ADDITIONAL NOTES FOR THE FINANCIAL ASPECTS MODULE

Accounting principles:

• Duality: every transaction affects two items on the financial

statements, debit
& credit

• Money as a common unit of account: only transactions that can be measured

in rand (R) terms are recorded.

• The cost principle: assets are reflected at cost.

• Accrual: transactions are recorded when they actually take place not when
cash is received or payment is made.

ACCOUNTING EQUATION

ASSET = OWNERS’ EQUITY (OE) + LIABILITIES

ITEMS THAT INCREASES (+)OE ITEMS THAT DECREASES

Land (purchased +/ sold -)
Buildings (purchased +/ sold -)
Furniture (purchased +/ sold -)
Equipment (purchased +/ sold -)
Machinery (purchased +/sold -)
Investment (purchased + sold -)
Debtor: when goods are sold on
credit – debtor’s account
increases (+), and decrease (-)
when debtors pay.
(-)OE
Income items Expense items
Loan /mortgage bond increases(+) when
Capital contribution + Packing material ( -) the business is given a loan/bond and
decreases (-when the business pays back
Sales + Advertising (-) the amount borrowed.
Rent received + Rent expense( -)
Creditors/payables Increases (+) when the
Services rendered + Salaries (-) business purchases goods on credit, and
decreases ( -) when the business pays or
Discount received + Discount allowed( -)
returns goods back to the suppliers/
Commission received + Rates (-) creditors.
Credit loss recovered + Credit loss( -)
N.B (+ )IS AN INCREASE= CREDIT AND (-) IS
Interest on savings + Interest on loan( -) DECREASE = DEBIT

Interest on fixed deposit + Water and electricity (-)

Bank payment (-) Municipal expenses( -)

Bank receipt (+) Printing costs (-)

Insurance (-)

Cash (on hand +/ withdraw-) Telephone (-)

Other items that decreases OE:

Drawings (-)
N.B. (+) IS AN INCREASE=DEBIT
(DR) (-) IS A DECREASE = Cost of sales( -)
CREDIT Sales returns/debtors allowances (-)

N.B (+ )IS AN INCREASE= CREDIT AND (-) IS A DECREASE

= DEBIT
INTERNAL SOURCE DOCUMENTS: those that ORIGINATE from the business

- Cheque counterfoil (original) – on payment

- Receipt (duplicate) - on receipt of cash

- Cash register slip (duplicate) – on cash transactions

- Sales invoice (duplicate) – on credit sales

- Credit nots (duplicate) – on returns by debtors

- Petty cash voucher (duplicate) – small payments

- Debit note (duplicate) – on goods returned by the business

EXTERNAL SOURCE DOCUMENTS: those that are RECEIVED by the business

- Receipt (original) – on payment to people that are outside the business

- Purchase invoice (original)- on credit purchases

- Credit note (original) – on goods returned by the business

SUBSIDIARY JOURNALS OR BOOKS OF PRIME ENTRY

1. Cash receipt journal (CRJ) - records cash receipts

2. Cash payments journal (CPJ): for recording all cash payments

3. Debtors journal/ sales journal (DJ/SJ): for recording all credit sales

4. Creditors journal/ purchases journal (CJ/PJ) – for recording all credit purchases

5. Debtors allowances journal /sales returns journal (DAJ/SRJ) - for recording all
returns by debtors and allowances

6. Creditors allowances journal/ purchases returns (CAJ/PRJ) – for recording returns

to creditors and allowances
 THE TRIAL BALANCE

A trial balance is a list of all balances and totals in the general ledger.

Purpose of the trial Balance

1. To establish whether the double entry system was applied correctly and consistently.

2. To test the arithmetic accuracy of the entries made.

According to double entry system, one account is debited and another credited.

Therefore, the total of the debit sides of all the accounts must be equal to the total of credit
sides of all the accounts.

Errors that will be revealed by the trial balance:

 1. Incorrect addition of the columns of the trial balance.

2. Incorrect balancing of the accounts.

3. Entry of the balance in the wrong column of the trial balance.

4. Omission of a balance.

5. Omission of either a debit or a credit entry in the accounts, i.e. faulty double entry procedures

or incomplete recording.

Errors that will not be revealed by the trial balance.

1. Complete omission of a transaction.

2. An entry on the correct side of a wrong account.

3. An entry of an incorrect amount on both sides.

4. An error of principle, such as equipment being debited to the trading inventory account.

5. Compensating errors, where the effect of one mistake is cancelled by another mistake.

Order of accounts on the trial balance:

BALANCE SHEET SECTION ACCOUNTS

1. Capital
 2. Drawings

3. Non-current assets

4. Current assets

5. Non-current liabilities

6. Current liabilities

NOMINAL ACCOUNTS SECTION

1. Sales

2. Cost of sales

3. Other expenses

4. Other income accounts

FORMAT OF THE TRIAL BALANCE:

TRIAL BALANCE OF ………….

Debit Credit
BALANCE SHEET SECTION
Capital X
Drawings X
Equipment X
Vehicles X
Trading Inventory X
Bank X
Cash float X
Creditors X
Loan X

NOMINAL ACCOUNTS SECTION

Sales X
Cost of sales X
Rent expense X
Stationery X
Wages X
Rent income X
Water and electricity X
R10 000 R10 000