Chapter 3 recordkeeping lesson 3.2 preparing a budget sheet answers

Help With Financial Management

EAR MODULE 661 BUSINESS ADMINISTRATION I: FINANCIAL MANAGEMENT

READ THIS BEFORE YOU DO ANYTHING ELSE! 1. TUTORIAL INTRODUCTION Welcome to studying with Business Management Training College! We trust that you will find your studies towards this qualification rewarding. It is very important that you work through the study material in each guide and in the prescribed text books, as this will prepare you for the assignments at the end of each Module. In order to complete the Qualification you need to be found competent against all the Assessment Criteria of the Topics in this Module. 2. HOW DOES THIS MODULE WORK? Chapters start with a title followed by the lessons for that chapter. At the beginning of every chapter is a list of the outcomes for the particular chapter. YOU ARE NOT REQUIRED TO ANSWER THESE STATEMENTS. We are only informing you of WHAT you will learn and be assessed on in this module. The study guide fulfils the purpose of a tutor, and will effortlessly guide you through the

training material. Each lesson teaches you about a specific topic. Make sure you understand the topic of the lesson before you proceed to the next lesson. If at any time you require assistance, please contact one of the study advisors at BMT College who will promptly assist you with any queries. REMEMBER: IT IS IMPORTANT TO STUDY AND WORK THROUGH ALL THE LESSONS IN THIS GUIDE BEFORE ATTEMPTING THE ASSIGNMENT. IF YOU UNDERSTAND THE WORK IN THIS GUIDE, THE ASSIGNMENT WILL BE EASY. 2

STUDY INSTRUCTIONS 3. ICONS USED IN THIS MANUAL LESSON 1 Indicates the start of a new lesson Indicates the start of a Chapter (also top left of STUDY chapters) Usually an explanation or definition of a specific word or concept Examples of a specific topic or concept Important information. Take a break from your studies! Making notes while you study is very important. Spaces have been allocated throughout this manual for this purpose Indicates self assessment and self assessment answer section THESE SHOULD NOT BE SUBMITTED FOR ASSESSMENT Outcomes for this Module (What you will learn) Steps to be followed in order to complete/execute/do a specific action or task. No prescribed textbook for this module 3

READ THIS BEFORE YOU DO ANYTHING ELSE! HOW TO COMPLETE YOUR ASSIGNMENT 4. COMPLETING THE QUESTIONS:  Answers to review questions must preferably be typed as this eliminates the possibility of an assessor marking the answers incorrect due to the illegibility (unclearness) of the handwriting.  You need to complete ALL the formative questions. Unless the College granted you RPL exemption from that topic or subject, you need to do all the questions. If you do not understand a question, phone or e-mail your assessor to get assistance. ALL questions need to be completed in order to be found competent.  Each question must be marked clearly. The question numbers must not be placed in the left margin but at the top of the answer. Question 1.1 An example of a breakfast cereal is Kellogg’s.  Only attempt the summative assignment after you successfully worked through the module and completed all the formative questions for the particular module/s.  Diploma learners are required to complete a Summative assignment on completion of a subject (provided in the yellow assignment covers).  Use single sheets, front side only. (Double pages must be cut loose on the sides)  Learners who received exemption from certain topics or subjects through RPL (recognition of prior learning) must attach the official letter from the College stating the exempted topics or subjects. 5. SUBMITTING YOUR FORMATIVE AND SUMMATIVE ASSIGNMENTS:  Make sure your name, surname and student number is on every page.  Place the answers to your formative assessment inside the BLUE Formative Assignment

cover provided.  Place the answers to your summative assignment inside the YELLOW Summative Assignment cover provided.  Use a file binder and bind the cover around your answer sheet.   Always keep a copy of your assignment (should your assignment be lost in the post) as the BMTC can take no responsibility for assignments lost in the post.  Only summative assignments must be certified under oath (at any police station or post office) to be the original work of the candidate.  Only the original certified answers will be accepted for assessment. 4 STUDY INSTRUCTIONS  No photocopied, faxed, e-mailed or any other than the original certified answers will be accepted for assessment.  PLEASE NOTE: You can only submit the Formative Assignment once! That means, you only have one attempt for the formative assessment. If you fail the formative you need to make up the marks in the summative. You have three attempts to pass the summative assignment successfully. 6. RESULTS OF YOUR FORMATIVE AND SUMMATIVE ASSIGNMENT:  Your formative and summative assignment results will be outlined in a results letter at the end of each module.  Your formative assessment will count 25% toward your final result for the module and your summative assessment will count 75% of your final result for the module.  To pass and to be advanced to the next module, you need a final result of 50%.  If you do not obtain a pass mark of 50%, you will be required to re-do sections of the summative assignment where you did not obtain a successful result.  Even though your progress will be followed by a study advisor, it will not be possible for the assessor to comment on each answer you submitted. This preventative measure is taken to

eliminate irregularities of sharing memorandum answers with fellow students.  7.  The Assessment Appeals Form need to be submitted to the College. Assignment (tests) structure for the 1st year of the Diploma qualification Study Formative Summative Next Action from the college? Process STUDY COMPONENT 1 Management Principles (a) College will mark module 1 NO SUMMATIVE DUE Step 1 Complete and submit formative assignment and posts after module 1 Module 1 questions module 2. Management Principles (b) College will mark module 2 NO SUMMATIVE DUE Step 2 Complete and submit formative assignment and posts after module 2 Module 2 questions module 3. College will mark module 3 Management Principles (c) Complete and submit the formative and summative of Complete and submit Step 3 summative assignment on component 1. Learner receives Module 3 Module 1, 2 and 3. results of component 1. The College formative questions

posts module 4. STUDY COMPONENT 2 Business Admin (a) College will mark module 4 NO SUMMATIVE DUE Step 4 Complete and submit formative assignment and posts after module 4 Module 4 questions module 5. Business Admin (b) College will mark module 5 NO SUMMATIVE DUE Step 5 Complete and submit formative assignment and posts after module 5 Module 5 questions module 6. College will mark module 6 Business Admin (c) Complete and submit the formative and summative of Complete and submit Step 6 summative assignment on component 2. Learner receives Module 6 Module 4, 5 and 6. results of component 2. The College formative questions posts module 7. STUDY COMPONENT 3 Entrepreneurship (a) College will mark module 7 NO SUMMATIVE DUE Step 7 Complete and submit formative assignment and post after module 7 Module 7 questions module 8. Entrepreneurship (b) College will assess module 8 Complete and submit the

Complete and submit formative and summative of Step 8 summative assignment on Module 8 component 3. Learner receives Module 7 and 8 formative questions results of component 3. END OF 1ST YEAR

STUDY PLANNER Expected Suggested

time of Type REF Heading/Description Duration completion (in hours) (learner to complete) CHAPTER 1 - INTRODUCTION TO FINANCIAL MANAGEMENT Lesson 1.1 Financial Management Defined 4 Lesson 1.2 Basic Financial Concepts 3 CHAPTER 2 - BASIC FINANCIAL ACCOUNTING AND STATEMENTS Lesson 2.1 Recording Transactions 2 The Effect of Transactions on the Financial Lesson 2.2 3 Position of the Enterprise Lesson 2.3 Balancing the Accounts of the General Ledger 3 Lesson 2.4 Preparing and Controlling Budgets 2 Lesson 2.5 The Income Statement 3 Lesson 2.6 The Balance Sheet 3 CHAPTER 3 - BASIC BUSINESS CALCULATIONS Lesson 3.1

Recording Transactions 4 Lesson 3.2 Calculating Interest 2 Lesson 3.3 Financial Ratios 3 Formative Complete formative answer sheet (Blue Cover) 2 Summative 2 Summative assignment about module 4-6 4

TEAM SUPERVISOR CHAPTER 1 INTRODUCTION TO FINANCIAL MANAGEMENT IN THIS CHAPTER:  LESSON 1.1 : FINANCIAL MANAGEMENT DEFINED  LESSON 1.2 : BASIC FINANCIAL CONCEPTS AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO: 1. Define and explain financial management as a concept 2. Explain the general objectives of financial management 3. Explain the main tasks of financial management 4. Explain the meaning of a number of important financial management concepts (capital, profitability, liquidity, solvency, assets, liabilities, income, expenditure and transactions)

LESSON 1.1 LESSON 1.1 FINANCIAL MANAGEMENT DEFINED In this Lesson: Financial Management is concerned with acquiring the necessary resources to ensure the most advantageous financial result to the business over the short and long term. It has to ensure that the business makes best use of its financial resources. The primary financial objective of any business is to gain maximum return on the capital invested in the business. Financial managers want to achieve the highest possible profitability or net income on the capital available. The secondary objectives of financial management all contribute in the end to the primary objective of maximising profitability. CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:  Financial management: The planning, directing, monitoring, organising, and controlling of the monetary resources of an organisation.  Liquidity refers to a company’s ability to keep making all necessary payments regularly and on time. 9

FINANCIAL MANAGEMENT DEFINED 1. FINANCIAL MANAGEMENT DEFINED 1.1 DEFINITION OF FINANCIAL MANAGEMENT Financial management can be defined as the responsibility to:  Acquire the necessary resources to ensure the most advantageous result to the business over the short and long term

 Make sure that the business makes best use of its financial resources Financial Management is about the analysis of financial variables to ensure the maximum utilisation of capital and the maximum attraction of capital to finance the utilisation. 1.2 THE GENERAL OBJECTIVES OF FINANCIAL MANAGEMENT PRIMARY OBJECTIVE The primary financial objective of any business is to gain maximum return on the capital invested in the business. Financial managers want to achieve the highest possible profitability or net income on the capital available. SECONDARY OBJECTIVES The secondary objectives all contribute in the end to the primary objective of maximising profitability. They are:  Use limited resources as well as possible Available capital must be used as effectively and profitably as possible.  Maintain a healthy position of liquidity A healthy position of liquidity often means the difference between growth and success on one hand, or failure on the other hand. If a business is in a situation where it can no longer make compulsory payments in the short term, the business will fail if the problems cannot be overcome. 10 LESSON 1.1 An effective working capital cycle tries to free capital that is tied up in working capital (such as stock and debtors) as quickly as possible to allow this capital to be used for other needs like paying creditors.

 Maintain a positive cash flow To ensure that the business always has enough money to pay what it needs to pay at any given time, it needs to:  Collect debt as soon as possible.  Eliminate unnecessary stock and do not overstock.  Eliminate products that are not profitable.  Lease fixed assets such as buildings, delivery vehicles and computer equipment instead of buying them.  Use discounts offered by suppliers (e.g. bulk discounts).  Keep operating costs as low as possible.  Regularly (at least once a month) draw up a cash budget. It allows you to make suitable provision for possible shortages of cash and to know when cash will be available.  Negotiate the best loan conditions and interest rates from financial institutions. Lower interest rates mean lower cost of capital and therefore more profit. A business must be able to make interest payments on borrowed capital regularly and on time. It must be able to keep to the terms and conditions of the loan.  Implement an effective budgeting system. 1.3 THE TASKS OF FINANCIAL MANAGEMENT 1.3.1 DRAW UP AND MAINTAIN A FINANCIAL POLICY Formulate guidelines according to which financial activities must be conducted. This will also assist in decision-making, e.g. guidelines according to which you will grant credit, determine product prices, value stock and calculate depreciation. Keep to the guidelines that have been formulated.

1.3.2 DRAW UP FINANCIAL STATEMENTS A proper record-keeping system that will provide the accountant / bookkeeper with all the necessary source documents to draw up financial statements must be maintained. 11

FINANCIAL MANAGEMENT DEFINED 1.3.3 DO FINANCIAL ANALYSES (FOR PLANNING AND CONTROL) With a financial analysis you investigate the financial position of your business. This information allows you to apply financial control and to determine to what extent the actual performance of your business meets the objectives you have set for it. Problem areas can be identified and corrective action can be taken when necessary. For example businesses normally loose money for one of two reasons: A) Poor profits High expenses; high administrative costs, advertising costs, staff costs and fixed expenses. Poor gross profit; incorrect purchasing and receiving, incorrect storage and control and inefficient production. Overcoming the problems of poor profits:  High expenses High admin costs: Keep good record of costs and eliminate unnecessary costs. High advertising costs: Only advertise if benefits from advertising will outweigh the costs. High staff costs: Cut down unnecessary wages. Regulate staff meals and privileges. Clean and mend uniforms regularly. Avoid overtime. High fixed expenses: Avoid purchases on lease terms. Renegotiate terms regularly.  Poor gross profit Incorrect purchasing and receiving: Check quantity and quality of goods before paying for them. Choose suppliers carefully to ensure good quality at reasonable price. Incorrect storage and control procedures: Keep cold-rooms and equipment well maintained. Do not over-order. Inefficient production: Keep portion sizes at a reasonable level and monitor complaints from guests. Correct any problems as soon as possible. B) Low turnover This is normally caused by Ineffective management and/or external factors. Overcoming the problems of low turnover:

Ineffective management: More training for managers. Obtain more feedback from guests. External factors: Keep up with changes and events in your micro (internal), macro (PEESTL) and market environments and adapt as soon and effectively as possible. 1.3.4 MAKE CREDIT EVALUATIONS AND COLLECT DEBTS  Judge the creditworthiness of customers who want to buy on credit.  Decide on what terms credit will be granted.  Credit sales mean additional administration and costs.  Debts must be collected effectively and on time because delays can have a negative effect on your cash flow and liquidity. 1.3.5 DEAL WITH TAXES AND INSURANCE OF THE BUSINESS Make provision for paying VAT and Income tax to the SA Revenue services (SARS). 12

LESSON 1.2 LESSON 1.2 BASIC FINANCIAL CONCEPTS In this Lesson: As a manager you should be familiar with the basic financial concepts to be able to know exactly what is referred to when, for instance the financial manager refers to the liquidity of the business or the income statement or balance sheet. It is important that we understand the key aspects and terms of finance. 1. BASIC FINANCIAL CONCEPTS 1.1 FINANCE

Finance is the art of raising, managing, and making money. It is a process that involves three essential steps:  Assessing the financial health of the company  Using the information to plan for future performance  Executing the plan 1.2 CAPITAL Capital structure The capital structure represents the long-term financing of the firm, represented by long- term debt, preferred stock and common equity (consists of capital and retained earnings). Capital structure is distinguished from financial structure, which includes short-term debt plus all other accounts. Capital refers to the money available to the business for the purchase of goods and services with a view to generating an income for the business. 13

BASIC FINANCIAL CONCEPTS  Fixed capital The capital used to obtain assets such as land, buildings, machinery and equipment.  Operating or working capital Money used to acquire current assets such as stock or financing debtors.  Short-, medium- and long- term capital

 Short-term capital: Capital that is usually available for a period of between one and three years; in most cases less than one year  Medium-term capital: Capital usually available for a period between one and five years.  Long-term capital: Capital usually available for a period longer than five years (10, 15 and even 20 years).  Owners’ capital or equity The capital made available by the owner/s of the business.  Outside (borrowed, loaned or foreign capital) The part of the capital lent or provided to the business by external institutions (investors, suppliers, commercial banks and other financial institutions) at a certain price (interest). 1.3 PROFITABILITY Profitability refers to the relationship between the net income earned over a certain period, and the capital used in that period to generate income. Profitability is calculated as a percentage: Net income earned X 100% Total Capital employed 1.4 LIQUIDITY A business will incur certain expenditure in the process of making an income. Payments must be made to suppliers, interest must be paid to financial institutions and salaries/wages, rental, water and electricity must be paid. Liquidity refers to the company’s ability to keep making all these payments regularly and on time.

14 LESSON 1.2 1.5 SOLVENCY The ability of a business to pay off its debt at any given time, even if all its activities should stop, is known as the solvency of the business. Total assets must cover total liabilities of the business (liabilities are what the business owes to its creditors and suppliers and suppliers of capital). This means in fact that the business’s total assets must at least equal or exceed its total liabilities. When the business’s total liabilities exceed its total assets, the business is technically insolvent. 1.6 ASSETS Assets refer to all the economic resources that an enterprise owns. In an accounting environment, an asset is something that an entity has acquired or purchased, and that has money value (its cost, book value, market value, or residual value). An asset can be: (1) something physical, such as cash, machinery, inventory, land and building, (2) an enforceable claim against others, such as accounts receivable, (3) right, such as copyright, patent, trademark, or (4) an assumption, such as goodwill. Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into cash. See also intangible assets and tangible assets FOUR TYPES OF ASSETS TO BE FAMILIAR WITH: 1.6.1 Fixed assets (intangible)

These are assets that confer rights, ex. goodwill, franchise fees, patents, special licences, brands, copyrights, etc. 1.6.2 Fixed assets (tangible) These are items that are purchased to facilitate the running of the business. They are not purchased for resale, ex. land, buildings, plants and machinery, fixtures and fittings, office machines, furniture, vehicles, etc. 15

BASIC FINANCIAL CONCEPTS 1.6.3 Investments When a business has spare cash that the owners do not want to put into their trading operations, they may decide to invest that money into other trading profit earning investments or ventures; investments in other businesses, long-term deposits, shares in listed companies, etc. If the investment is of a long-term nature it will be shown separately on the balance sheet under fixed assets. Short-term investments for quick profits will be shown as a current asset. 1.6.4 Current assets These are the trading assets of the business. They are part of the working capital. Typical current assets are: stock of raw materials, stock of finished goods, work in progress, prepaid expenses and deposits, cash on hand and at bank and outstanding debtors. 1.7 LIABILITIES Liabilities refer to all money owed by the enterprise to other people or businesses. A liability legally binds an individual or company to settle a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. In the case of a company, a liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are

debts payable within one year, while long-term liabilities are debts payable over a longer period. THREE TYPES OF LIABILITIES: 1.7.1 Owner’s equity  Amounts invested in the business by owners: share capital and loan accounts.  Accumulated profits. In the case of a Company or CC, these profits may be  distributable (dividends) or non-distributable (reserves). Equity is a stock or any other security representing an ownership interest. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). 1.7.2 Long term liabilities Amounts the business borrowed from financial institutions and other businesses or individuals. The loans are repayable over long periods of time. 16 LESSON 1.2 1.7.3 Current liabilities The trading liabilities of the company that form part of the working capital; creditors, bank overdrafts, taxes, etc. 1.8 INCOME The amount of money or its equivalent received during a period of time in exchange for labour or services, from the sale of goods or property, or as profit from financial investments. Income is simply the event that results in money flowing into the business. EXAMPLES OF INCOME: Sales

Services rendered (such as an accountant’s services, doctor’s services, a plumber’s services, etc.) Interest received Rent received Each one of these things above represent some sort of event that occurs (like a sale being made), which results in money flowing into a business. Two basic types of income:  From trading or service operations: Sales, commissions, etc.  From other sources: Interest received, dividends, profit on sale of fixed assets, etc. 1.9 EXPENSES Payment of cash or cash-equivalent for goods or services, or a charge against available funds in settlement of an obligation as evidenced by an invoice, receipt, voucher, or other such document. TWO BASIC TYPES OF EXPENSES: 1.9.1 Fixed overhead expenses. These are expenses that must be paid whether the business is trading or not. They are not directly related to sales or manufacturing, ex. rental of administrative offices, receptionist’s and accountant’s salaries, telephone and electricity expenditure. 17

BASIC FINANCIAL CONCEPTS 1.9.2 Variable expenses Expenditure directly related to the manufacturing or sales processes of a company, ex.

materials used, labour, depreciation on machines, etc. 1.10 TRANSACTIONS A transaction is classified as an agreed upon transfer of value from one party to another, ex. sale or purchasing of goods. In an enterprise, all transactions must be recorded, classified and summarised to provide information on which owners, managers and investors can base their decisions and actions. In accounting, any event or condition recorded in the book of accounts is a transaction. This information is normally communicated by means of financial reports such as the balance sheet (financial position) and the income statement (financial result). We obtain essential information from accounting records, such as: Sales Total sales figures by day, week, month and year should be available and these sales should also be broken down into departments, products or type of merchandise, if applicable. These divisions of sales are necessary to determine the profitability of each department or line and to make decisions about it. Operating expenses Information is needed for all types of expenses. Retailers may classify their expenses as selling expenses and general expenses. Factory’s expenses may be classified as manufacturing, selling and general expenses. Accounts receivable Records of total cash sales and total sales on account must always be available. Accounts payable Records of every debt incurred must be available and the total debts outstanding at any time must be easily accessible. Inventory

Regular information on the total inventory must be available. Payroll records Payrolls include records of weekly wages, monthly cheese to employees, pension fund contributions, PAYE, etc. 18

LESSON 1.2 NOTES:

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TEAM SUPERVISOR CHAPTER 2 BASIC FINANCIAL ACCOUNTING AND STATEMENTS IN THIS CHAPTER:  LESSON 2.1 : RECORDING TRANSACTIONS 

LESSON 2.2 : THE EFFECT OF TRANSACTIONS ON THE FINANCIAL POSITION OF THE ENTERPRISE  LESSON 2.3 : BALANCING THE ACCOUNTS OF THE GENERAL LEDGER  LESSON 2.4 : PREPARING AND CONTROLLING BUDGETS  LESSON 2.5 : THE INCOME STATEMENT  LESSON 2.6 : THE BALANCE SHEET AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO: 1. Describe how financial transactions are recorded 2. Explain the double-entry system in accounting 3. Explain the accounting equation 4. Explain the effect a transaction will have on the financial position a business 5. Name and explain the function of all the main documents involved in recording and summarising transactions (source documents, journals, ledger, financial statements) 6. Balance a general ledger account 7. Classify general ledger accounts into asset, liability, income or expenditure accounts 8. Prepare a pre-adjustment trial balance for a small business/department 9. Discuss the importance of budgets 10. Explain why budgets are drawn up 11. Describe the stages that have to be completed in sequence to prepare a proper budget 12. Explain terminology associated with budgeting 13. Identify various types of budgets and briefly explain them 14. Prepare a sales budget for a small business/department 15. Prepare a production budget for a small business/department 16. Prepare an income statement for a small business/department 17. Utilise information from an income statement to calculate the breakeven point, maximum discount, and mark -up % for a business 18. Prepare a balance sheet for a small business/department

LESSON 2.1 LESSON 2.1 RECORDING TRANSACTIONS In this Lesson: Before any transaction can be transferred to the financial statements, it has to be summarised, organised and recorded. Every transaction has an effect on the financial position of the enterprise. Transactions must be classified, recorded and summarised to show its effect on the financial position of the business. 1. RECORDING TRANSACTIONS 1.1 TRANSACTIONS In general, everything a company does results in a transaction, including things that take place between the business and:  Customers, who buy products and services sold by the business  Employees, who are paid wages and provided benefits  Vendors, who sell services, equipment, and supplies to the business  Government agencies, who collect taxes from the business  Sources of equity capital (investors or owners who put money in and take it out of the business)  Sources of debt capital (banks and lending institutions) Accounting guidelines govern how businesses record transactions. They also dictate the design of the recordkeeping system that a business uses and how reports are prepared, based on the information gathered and put into the system.

Before any transaction can be transferred to the financial statements, it has to be summarised, organised and recorded. Every transaction has an effect on the financial position of the enterprise. 21

RECORDING TRANSACTIONS Transactions must be classified, recorded and summarised to show its effect on the financial position of the business. For example: When you sell a stock item:  There is a change in stock.  There is a change in cash or debtors. When you buy stock to resell:  There is a change in stock  There is a change in cash or creditors This bookkeeping or recording phase provides the information on the financial position and the financial result of the enterprise that can be used to compile balance sheets and income statements. All transactions are recorded in two separate accounts. There is an account for each asset, liability and equity item. There also is an account for each income and expense item. All these accounts are classified and grouped together in the general ledger.

Income and expenses affect the equity and are therefore referred to as nominal accounts. The nominal accounts provide the information for the income statement while the asset, liability and equity accounts provide information for the balance sheet and statement of changes in equity. The accounts in the general ledger are basically in the form of a “T” and are often referred to as T-accounts. A DEBIT (Dt) and CREDIT (Ct) system is used. The ledger page is divided in two and debits are entered on the left hand side and credits on the right hand side. When we enter something on the left side of the account, this is known as debiting the account. A debit entry is put through or the account is debited. When we enter something on the right side of the account, it is known as crediting the account. A credit entry is put through or the account is credited. A debit amount on one ledger account must have an equal credit on another ledger account. For every debit entry there always must be a credit entry of a corresponding amount. This is known as the double-entry system or double entry accounting. 22 LESSON 2.1 DOUBLE ENTRY ACCOUNTING This is the method used by most businesses and preferred by accountants. With this method, every valid entry or transaction must involve two (or more) accounts. (In fact, most accounting software packages will not allow you to post a single entry transaction!) Both sides – the debit and the credit – of the transaction must balance and this ensures that all financial statements balance. For example, let’s say that the business buys a R2, 000 computers on credit. The company’s assets go up by R2, 000 (the debit) but the liabilities also go up by R2, 000 (the credit). As this is paid, assets (cash) decrease as payments are made and the liability goes down by the same amount

Some notes about recordkeeping:  Rand signs are typically not used in journals or ledgers, but should be placed in financial reports and statements (even if it is on the first line only).  Commas (to show thousands of dollars) are not required in journals or ledgers but should be placed in financial reports and statements for clarity.  Dashes or blank spaces can be used to indicate zeroes. 1.2 THE ACCOUNTING EQUATION The financial position of an enterprise can be expressed as follows: DEBIT BALANCES = CREDIT BALANCES OR ASSETS = INTERESTS (FINANCING) OR ASSETS =

LIABILITIES + EQUITY A debit balance can only be one of two things: an asset or an expense. A credit balance can only be one of two things: an income or a liability. 23

RECORDING TRANSACTIONS The accounting equation can therefore also be written as follows: How money is applied (Dt) = Where money comes from (Ct) Assets + Expenses (Dt) = Liabilities + Income (Ct) Dt ASSET (e.g. Bank) or EXPENSE Account (e.g. Rent paid) Ct Decrease (-)  An asset account is increased by an entry on the debit side and decreased by an entry on the credit side.  The amount of an expense account is also increased by entries on the debit side and decreased by entries on the debit side. Dt LIABILITY (e.g. Creditor) or INCOME (e.g. Sales) Ct

Decrease (-) Increase (+) • Liabilities and the capital account are increased by entries on the credit side and decreased by entries on the debit side. • The amount of an income account is increased by entries on the credit side and decreased by entries on the debit side. 1.3 LEDGER ACCOUNTS The ledger account is also known as the T-account as it has the form of a T. The title is being written on the horizontal line and transactions are entered on the left side (debit side) and right side (credit side) of the vertical line: Cash Account Debit side Credit side 24 LESSON 2.1 Balance: The balances of certain accounts increase when debited, while the balances of other accounts increase when credited. The reason for this is found in the basic accounting comparison: Assets= Ownership interest + Liabilities