to do so. In this case,
the partner who has sufficient personal assets must sell them to repay the debt.
What can you learn from this type of liability?

Advantages
Module 1
■ More capital and skills are contributed resulting in greater expansion potential.
■ Partners can cut costs by sharing equipment and other facilities, and so on
Disadvantages
■ A partnership has jointly and severally liability with regards to outstanding debts.
■ Disagreement between partners can result in slowing down decision-making
processes and even business failure.
3. Non-profit companies
Non-profit companies, also known as organisations with no profit motive or
non-profit organisations (NPOs), are entities which are not driven by the profit Keyword
motive. They are formed to dedicate themselves to specific causes, such as charity, Organisations with
no profit motive an
education and training, promoting gender equality, welfare (like feeding schemes),
entity formed to
and so on. Most of their income is used to advance their cause. They are dedicated serve a public given
to the public interest and their finances are open to public inspection. cause. NPOs do not
The Non-profit Organisations Act No. 71 of 1997 prescribed the standards operate for profit, but
of governance and public accountability within which NPO’s must conduct provide and promote
their activities. social services, i.e.
public causes such
Every NPO must have a constitution outlining various aspects of the NPO, as charities.
such as:
■ the organisation of the NPO, for example number of board members (usually at
least five members)
■ its purpose
■ its functions
■ person or persons in charge
■ details about how the constitution can be changed if needed.
The primary task of board members of the NPO is to make sure that there are
sufficient resources to promote the mission of the NPO.
NPOs do not have owners, only founders. The founders of an NPO are not
allowed to make a profit from the NPO or benefit from the net earnings of the entity.
They can receive compensation for services rendered like other employees or for
expenses incurred.
The Income Tax Act prescribes the types of activities that NPOs can undertake
to receive tax-exempt status (i.e. not pay company tax on their income). Once
tax-exemption is approved by SARS, the NPO obtains Public Benefit Organisation
(PBO) status.
It is not compulsory for NPOs to pay VAT (VAT exempt). As an employer, the
NPO needs to register employees for PAYE (if salary is over income threshold)
and UIF.
The income and property of an NPO cannot be distributed to its members or
office bearers, except as reasonable compensation for services rendered.
Characteristics
■ Formation: Various legal start-up requirements.
■ Number of owners: There are no owners. The founders must draw up a
constitution which will prescribe the number of board members.
■ Legal status: Has legal status.
■ Liability: Limited liability.

Advantages
■ Separate legal entity.
■ Limited liability protection.
■ Tax-exempt status.
■ Contributions from donors are tax exempt.
■ Access to grants.
■ Tax-deductible donations.
■ Credibility.
Disadvantages
■ Creating an NPO takes time, effort and money.
■ Subject to strict financial reporting requirements.
■ Accessing grants is a tedious process.
4. Profit companies
4.1 Personal liability company
Note The name of a personal liability company must have the abbreviation ‘Inc.’ at its
end, for example Smart Accountants Inc., or must end with the word ‘Incorporated’.
Personal liability
means the current and A personal liability company (Inc.) is a company that is mainly used by highly skilled
previous directors of professionals who form specialised businesses, for example engineers, accountants
the company can be or lawyers. The legal start-up requirements for a personal liability company are less
held responsible for the complicated than for a public company.
debts of the company. A personal liability company is governed by a Memorandum of Incorporation
They can lose their
personal possessions
which determines the number of shareholders. These shareholders enjoy limited
to repay any debt liability. The Memorandum of Incorporation must also stipulate the maximum
should the business number of directors. The Companies Act No. 71 of 2008 prescribes that the Board
go bankrupt or sued of a personal liability company must consist of at least one director. Directors of
for debt. personal liability companies do not enjoy limited liability. The principle of personal
liability applies to them.
Characteristics
■ Number of owners: Memorandum of Incorporation will determine number
of shareholders.
■ Liability: Limited liability for shareholders, but directors do not enjoy
limited liability.
Advantages
■ Separate legal entity.
■ Shareholders enjoy limited liability.
■ Enough capital can be raised from more people.
Disadvantages
■ Various legal requirements.
■ Profits of a company are taxed according to a fixed rate.
■ Principle of personal liability applies to directors.

4.2 State-owned enterprises (SoEs)
Module 1
State-owned enterprises were created to be commercial entities managing a
specific commercial activity on behalf of government. The majority of the provisions Keyword
of a public company also apply to state-owned companies. SoEs should make profits A state-owned
and serve as extra income for government. enterprise a legal
entity that is created by
There are more than 700 SoEs in South Africa owned by government (on all
a government (on all
three levels of government). This means that government is the only shareholder or three levels) to manage
the majority shareholder in these enterprises. Some of the most well-known SoEs are a specific commercial
ESKOM, SABC, SAA, PRASA, Rand Water and SA Post Office. activity on behalf of
SoEs that are wholly owned by government do not pay corporate income the government.
tax on their corporate profits. Government will simply request that the dividend
distributions are paid over to government, since the government is the only
shareholder.
State-owned enterprises in South Africa have over the last number of years been
constantly in the news, due to large-scale corruption, state capture, incompetent top
managers, and so on.
Despite being commercial entities, many SoEs make huge losses and cost the
government (i.e. taxpayers) billions of rand per year as bailouts. This means that
government must cut budgets of important areas, for example police, clinics, to
assist SoEs.
Many of the SoEs do not hand in annual financial statements due to incompetent
senior managers, nepotism and state capture. Especially the Auditor-General is
concerned about this and other forms of financial neglect.
4.3 Private company with limited liability

The name of a private company with limited liability ends the abbreviations ‘Prop.
Ltd’ or ‘Pty Ltd’. A private company with limited liability is a business entity
trading for profit. It must have at least one director and must have a minimum of
one shareholder. Membership is limited to a maximum number of 50 shareholders.
It is a more complicated process than a close corporation to start-up. But the
new Companies Act has made the start-up process simpler. There are also fewer
disclosure and transparency requirements than a public company.
Characteristics
■ Number of owners: Minimum of one shareholder; maximum number of 50
shareholders (if more than 50, it must form a public company).
Advantages Did you know?

The new South African
Companies Act (Act
■ Enough capital can be raised from many people/shareholders. No. 71 of 2008)
became effective
Disadvantages on 1 May 2011. It
■ Fewer legal requirements and a simpler process to form a private company. replaced the old
Companies Act No. 61
of 1973.

4.4 Public company
A public company’s name ends with the abbreviation ‘Ltd’). A public company is
Keyword a business entity whose shares are freely traded on recognised stock markets, for
Shareholders the example JSE. It has a minimum of seven shareholders (no maximum number of
owners of a company, shareholders – may even be thousands). It is a complicated process to start-up,
since they have bought
since there are many legal start-up requirements. Public companies must have at
shares in the business.
least three directors.
Another term for a Public Company (Ltd) is Company with limited liability
(Ltd). In the UK the term is Public Limited Company (Plc), for example Manchester
United Plc.
Characteristics
■ Formation: Many legal start-up requirements.
■ Number of owners: Minimum of seven shareholders.
Advantages
■ Enough capital can be raised from thousands of people.
Disadvantages
■ Many legal requirements and complicated process to form a company.
4.5 Close corporation

A close corporation is a business entity owned by one member/director with a
Note maximum of 10 members/ directors and where all the members enjoy limited
Members of a close liability. It is relatively easy to start, since there are little legal start-up requirements.
corporation enjoy
However, new close corporations may not be formed anymore.
limited liability.
However, if it can be
proved that members Characteristics
acted irresponsibly ■ Formation: Few legal start-up requirements.
or negligently by ■ Number of owners: One to a maximum of 10 members.
not keeping to the
rules governing close
corporations, members ■ Liability: Limited liability.
may lose their claim to
limited liability. Advantages
■ Each member enjoys limited liability.
■ Dividends paid to members are not taxed.
Disadvantages
■ Fixed tax rate on profits.
■ Certain administrative requirements to meet, for example accounting
requirements, and so on.

Sub-unit 1.1.3 Business activities of
Module 1
organisations
LEARNING OUTCOMES
■ Identify the business activities of the organisations (in Sub-unit 1.1.2) and
indicate the difference between each in respect of generating profit:
■ service activities
■ trading activities
■ manufacturing activities
■ activities with no profit motive.
Introduction
There are four broad activities that organisations engage in based on their output
(i.e. what they sell or market) in the economy:
■ Service activities that render a service to clients, i.e. they market and sell
intangible benefits on a profit basis. Examples are accounting activities,
electrical installation and repair work, legal activities and motor repair services.
■ Trading activities, i.e. buying already manufactured products (tangible benefits)
and selling these products to retailers or to customers on a profit basis.
Examples are businesses that sell electrical products, groceries, clothing and
motor spare parts or vehicles.
■ Manufacturing activities, i.e. small and large factories making products, i.e.
converting raw materials or half-finished products into new products on a profit
basis. Examples are using raw vegetables and process it into canned or frozen
food or using fabrics and convert it into dresses, suits, and so on
■ Activities with no profit motive, i.e. to render services to communities.
Examples are charity activities that are funded by government of corporate
businesses. The beneficiaries receive the benefits at a low fee or totally free.
Other examples are sport clubs and hobby societies that charge a fee to cover
costs. The intention is not to make a profit, but to breakeven.
Accounting students need to know the differences among these four broad activities
that organisations engage in, since the accounting administration and processes
of each differs. For example, in a manufacturing business the focus is on cost
accounting to determine the various cost elements when manufacturing products.
Cost and Management Accounting N5 focuses on this field of accounting. A trading
business, on the other hand, focuses on calculating the cost of sales to determine
gross profit, while a service business does not have any cost of sales (and thus no
gross profit calculation).

Sub-unit 1.1.4: Accounting transactions
LEARNING OUTCOMES
■ Identify the source documents and the accounts involved with each transaction
■ Determine which account must be debited or credited, as well as explaining the
influence of the relevant transaction on the accounting equation.
Introduction
When a transaction takes place, the information is captured or recorded on a source
document. Accountants need these documents to start the accounting process.
Source documents are the first step in the accounting cycle. Source documents
contain information about a transaction, for example:
■ date of transaction
■ source document number
■ purpose or reason of transaction
■ who was involved in the transaction
■ amount involved (usually both in words and amount).
Source document numbers are usually pre-printed on the document. These numbers
Note
appear in numerical order. Staff members need to ensure that none of these
Source documents
must be completed documents goes missing. Should a document go missing, the matter needs to be
for each and every investigated.
transaction. We will briefly discuss the following source documents:
■ receipts
■ cash register slips (or till slips) and cash register rolls
■ cheques and cheque counterfoils
■ deposit slips
■ cash invoices.
We will also look at supporting documents. We will discuss other source documents
Did you know?
such as Petty Cash vouchers and Bank Statements in later modules.
Note that source
documents come in
different sizes and
formats; for example,
1. Receipts
the cash register slip A receipt is issued to a customer when the business receives cash. The following are
of KFC looks different examples for which a business issues a receipt:
from the one of
■ owner of business gives capital to his or her business
Checkers, and so on.
■ customer pays for goods or client pays for services
■ customer settles an account
■ business receives cash for rent.
Receipts are pre-printed in duplicate form. The customer receives the original
(top) copy, while the business keeps the duplicate (second or bottom) copy. The
bookkeeper or accountant uses the duplicate copy to record the transaction.
Figure 1.1 illustrates a handwritten receipt.

Module 1
Receipt R c
Date: 31 January 2020 Receipt no: 078
Received from: Ms Mary Dube
The sum of: Seven Hundred and Fifty Rand 750 00
Nil cents
For: Repair motor
Signature: Vusi Mda

With thanks
For: Vusi Repairs
Figure 1.1 Example of a receipt
2. Cash register rolls and cash register slips

Inside a manual cash register are two paper rolls. The
transaction information is captured on both rolls. The
copy roll stays inside the till. This information is later
used by the bookkeeper to record the transactions in
the accounting process. The other roll, the original roll,
provides the till slip for the customer.
A computerised cash register system has only one
roll, from which the till slips are issued to customers.
The transaction information is captured directly on the
accounting system in the server or mainframe at the
head office.
3. Cheque and cheque counterfoils

Cheques are used by organisations and private persons to pay for goods and services.
A cheque is a payment method, similar to notes and coins. Due to new technology
(such as e-banking), rising costs and especially cheque fraud, the popularity of
cheques has decreased significantly in recent years.
Businesses and banks are very strict when cheques are used. They usually request
identity documents and contact details in transactions that involve the use of Figure 1.2 Example of a cash
cheques. There are three parties involved in cheque transitions, namely: register slip
■ the drawee – the bank whose cheque is used
■ the drawer – the party (business or person) who writes out (issues) the cheque
■ the payee – the party (business or person) who receives the cheque.
A cheque book consists of two sections, as illustrated:

■ cheque counterfoils (these remain in the cheque book)
■ cheques.

DATE 30/01/2020
TO Good Hope Spares
SIMBANKLimited/Beperk
12-43-00
Date 30/01/2020
FOR Spare Parts
BALANCE B/F R17 200.85

Pay Good Hope Spares or Bearer
DEPOSITS R3 000.00
Amount Seven Thousand Two Hundred Rands and R 7 200.43
TOTAL R20 200.85
Forty Three Cents Vusi Mda
THIS CHEQUE R7 200.43
NEW BALANCE Vusi Repairs
120-487-023 120-487-023
Cheque counterfoil Cheque

Figure 1.3 Example of a cheque and its counterfoil
4. Deposit slips
A deposit slip is completed every time when an employee deposits cash into the bank
account of the business or into the account of another business. Some businesses use
a deposit book consisting of a hundred or two hundred deposit slips. Deposit slips
usually have two sections for the various deposits:
■ section for notes, coins and postal orders
■ section for cheques.
SAAB DEPOSIT SLIP
Credit College of City Town Date 20-03-2020

R C
Paid in by A. Student
Notes
No cheque exceeding Signature AStudent Coins

R500 000.00 can be MO and PO
accepted. Tel 071 541 0000
Subtotal
Drawer’s name Bank Branch code
TELLER’S STAMP 1 F. Ather Simbank 012-345-67 1 000 00
2
3
Authorised by I ACCEPT THE CONDITIONS PRINTED ON THE REVERSE

Total R 1 0 0 0 . 0 0
Authority no
Account no. 4 0 6 1 7 9 4 2 2 6 Dep. ref. 1 4 1 - 6 0 7 - 9 8 1
Figure 1.4 Example of a deposit slip
The employee hands the bank teller the deposit slip with all the cash, i.e. notes,
coins, postal orders (PO) and cheques. The amount of the deposit slip must match
the amount of the cash.
Individuals usually deposit money at an ATM. When individuals deposit cash
over the counter at the bank, they also need to complete a deposit slip.

Some banks use deposit slips that are completed in triplicate, while other banks
Module 1
use deposit slips that are completed in duplicate. The business or client keeps the
original (with a bank stamp affixed to it), while the bank keeps the copy or duplicate.
5. Cash invoices
When a business receives cash from customers or clients, one of the following source
documents are issued:
■ receipt – usually an informal business selling goods or rendering a service
■ cash register roll – any business having a till point with a cash register roll
■ cash invoice – usually a formal business selling goods or rendering a service.
Businesses with a computerised system will issue a computer printed cash invoice,
while other businesses will complete it by hand. The example shown in Figure 1.5
was completed by hand. The information printed on a cash register roll is the same
as that on a cash invoice. Only the format, i.e. the layout, is different.
Cash Invoice
iseecreative events
7 Creative Street
CAPE TOWN 8000
Date: 12 February 2020 Cash Invoice No. 129
To: Mr & Mrs Peters Account No. SI 067

5 Wedding Avenue
GATESVILLE 7460
Quantity Description Unit price Amount
3 Coffee table wedding albums R700.00 R2 100.00
1 Wedding video R5 000.00 R5 000.00
1 Photo shoot CD (300 photos) R3 000.00 R3 000.00
Terms: Total exclusive of VAT R10 100.00

30 days 10% discount if
VAT @ 15% R1 515.00
settled within 20 days of
invoice Total including VAT R11 615.00
Figure 1.5 Example of a cash invoice completed by hand

5.1 Invoices
An invoice is a source document that serves as proof that goods were bought on
credit (will pay at a later stage).
When our business buys on credit from another party, that party will issue our
business the original invoice. When our business sells to customers on credit, these
customers will receive the original invoice and the business keeps the duplicate of
the invoice.
To the buyer it is known as a purchase invoice. To the seller it is known as a
sales invoice.
5.2 Credit notes

A credit note is a source document that serves as proof that unwanted goods were
returned (and that the business has accepted the return of these unwanted goods).
When our business returns unwanted goods, the supplier issues our business
the original credit note (supplier keeps the duplicate). When our business receives
unwanted goods from customers, the customer receives the original credit note and
the business keeps the duplicate credit note.
6. Supporting documents
A source document is the proof that a specific transaction took place. For many
Keyword transactions we also find supporting documents. For example, when the business
Supporting deposits cash with the bank teller, the deposit slip (with the date stamp for that
document an specific day) serves as the source document of the transaction. However, at the end
additional document
of the month, the bank sends a Bank Statement. This Bank Statement reflects all
that confirms that
the transaction took the deposits. The Bank Statement is the supporting document for all the different
place, for example, a deposits, including the deposit for that specific day.
Bank Statement. The Bank Statement is also the supporting document for all the different
payments, such as cheque payments (besides the cheque counterfoil), electronic
fund transfers or EFT (besides the EFT slip), and so on Another example of a
supporting document is the following situation:
■ The business pays a supplier for services rendered or products delivered per
cheque or per EFT. The business will have the cheque counterfoil or EFT
advice as the source document for the payment. However, the supplier will issue
a receipt when the cheque or EFT is received. This receipt is the supporting
document to the transaction that has taken place.
Supporting documents are usually not used as proof of transactions. However, when
a source document is not available or unreadable, the supporting document will be
used to record a transaction.
6.1 Internal and external documents

Accounting documents, such as source documents, come from only two sources,
namely:
■ the organisation that issues these documents
■ the organisation that receives them from other organisations
When the organisation completes and issues the source documents, they are
known as internal documents (come from inside our organisation or business).

When the organisation receives the source documents from other organisations
Module 1
such as suppliers, they are known as external documents (come from outside our
organisation).
Internal documents are numbered according a numbering system selected by our
organisation. For example, if the name of our business is Iseecreative Events, then
our business may decide to number receipts as IER 001, IER 002, IER 003, and so
on When receipts are issued to clients, these receipts are recorded in numerical order
(starting from No. 001) in the books of our business.
External documents are numbered according a numbering system selected by
the outside organisation, for example a supplier. Since the business will buy from
many different suppliers, these documents cannot be recorded in numerical order.
For example, when cash invoices are received from suppliers, these cash invoices
with their totally different document numbers will be recorded in date order as they
are received. Some businesses renumber these external documents and then record
them in the new numerical order.
6.2 Original and duplicate documents

In the various sections we have already explained the difference between original
and duplicate source documents, as well as who issues and receives them. The basic
guidelines are:
■ Our business will always have or keep the duplicate source documents of
the internal documents, since the originals are given to customers and
organisations.
■ Our business will always receive and keep the original source documents of
external documents, since our business now becomes the customer to suppliers
and other organisations.
ACTIVITY 1.2 Identifying source documents for financial transactions
1. Complete the following table:
Transactions Source document Internal/ Original/

External Duplicate
Till sales for the day, R2 500.
Business pays supplier for merchandise by cheque,

R4 000.
Owner gives a cheque as additional capital, R10 000.
Customer pays R350 for goods received.
Business deposits cash for the day with SimBank, R7 000.
Customer settles her account, R250.
Business buys fuel on credit from local garage, R450.
Business pays Telkom by cheque, R600.
Cash sales for the day, R4 200.
Business returns unwanted goods to the supplier, R500.
2. Provide the supporting document in each of the above examples.

26
7. Summary of typical ledger entries
General Ledger (two accounts involved) Effect on basic accounting equation
Source
Transaction document/-s Journal Dr Cr A = O + L
1 The owner, Ms B Smart, Business will CRJ Bank (asset increases) Capital (owner’s equity
deposited R50 000 into retain: ▶ Dr Bank increases)
the bank account of Duplicate ▶ Cr Capital
9781485710165_ntd_acc_n4_stb_eng_za.indb 26
her business, B Smart receipt +50 000 +50 000 0
Technologies, as capital Bank (B2) Capital (B1)
contribution. 50 000 50 000
Module 1: Introduction
2 The business paid by Cheque CPJ Rent expense (expense Bank (asset decreases)
cheque the rent for the counterfoil decreases owner’s equity) ▶ Cr Bank
first month, R10 000. (remains in ▶ Dr Rent expense
cheque book) –10 000 –10 000 0
Rent expense (N9) Bank (B3)
10 000 10 000
3 The business purchased Cheque CPJ Equipment (asset Bank (asset decreases)
a computer for office counterfoil increases) ▶ Cr Bank
use by cheque, R4 000. (remains in ▶ Dr Equipment
+4 000
cheque book) 0 0
Equipment (B6) Bank (B3) –4 000
4 000 4 000
4 Cash cheque issued for Cheque CPJ Cash Float (asset increases) Bank (asset decreases)
cash float, R500. counterfoil ▶ Dr Cash float ▶ Cr Bank
(remains in +500
Cash float (B4) ank (B3) 0 0
cheque book) –500
500 500
5 Ms B Smart paid her Cheque CPJ Drawings (by using a Bank (asset decreases)
private home telephone counterfoil business cheque for private ▶ Cr Bank
account per business (remains in use, the owner’s equity
cheque, R2 000. cheque book) decreases)
▶ Dr Drawings –2 000 –2 000 0
Drawings (B2) Bank (B3)
10 000 2 000
2020/05/23 14:05
Source
6 Cashed a cheque for Cheque CPJ Petty Cash (asset Bank (asset decreases)
petty cash, R300. counterfoil increases) ▶ Cr Bank
(remains in ▶ Dr Bank
+300
cheque book) 0 0
–300
Petty Cash (B5) Bank (B3)
300 300
7 Received R800 cash for Business will CRJ Bank (asset increases) Services rendered
services rendered to retain: ▶ Dr Bank (income increases owner’s
local church. Duplicate equity)
receipt ▶ Cr Services Rendered
+800 +800 0
Bank (B3) Services Rendered (N2)
800 800
8 Use R80 from petty cash Petty Cash PCJ Postage (expenses Petty Cash (asset
to buy stamps. voucher decrease owner’s equity) decreases)
(petty cash ▶ Dr Postage ▶ Cr Petty Cash
voucher: no –80 –80 0
duplicates are Postage (N11) Petty Cash (B5)
used) 80 80
9 Return of goods by Duplicate Debtors Debtors returns (expense Debtors Control (asset
debtor, R100 (at selling Credit Note Allowances decreases owner’s equity decreases)
price). Journal ▶ Dr Debtor Allowances ▶ Cr Debtors Control
/ –100 –100 0
Sales Returns Debtor Allowances (N12) Debtors Control (B9)
Journal 100 100
10 Bought diesel for Original Creditors Fuel (expense decreases Creditors Control (liability
delivery van on credit, invoice Journal owner’s equity) increases)
R800. / ▶ Dr Fuel ▶ Cr Creditors Control
Purchases 0 –800 +800
Journal Fuel (N7) Creditors Control (B10)
Unit 1.1: Accounting theory, principles and concepts

800 800
27
Module 1
2020/05/23 14:05
28
Source
11 B Smart Technologies Bank CRJ Bank (asset increases) Interest income on

received R150 as interest Statement ▶ Dr Bank current account (income
income on current increases owner’s equity)
account. ▶ Cr Interest Income on
Current Acc
+150 +150 0
Interest Income on
Bank (B3) Current account (N4)
150 150
12 Account of debtor for Internal GJ Credit losses / Bad Debtors Control
R250 must be written memo- debts (increase in expenses (asset decreases)
off as irrecoverable. randum decreases the owner’s equity) ▶ Cr Debtors Control
▶ Dr Credit Losses
–250 –250 0
Credit Losses (N20) Debtors Control (B3)
250 250
13 Pay the account of EFT notice of CRJ Creditors Control (liability Bank (asset decreases)
Computer Warehouse payment decreases) ▶ Cr Bank
per EFT after a Bank ▶ Dr Creditors Control
statement was received, Statement –20 000 0 –20 000
R20 000. Creditors Control (B10) Bank (B3)
20 000 20 000
14 A debtor’s account for Internal GJ Debtors Control (asset Interest income on

R1 000 was six months memo- increases) overdue account (income
overdue. Interest is randum ▶ Dr Debtors Control increases owner’s equity)
charged at 10% p.a. ▶ Cr Interest Income on
Overdue Account
+50 +50 0
Interest Income on
Bank (B3) Overdue account (N5)
50 50
2020/05/23 14:05
Source
15 Correct error: Internal GJ Repairs (correct wrong Vehicles (correct error:

It was found that repairs memo- entry: expense decreases asset decreases)
done to the delivery randum owner’s equity) ▶ Cr Vehicles
van for R3 000, was ▶ Dr Repairs
–3 000 –3 000 0
incorrectly debited to
the vehicle account. Repairs (N10) Vehicles (B3)
3 000 3 000
16 Included with the Bank CPJ Debtors Control (asset Bank (asset decreases)
Bank Statement, was Statement increases) ▶ Cr Bank
a cheque of a debtor, ▶ Dr Debtors Control
+600
marked R/D, R600. 0 0
Debtors Control (B3) Bank (B3) –600
(A reverse entry must be
made.) 800 600
17 Bought inventory / Cheque CPJ Trading stock (asset Bank (asset decreases)
trading stock from counterfoil increases) ▶ Cr Bank
Computer Warehouse (remains in ▶ Dr Trading stock
+25 500
per cheque, R25 500. cheque book) 0 0
Trading Stock (B6) Bank (B3) –25 500
(perpetual / continuous
inventory system) 25 500 25 500
18 Bought trading stock Cheque CPJ Trading stock (asset Bank (asset decreases)
from a supplier on counterfoil increases) ▶ Cr Creditors Control
credit, R20 000. (remains in ▶ Dr Trading stock
(perpetual inventory cheque book) +20 000 0 +20 000
system) Trading Stock (B6) Creditors Control (B10)
20 000 20 000
Unit 1.1: Accounting theory, principles and concepts

29
Module 1
2020/05/23 14:05
30
Source
19 Cash sales for the day, Cash register CRJ Bank (asset increases) Sales (income increases
R2 500. Cost price roll (CRR) ▶ Dr Bank owner’s equity)
R1 750. ▶ Cr Sales
(perpetual inventory
system) Bank (B3) Sales (N1)
Under the perpetual 2 500 2 500 +2 500 +2 500
inventory system, you
–1 750 –1 750 0
must record two double Cost of Sales (expense Trading Stock (asset
+ 750 + 750
entries: decreases owner’s equity) decreases)
■ Record the cash sales ▶ Dr Cost of Sales ▶ Cr Trading Stock
part
■ Record the cost of Cost of Sales (N16) Trading Stock (B6)
the sales (cost price) 1 750 1 750
20 Credit sales, R3 000. Duplicate Debtors Debtors Control (asset Sales (income increases
Cost price R1 500. Credit Invoice Journal increases) owner’s equity)
(perpetual inventory / ▶ Dr Debtors Control ▶ Cr Sales
system) Sales Journal
Under the perpetual Debtors Control (B13) Sales (N1)
inventory system, you 3 000 3 000 +3 000 +3 000
must record two double
–1 500 –1 500 0
entries: Cost of Sales (expense Trading Stock (asset
+ 1 500 + 1 500
■ Record the credit decreases owner’s equity) decreases)
sales part ▶ Dr Cost of Sales ▶ Cr Trading Stock
■ Record the cost of
the sales (cost price) Cost of Sales (N16) Trading Stock (B6)
1 500 1 500
2020/05/23 14:05
Exam practice questions
Module 1
You will receive at least two previous exam question papers. Complete these and
hand them in for assessment.
Exam preparation
No theory questions, for example definitions or accounting equation, were asked during
the past number of exam papers. Despite this tendency, do not be surprised when a
future exam question or sub question is set on the accounting equation.

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N4 Financial Accounting

SCHOOL FOR SMALL

9781485710165_ntd_acc_n4_stb_eng_za.indb 1 2020/05/23 14:04

© Pearson South Africa (Pty) Ltd

First published in 2020

ISBN 9781485710165 (print)

Publisher: Amelia van Reenen

9781485710165_ntd_acc_n4_stb_eng_za.indb 2 2020/05/23 14:04

Module 2: Accounting entries for a

Module 3: Accounting entries for a

Module 4: Departmental accounts according

9781485710165_ntd_acc_n4_stb_eng_za.indb 3 2020/05/23 14:04

Module 6: Statement of Cash Flow .........................301

9781485710165_ntd_acc_n4_stb_eng_za.indb 4 2020/05/23 14:05

After studying this module, you should be able to:

9781485710165_ntd_acc_n4_stb_eng_za.indb 1 2020/05/23 14:05

Sub-unit 1.1.1: Accounting theory

1. The concept ‘financial accounting’

9781485710165_ntd_acc_n4_stb_eng_za.indb 2 2020/05/23 14:05

2. The concept ‘bookkeeping’

The objective or purpose of financial accounting is to provide information about:

Financial performance answers the following questions:

Financial position answers the following questions:

4. Users of financial information

Table 1.1: Users of accounting and financial information

User Internal/External Why information is needed

Management Internal users to plan future expansions, etc.

Government/SARS External user to calculate tax obligations of the entity

Unit 1.1: Accounting theory, principles and concepts 3

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Remember, all businesses involved in trading activities

If the mark-up is too small, the owner will not be able

6. International developments and standards

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Table 1.2: Examples of GAAP and IFRS terms

Debtors Accounts receivable

Creditors Accounts payable

Balance Sheet Statement of Financial Position

7. Early accounting history

7.1 Friar Luca Pacioli: The ‘father of accounting’

Unit 1.1: Accounting theory, principles and concepts 5

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9. Principle of increasing and decreasing wealth

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There are two types of assets, namely:

Fixed assets (non-current assets)

Group 2: Owner’s equity

Capital contributions by the owner

Unit 1.1: Accounting theory, principles and concepts 7

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Besides current income and/or sales, other income accounts are:

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11. Ledger accounts or T-accounts

Debit or Dr means left Credit or Cr means right

For example, the Vehicles Account will look as follows:

Unit 1.1: Accounting theory, principles and concepts 9

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Assets (A) = Owner’s equity (O) + Liabilities (L)

Do you agree that the following statements are all true?