Financial Statement Elements

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Financial Statement Elements

• Financial statement elements include assets, liabilities, and equity.
• Equity includes capital, drawings accounts, income, and expense accounts.
• Income and expenses determine profit or loss.

Relationship Between the Elements

• Assets minus Liabilities equals Equity.
• Income minus Expenses equals Profit or loss.

Location of Elements in Financial Statements

• The Statement of Financial Position shows Assets, Liabilities, and Equity.
• The Statement of Profit or Loss and Other Comprehensive Income display Income and Expenses.
• The Statement of Changes in Equity reflects Equity.

Asset Definition

• Assets are present economic resources controlled by the entity.
• They are acquired as a result of a past event.
• Economic resources have the potential to produce economic benefits.
• Assets can be non-current or current.

Liability Definition

• Liabilities are present obligations to transfer an economic resource.
• They arise from a past event, creating a duty or responsibility.
• The entity has no practical ability to avoid the liability.
• Liabilties can be non-current or current.

Equity Definition

• Equity is the residual interest in the assets of the entity.
• It is determined after deducting all liabilities.

Income Definition

• Income is an increase in assets or a decrease in liabilities.
• It results in an increase in equity.
• It excludes contributions from equity claims holders.

Expenses Definition

• Expenses are decreases in assets or increases in liabilities.
• They result in a decrease in equity.
• They exclude distributions to equity claims holders.

Assets: Current vs Non-Current

• Current assets are short-term, typically used or converted to cash within one year; trade assets belong to this category.
• Non-current assets are long-term, held for more than one year to aid business operations, or purchased for purposes other than trade.
• An item sold for R500 on credit to a debtor would Debit Debtors Control (SOFP) R500 and Credit Sales (P/L) R500.
• A delivery vehicle purchased for R200,000 would Debit Vehicle (SOFP) R200,000 and Credit Bank (SOFP) R200,000.

Non-Current Assets: Investments

• Investments include assets like shares, bonds, or properties.
• They are bought with the expectation of earning income or increasing in value.
• Shares purchased worth R10,000 would Debit Investments (SOFP) R10,000 and Credit Bank (SOFP) R10,000.
• Shares disposed of worth R5,000 would Debit Bank (SOFP) R5,000 and Credit Investments (SOFP) R5,000.

Current Assets: Inventory

• Inventory consists of goods held for sale or raw materials for production, assuming a periodic inventory system.
• An inventory balance of R5,000 at year-end would Debit Inventory (SOFP) R5,000 and Credit Cost of Sales (P/L) R5,000.
• Inventory opening balance used to compute cost of sales R2,500 would Debit Cost of Sales (P/L) R2,500 and Credit Inventory (SOFP) R2,500.
• The FIFO method means goods received first are consumed first.

Assets: Debtors Control

• Debtors control refers to individuals or businesses that owe the entity after purchasing goods or services on credit.
• A customer purchasing goods for R7,000 on credit would Debit Debtors Control (SOFP) R7,000 and Credit Sales (P/L) R7,000.
• A customer paying R3,500 to settle their account would Debit Bank (SOFP) R3,500 and Credit Debtors Control (SOFP) R3,500.

Asset: Debtors Control Credit Losses

• Debtors control credit losses refers to amounts the entity cannot collect from debtors due to insolvency.
• A customer owing R500 goes bankrupt, the entity writes off the debt.
• The write off would Debit Credit Losses (P/L) R500 and Credit Debtors Control (SOFP) R500.

Assets: Bank (Cash)

• Bank refers to an entity's cash held in a business bank account.
• A client paying R1,000 into the entity's bank account to settle an account would Debit Bank (SOFP) R1,000 and Credit Debtors Control (SOFP) R1,000.
• The entity paying R1,500 to purchase inventory would Debit Purchases (P/L) R1,500 and Credit Bank (SOFP) R1,500.

Assets: Petty Cash

• Petty cash is a small amount of cash used for minor expenses.
• When replenishing petty cash with R500, Debit Petty Cash (SOFP) R500 and Credit Bank (SOFP) R500.
• Paying for minor repairs of R250 would Debit Repairs (P/L) R250 and Credit Petty Cash (SOFP) R250.

Types of Discounts Affecting Debtors Control

• Trade discount: A percentage or fixed amount discount offered at the time of purchase.
• Trade discounts are not recorded in accounts, as it reduces the price directly.

Settlement Discount

• Settlement discount is a discount given for early payment of a credit purchase.
• For example, if a customer owing R2,000 pays early and gets a 5% settlement discount, the entity receives R1,900.
• To record this transaction, Debit Discount Allowed (P/L) R100 and Debit Bank (SOFP) R1,900, then Credit Debtors Control (SOFP) R2,000.
• If a customer receives a 10% trade discount on a R5,000 cash sale, the entity receives R4,500.
• To record this, Debit Bank (SOFP) R4,500 and Credit Sales (P/L) R4,500.

Liabilities: Current vs Non-Current

• Current liabilities are repayable over a period of less than 1 year.
• Non-current liabilities are repayable over a period of more than 1 year.
• If an entity borrows money to start a business, repayable over 5 years, the first repayment is in the following financial year.
• In the current year statement of financial position, the portion repayable within the 1st year is a current liability, and the portion repayable in the last 4 years is a non-current liability.

Liability: Creditors

• Creditors are individuals or businesses the entity owes money to because it purchased goods/services on credit.
• Subsequently making a payment of R50,000 to settle the account would Debit Creditors (SOFP) R50,000 and Credit Bank (SOFP) R50,000.
• Purchasing goods on credit worth R100,000 from the supplier would Debit Purchases (P/L) R100,000 and Credit Creditors Control (SOFP) R100,000.
• A periodic inventory system is assumed.

Types of Discounts affecting Creditors Control

• Trade Discount: A percentage or fixed amount discount offered at the time of purchase, usually for bulk buying or loyalty, not recorded directly in accounts.
• Settlement Discount: A discount given for early payment of a credit purchase.
• The entity owes R2,000 to a supplier, pays early, and gets a 5% discount, where the entity pays R1,900.
• Debit Creditors Control (SOFP) R2,000, Credit Discount Received (P/L) R100, and Credit Bank (SOFP) R1,900.
• A supplier gives a 10% trade discount on a R5,000 cash purchase, the entity pays R4,500.
• Debit Purchases (P/L) R4,500 and Credit Bank (SOFP) R4,500.

Liability: Bank Overdraft

• A bank overdraft occurs when you withdraw more money than you have in your bank account.
• Overdrafts create a short-term liability.
• When overdrawing a bank account with R2,000, Debit Bank (SOFP) R2,000 and Credit Bank Overdraft (SOFP) R2,000.
• When subsequently repaying R1,000 of the bank overdraft using cash, Debit Bank Overdraft (SOFP) R1,000 and Credit Bank (SOFP) R1,000.

Equity: Duality Concept

• The Duality Concept is where every financial transaction has two equal and opposite effects, keeping the accounting equation balanced.
• Owner's Equity = Assets - Liabilities
• Equity shows what the owner truly owns.
• Debit means decreases with drawings and expenses while Credit means increases with capital contributions or income.
• Every debit should have an equal and opposite credit.

Equity: Capital Contribution

• Capital contribution can be either financial resources or assets that a business uses to fund its operations and growth.
• An investor contributing R10,000 cash to buy equipment Debits Bank (SOFP) R10,000 and Credits Equity - Capital Contribution (SOFP) R10,000.
• An investor contributing an oven worth R15,000 to produce inventory Debits Equipment (SOFP) R15,000 and Credits Equity - Capital Contribution (SOFP) R15,000.

Equity: Drawings

• Drawings are the withdrawal of cash, inventory, or other assets by the owner.
• Drawings reduces the owner's equity.
• Drawings are not accounted for as expenses as it does not relate to business operations.
• An investor withdrawing R2,000 Debits Drawings (SOFP) R2,000 and Credits Bank (SOFP) R2,000.
• An investor withdraws R500 of inventory for personal use.
• Debit: Drawings (SOFP) R500
• Credit: Inventory (SOFP) R500

Income and Expenses: Sales

• Revenue earned by a business through the sale of goods or services to its customers contributes to net income.
• Sales contribute to net income and the retained earnings equity component.
• Sales returns from customers decreases equity.
• Revenue/Other income earned increase the equity.
• A customer returning R10,000 worth of goods Debits Revenue (P/L) R10,000 and Credits Bank/Debtors Control (SOFP) R10,000.
• A sale made worth R10,000 Debits Bank/Debtors Control (SOFP) R10,000 and Credits Revenue (P/L) R10,000.

Income and Expenses: Cost of Sales

• Cost of Sales represents the direct costs incurred to produce or purchase the goods that a business sells.
• Cost of Sales is deducted from Sales/Revenue to calculate gross profit.
• Gross profit impacts net income and therefore equity through retained earnings.
• The inventory with a cost of R7,000 was sold to a customer.
• Debit: Cost of sales (P/L) R7 000
• Credit: Inventory (SOFP) R7 000

Income and Expenses: Other Income

• Other income is income NOT from ordinary activities such as rental income, interest charged on overdue accounts, and gain on disposal of equipment.
• The entity earns rental income of R2,000 from renting out a portion of its building.
• Debit: Bank (SOFP) R2 000
• Credit: Rental income (P/L) R2 000

Income and Expenses: Other Expenses

• Other expenses are costs incurred to generate the income such as salaries, rent, and supplies.
• The entity pays for rental for its office building of R1,800
• Debit: Rent expense (P/L) R1 800
• Credit: Bank (SOFP) R1 800

Year-End Adjustments: Accrued Income

• Accrued income is earned by the entity in the current year but hasn't been received.
• It is an asset because the entity expects to receive the cash in the future.
• For the performance of a service worth R5000 where payment is not yet received, Debit: Accrued income (SOFP) R5 000 and Credit: Service Rendered (P/L) R5 000.

Year-End Adjustments: Accrued Expenses

• Accrued expenses are expenses the entity has incurred but hasn't paid, representing a liability at year-end.
• Expenses should be recorded in the current year in profit or loss.
• A bill of R3,000 for electricity used remains unpaid at year-end.
• Debit: Electricity expense (P/L) R3 000
• Credit: Accrued expense (SOFP) R3 000
• The electricity bill is paid in the next financial year.
• Debit: Accrued expense (SOFP) R3 000
• Credit: Bank (SOFP) R3 000

Year End Adjustments: Income Received in Advance

• Income received in advance represents payment for goods or services yet to be provided.
• It constitutes a liability because the entity still owes the service or product to the customer.
• An entity receives R10,000 in the bank in the current year for a service to be performed in the next financial year.
  • Debit: Bank (SOFP) R1 000
  • Credit: Income received in advance (SOFP) R1 000
• The service transaction in the following year would be reflected in this way.
  • Debit: Income received in advance (SOFP) R1 000
  • Credit: Service rendered / Sales (P/L) R1 000

Year End Adjustments: Depreciation

• Depreciation is the annual write-off of a non-current asset's cost over its expected useful life, treated as an expense.
• Debit Depreciation (P/L)
• Credit: Accumulated depreciation (SOFP)
• Straight Line Method: An asset's value decreases by the same amount every year.
• Formula: Value of asset decreases by the same amount every year is the cost of the asset ÷ Useful life
• Reducing Balance Method: An asset's value decreases by a percentage of its carrying amount each year.
• Formula: Value of asset x % Depreciation / Useful life

Year End Adjustments: Allowance of Credit Losses Adjustment

• Allowance of credit losses adjustment is an estimate of potential credit losses, created by a company.
• You estimate R300 of potential credit losses in the current financial year, assuming no credit losses have been incurred.
• If the allowance amount is needed to increase.
• Debit: Credit Losses (P/L) R130
• Credit: Allowance for Credit Losses (SOFP) R130
• If the allowance amount is needed to decrease.
• Debit: Allowance for Credit Losses (SOFP) R100
• Credit: Credit Losses (P/L) R100