Financial Accounting Principles for Law Practitioners PDF Learning Unit 1/2024

Learning unit 1/2024 FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS LEARNING UNIT 1 THE NATURE AND FUNCTION OF ACCOUNTING Contents 1. Introduction..................................................................................................................................

Learning unit 1/2024 FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS LEARNING UNIT 1 THE NATURE AND FUNCTION OF ACCOUNTING Contents 1. Introduction................................................................................................................................2 1.1 What is accounting?...................................................................................................................2 1.2 The nature of accounting...........................................................................................................3 1.3 Forms of ownership and users of financial statements..............................................................3 1.4 Internal controls.........................................................................................................................4 1.4.1 Built-in control measures...............................................................................................4 1.4.2 Internal control systems/procedures..............................................................................4 1.5 Financial frameworks.................................................................................................................5 1.5.1 The Conceptual Framework..........................................................................................5 1.5.2 Accounting standards and statements...........................................................................6 1.5.3 Accounting policies........................................................................................................6 1.5.4 Fundamental theoretical principles that all general financial statements must be based on in terms of the IAS....................................................................................................7 1.6 Financial statements..................................................................................................................9 1.6.1 The statement of financial position..............................................................................10 1.6.2 The statement of profit or loss and other comprehensive income...............................12 1.7 The double-entry principle.......................................................................................................13 1.8 What is a contra account.........................................................................................................14 1.9 Word search.............................................................................................................................14 1.9.1 Find the accounting terms............................................................................................14 1.9.2 Solution........................................................................................................................15 1.10 Accounting crossword puzzle...................................................................................................16 1.10.1 Crossword puzzle......................................................................................................16 1.10.2 Crossword clues........................................................................................................16 1.10.3 Solution......................................................................................................................18 1.11 Flashcards...............................................................................................................................18 1  Learning unit 1/2024 Acronyms CF Conceptual Framework for Financial Reporting IFRS International Financial Reporting Standards IASB International Accounting Standards Board FRSC Financial Reporting Standards Council (South African Body) SAICA South African Institute of Chartered Accountants The Rules Rules of the Attorneys’ Profession IAS 1 Presentation of Financial Statements 1. Introduction Accounting is the bookkeeping method, which generates a financial record of all the business transactions entered into by a business (entity). An accounting system generates the financial records of the business and produces a summary of the income and expenses (statement of profit or loss) and assets and liabilities (statement of financial position). Therefore, the accounting system generates financial information in the format of financial statements. As the physical and digital worlds have integrated over time, today's accounting information systems are typically computer-based methods with special accounting software. Whether the accounting information is computerised or written up by hand the principles of the debits, credits and the double-entry system are still relevant and form the basis for the accounting system. This module deals with the financial accounting concepts and principles that are relevant to law practitioners as well as the accounting and recording of transactions that are specific to the practice of a law practitioner. 1.1 What is accounting? Accounting is a process consisting of the following three activities: The first activity involves identifying those events that are evidence of economic activity (transactions) relevant to the particular business or entity. and The second relates to the recording of the monetary value of the economic events (transactions) in order to provide a permanent history of the financial activities of the business. Recording involves keeping a chronological diary of measured events in an orderly and systematic fashion. This means that economic events are also classified and summarised. and The third activity encompasses the communication of the recorded information to interested users. The information is communicated through the preparation and distribution of accounting reports, the most common of which are known as financial statements. 2  Learning unit 1/2024 1.2 The nature of accounting Accounting is a means of communication used to convey Accounting uses words and figures to specialised information about the finances of an entity. convey financial information to the users of such information. These words and If the recipient of this specialised information (the user of figures are known as the financial information) does not understand it, the  concepts, information, which is conveyed, will have no value.  principles, and  procedures of accounting. This knowledge will ultimately result in an understanding of the message contained in financial statements Every person involved in an entity uses financial information to a greater or lesser extent. Accounting is a ‘‘language’’ used to Financial resources are limited, or ‘‘scarce’’, and if convey financial information to we are to spend them we must plan properly. interested parties, i.e. users of the Each of us also needs to know something about information. accounting to manage our personal financial affairs. Knowledge of accounting is thus also useful in this area. 1.3 Forms of ownership and users of financial statements The four main forms of ownership are: Many users, who analyse the information for various  sole traders, decision-making purposes, require financial information.  partnerships, The following are the most common users:  close corporations  Investors  companies  Creditors  Employees  Government  Management Users of financial information – The fields of accounting – Are divided into the following two  Financial accounting is concerned with the provision of categories: financial information to mainly external parties,  Internal users, such as  Management accounting is concerned with the management or employees provision of financial information to people within the  External users, such as investors, entity. creditors, or government Financial Accounting is concerned with the recording of transactions and the preparation of the financial statements for the entity as a whole. International Financial Reporting Standards (IFRS) govern financial accounting reporting, which consists of adhering to external international standards. These standards ensure the comparability of financial statements between entities and countries. Management Accounting provides financial information for specific purposes. Managers use this information in their decision-making, which leads to the attainment of the objectives of the entity. Without this financial information, it would be difficult for management to manage the business effectively. In this module, we will be concentrating on financial accounting. 3  Learning unit 1/2024 1.4 Internal controls Rules 54.14.7.1 (54.14.7.1.1 to 54.14.7.1.4) for the Rules of the South African Legal Practice Council (hereafter referred to as the Rules) require that internal controls are implemented to ensure compliance with the rules and to ensure that trust funds are safeguarded. Internal controls are the mechanisms, rules, and procedures put in place by an entity to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Internal control further ensures that the financial information provided by such a system is complete, accurate and reliable, that the assets of the entity are protected against loss or fraud, that management policies are implemented and that all parts of the system function properly. The success of any accounting system depends on a good system of internal control. An attorney’s practice is particularly dependent on such a system for its continued existence. Internal control systems must be designed to suit the type of entity concerned, for example, a sole proprietor, a partnership, or a personal liability company. 1.4.1 Built-in control measures Built-in control measures include:  numbered source documents  dates on source documents  control accounts in respect of clients (also debtors or trade receivables) and trust creditors (also known as trust payables)  separate bank accounts (business and trust bank accounts)  the keeping of petty cash according to the imprest 1 system.  the accurate analysis of all income and expenses  a monthly trial balance which ensures that all accounts are properly balanced  the reconciliation of bank accounts with bank statements  the reconciliation of business creditors (also known as trade payables) with creditor statements  a non-current asset register. 1.4.2 Internal control systems/procedures Internal control procedures include separation of duties, access controls, physical audits, standardised documentation, trial balances, periodic reconciliations, and approval authority. 1 The imprest system is a financial accounting method for paying out and subsequently replenishing a fund such as petty cash. At any point in time the cash on hand plus the value of the petty cash vouchers for expenses paid should be equal to the original fixed imprest petty cash amount. 4  Learning unit 1/2024 Examples of internal control procedures are:  efficient banking of all cash received  all payments must be made by EFTs (electronic fund transfers)  proper authorisation for all transactions  proper demarcation (limits) of authorisation  the separation of duties (e.g. the person who issues receipts may not record them in the relevant cash receipts journals)  an internal checking system (e.g. at least two staff members to check important transactions; rotation of staff etc.)  the keeping of registers for receipt books, invoice/debit notebooks and credit notebooks  the keeping of unused receipt books, invoice/debit notebooks and a credit note  the review of receipts against deposits  the initialling of changes and receipts  cash to be banked regularly  only authorised signatories are allowed to sign on behalf of the entity  no cash to be issued. 1.5 Financial frameworks Rule 54.6 requires that a law firm shall keep in the official language of the Republic such accounting records, which record both business account transactions and trust account transactions. The rules also require the preparation of financial statements, which reflect fairly the state of affairs and business of the firm and explain the transactions and financial position of the firm. The financial statements must also comply with an acceptable financial framework as applied in South Africa. The financial frameworks that are acceptable in terms of the Rules are:  the International Financial Reporting Standards (known as “IFRS”), and  the International Financial Reporting Standards for Small and Medium Entities (known as “IFRS for SME’s”) The International Accounting Standards Board (IASB) issues these frameworks from time to time. 1.5.1 The Conceptual Framework Accounting, as a specialised medium of communication (refer 1.2 above), has its own specific language (language of business) or jargon. If each business were to prepare financial statements and reports according to its own accounting rules and its own interpretation of accounting theory and principles, there would be chaos in the world of economics and business. The conceptual financial framework is a group of interrelated objectives and theoretical principles that serve as a frame of reference for financial accounting and more specifically for general purpose financial reporting. The objective of the conceptual framework is to provide information that is useful to potential and existing investors, lenders, and other creditors. 5  Learning unit 1/2024 All general-purpose financial statements must have the same objectives and must be based on the same fundamental theoretical principles. The objective of general purpose reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. These decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Potential and existing investors are interested in the returns they expect, while creditors and other lenders are interested in principal repayments and interest payments they expect. The objective of creating standardised accounting rules, called accounting standards, for particular issues (e.g. for the treatment of taxation in financial statements, etc.) is to limit the variety of available accounting practices and the elimination of undesirable alternatives. The accounting standards are not always rigid rules. Some standards allow more than one desirable alternative. 1.5.2 Accounting standards and statements In South Africa, the Financial Reporting Standards Council 2 (FRSC) plays an important role in the development of IFRS. The standardised accounting rules of the International Financial Reporting Standards 3 (IFRS) and the International Accounting Standards 4 (IAS) are the documented generally accepted accounting standards and practices as prepared by the International Accounting Standards Board (IASB), approved by the FRSC for use in South Africa and thereafter issued by the South African Institute of Chartered Accountants (SAICA). The objective of creating accounting standards for particular issues (e.g. for the treatment of interest paid in financial statements), is to limit the variety of available accounting practices, but without striving for strict uniformity or creating a set of rigid rules for all circumstances. The ultimate aim of accounting standards is to encourage widespread use of particular standards in financial reporting and to eliminate undesirable alternatives. 1.5.3 Accounting policies Transactions of a repetitive nature frequently occur, and the requirement of consistency means that an entity must establish an accounting policy, which determines how such transactions will be treated. LBL An accounting policy is thus a set of decisions about how the entity will treat the same type of transactions in order to ensure consistent performance. In the case of transactions that can be dealt with in various ways, it is necessary that the entity disclose the accounting policy it adopted in its notes to the financial statements. For example, 2 Financial Reporting Standards Council – http://www.thedtic.gov.za/wp-content/uploads/FRSC-Rules_Procedure.pdf 3 International Financial Reporting Standards – https://www.ifrs.org/ 4 International Accounting Standards 6  Learning unit 1/2024 an entity has to indicate what basis it has used to deal with the depreciation of property, plant and equipment. 1.5.4 Fundamental theoretical principles that all general financial statements must be based on in terms of the IAS (a) Underlying assumptions In accordance with the conceptual framework for financial reporting and the framework for the preparation and presentation of financial statements issued by the IASB, the financial statements are prepared on the accrual basis and based on the assumption that the business is a going concern. (i) Going concern (ii) Accrual basis A business is a going concern when it will The effect of transactions and events continue to trade in the foreseeable future, on a business’s resources must be and is not likely to cease trading imminently included in the periods in which those and have its assets liquidated (sold off). The transactions and events occurred and elements of the financial statements, i.e. not when the cash flow took place. assets, liabilities, owners’ equity, income and Expenses incurred to produce income expenses will thus be included in the financial must be included in the same financial statements at their original cost less period, even if they occurred in depreciation/impairment and not at different periods. This is referred to as liquidation values (forced selling values). the “matching of costs with revenue”. (b) Fundamental qualitative characteristics The information in the financial statements must be useful to the users of the statements. To be useful, the information should be relevant and faithfully presented. (i) Relevance (ii) Faithful representation Only relevant information needs to be Financial information must faithfully disclosed separately in the financial represent transactions and other statements. The relevance of the information events. The following characteristics is based on the nature and materiality of the will ensure faithful representation: information. Materiality Nature Information that is significant enough In certain instances, the nature of the is disclosed separately. Minor items information alone is sufficient to determine its are included in the financial relevance, for example, where information, statements but are not separately irrespective of its materiality, can affect the disclosed. decisions of the user. 7  Learning unit 1/2024 Completeness All the information that a user needs in order to be able to understand the economic events and transactions should be included in the financial statements. Neutrality Reliable information should be neutral (without bias) in that it should not present information in a manner that will achieve a predetermined result. Free from error The faithful representation of information does not imply that the information is accurate. It implies, however, that the event or transaction is free from error and that the process followed to provide the reported information was without errors. (c) Enhancing qualitative characteristics The enhancing qualitative characteristics improve decision-usefulness of financial reports. The conceptual framework also recognises that the enhancing qualitative characteristics cannot make information useful if that same information is irrelevant or not faithfully represented. Comparability Information should be comparable between different entities or time periods. Verifiability Independent and knowledgeable observers are able to verify the information. Timeliness Information is available in time to influence the decisions of users. Understandability Information shall be classified, presented clearly and concisely. (d) The cost versus the benefit of financial reporting The cost of providing financial reporting must be justified by the benefits of reporting that information. 8  Learning unit 1/2024 1.6 Financial statements The objective of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's:  assets  liabilities  equity  income and  expenses, including gains and losses contributions by and distributions to owners (in their capacity as owners)  cash flows. [IAS 1.9] In terms of IFRS, a complete set of financial statements of an entity should comprise the following: which reflects all assets, liabilities and equity of a statement of financial position an entity at a particular date which reflects the financial performance of the a statement of profit or loss and entity, indicating a net profit or loss for a specific other comprehensive income period which reflects the movement in: (a) the capital and current accounts of the a statement of changes in equity partners in a partnership; or (b) the shareholding and retained profits or losses of a company for a specific period which reflects the actual cash movements in and a statement of cash flows out of the entity for a specific period which reflect the accounting policy of the entity and expand on the line items in the statement of notes to the financial statements financial position and the statement of profit or loss and other comprehensive income Before we can discuss the basics of accounting, we need to know what the statement of financial position and the statement of profit or loss and other comprehensive income consist of. 9  Learning unit 1/2024 In terms of the Conceptual Framework, the information that must be used in the preparation of financial statements is grouped into elements according to their economic characteristics, which make up the financial statements. These elements are grouped under two headings, namely, the elements that pertain to the financial position in the statement of financial position and the elements that pertain to the financial performance in the statement of profit or loss and other comprehensive income. Statement of Statement of financial Statement of financial position at the financial Contributions position at the beginning of performance by and end of the the period distributions period to equity Assets minus Income holders Assets minus liabilities minus liabilities equal equity expenses equal equity 1.6.1 The statement of financial position The statement of financial position provides information about the following:  The economic resources available to the entity to generate future benefits.  The financial structure of the entity with emphasis on own and borrowed capital, which may also be used to predict future borrowing needs.  The liquidity position of the entity. Liquidity is an entity’s potential ability to pay its short- term debts. In other words, it is the availability of cash and other items, which can easily be converted into cash to pay short term debt. This information may also be used to predict the availability of cash, after the settling of debts for the same period.  The solvency of the entity’s position. Solvency refers to the extent to which an entity’s assets exceed its liabilities. It may also be used to predict the availability of cash over longer periods to meet debts as they fall due.  The elements that are directly related to the financial position are assets, liabilities and equity. (a) Assets Assets are defined as a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. The asset definition identifies all cash accounts as assets because the economic benefits have already flowed to the entity. In other words, bank accounts, savings accounts, petty cash accounts and cash float accounts are classified under assets if the balances are favourable. There are also items, which are expected to result in future economic benefits flowing to the entity i.e. trade receivables (also called debtors or client accounts). Debtors are individuals/firms, which owe money to the entity. The money they owe is expected to flow to the entity in future (a potential inflow) when the debtors pay their accounts. 10  Learning unit 1/2024 All items that an entity has control over or can be resold will be regarded as assets. These include inventory, vehicles, property, equipment, furniture, etc. Stationery and other consumables are meant to be consumed by the entity within one year and are therefore treated as expenses during the year. At year-end, if there are material consumables and stationery on hand, it is considered to be inventory, and a stocktake will be done to determine a value for the statement of financial position. (b) Liabilities Liabilities are debts. If you have a liability in financial terms, it means that you owe money to someone or some entity. A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events. Examples of liabilities are mortgages, loans from owners, loans from banks and other external parties, accounts payable (creditors) and bank overdrafts. (c) Owners’ equity Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. Equity represents the interest of the owners in the net assets of an entity, which means the part of the assets against which there is no claim from other parties. Equity differs from liabilities in that liabilities are obligations which must be settled out of the assets of the entity, whilst equity is not an obligation which has to be settled. Equity is not a claim against assets; it is what is left over after all liabilities are deducted from assets. There are two methods by which the owner’s equity in an entity can be calculated.  The first method is to make use of the basic accounting equation. If you have the total value of the assets of the entity, as well as the total value of the liabilities of the entity, then you can calculate the owner’s equity by subtracting the liabilities from the assets. The figure you arrive at should indicate how much money the owner(s) may withdraw from the entity if the business activities were to be terminated on that day. Equity = Assets ― Liabilities Notes – or + – or + – or + A decrease in an account is a – and an increase in an account is shown as a +  Equity can also be expressed in terms of the basic accounting equation given below: Assets = Equity + Liabilities Notes – or + – or + – or + A decrease in an account is a – and an increase in an account is shown as a + Refer to Learning unit 2.4 for a discussion of the accounting equation and illustrated examples. 11  Learning unit 1/2024 The second method that can be applied to calculate the value of the owner’s equity in the entity is to do the following calculation:  In the case of a sole proprietor or a partnership: Capital contributions by the owner/partners, plus profits (past and current) of the entity, minus drawings by the owner/partners.  In the case of a company: Issued share capital, plus accumulated reserves, plus retained earnings (accumulated profits minus accumulated losses). 1.6.2 The statement of profit or loss and other comprehensive income Profit is used as a measure of performance or as the basis for other measures such as return on investments or earnings per share. The elements that are directly related to the financial performance are income and expenses. Profit for the year is calculated by subtracting the expenses from the income of an entity. [Profit = Income less expenses] (a) Income Income is defined as increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. The entity earns income through its normal everyday business operations. For instance in the case of the sale of goods, the inflow of assets will be the money banked in the bank account and the increase in profit is an increase in equity. Income consists of revenue and gains. Revenue arises from the ordinary business activities of the entity and examples are sales, fees, interest, dividends and rental income. Gains may or may not arise from ordinary business activities of the entity. An example of a gain that arises from the ordinary business activities is a profit on the sale of depreciable non-current assets such as machinery. Examples of gains that do not arise from ordinary business activities are profit on the sale of office buildings and profit on the sale of non-current assets. Revenue and gains Revenue and gains arising from ordinary Gains not arising from ordinary business activities business activities  sales,  profit on the sale of office buildings,  fees, and  interest received,  profit on the sale of non-current  dividends, assets.  rental income  profit on the sale of depreciable non- current assets such as machinery 12  Learning unit 1/2024 (b) Expenses Expenses are defined as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Expenses are costs incurred by the business in order to run the business for the financial accounting period. Expenses consist of losses as well as those expenses that arise in the course of the ordinary activities of the entity. Examples of expenses are advertisements, purchases of trading stock, salaries and wages, stationery, depreciation and losses on the sale of non-current assets. 1.7 The double-entry principle An account consists of a left-hand side and a right-hand side and is presented in a “T” format. The left-hand side is referred to as the debit side and the right-hand side is referred to as the credit side. The name of the “T-account” is written across the centre at the beginning of each account (i.e. Motor vehicles). The double-entry principle states that for every debit entry into an account, there must be a corresponding credit entry into another account. With each entry referring to its corresponding entry in the other account. The double-entry principle is easily demonstrated using the following accounting equation: Assets = Equity + Liabilities A = E + L The accounting equation should always balance. Take note of the following important points:  A minimum of 2 accounts must always be used.  The equation must always remain in balance (i.e. each debit must have a corresponding credit)  A transaction can occur on one side of the equation only, for example: – An entity purchases equipment for cash. You will credit the asset – bank (decrease cash) and debit the asset – equipment (increase equipment) – A debtor settles his account owed to the entity. You will credit the asset – debtors control by the amount paid (reduce debtor) and debit the asset – bank (increase cash). 13  Learning unit 1/2024 The reality for a financial accounting student is that the double-entry rules are not a concept to understand – They are rules to be learnt. When analysing a transaction, always ask the following four questions: 1. Which two accounts are involved in the transaction? 2. Do the accounts form part of assets, equity or liabilities? 3. Did the assets, equity or liabilities increase or decrease? 4. Which one of the accounts must be debited and which one must be credited? 1.8 What is a contra account As a general rule, we use the opposite or contra account to describe the transaction. In this transaction, the contra account is capital. The source of this increase to the bank account is capital - the owner investing in the business. If we were to describe each transaction occurring within the T-account above as "bank," it would not adequately describe why our bank account increased or decreased. All transactions would just be listed as "bank." Using the opposite or contra account gives us a much better description of the transaction. 1.9 Word search 1.9.1 Find the accounting terms T F R T L M A T E R I A L I T Y C D E P R E C I A T I O N Q R I X E E U S A D P R O F I T Z J M G B R B H C N G E P U N U Q W L C I P M T C O S E U R C E C K I R T R Q A O G H A R N O F A C A W M O E M U R Y P C I M V I O B I H P X H N R S D H T E F N Z I D Z E P F T D R L A U I A V B L G C R E D I T O R S R Q O E A I M Z T N G N Z R T E E W C N N T O K Y S T G J A S S E T R T K Y K J F E V F V F U H T U E O F H N Y F S E Q U I T Y O S D R M A E Q U I P M E N T J A D I Y O O C Q V D O U B L E - E N T R Y A 14  Learning unit 1/2024 Accounting Property Creditors Expenses Debit Equipment Journal Profit Credit Furniture Ledger Materiality Transaction Debtors Depreciation Purchases Income Inventory Equity Bank Asset VAT Liability Double-entry 1.9.2 Solution Notes 15  Learning unit 1/2024 1.10 Accounting crossword puzzle 1.10.1 Crossword puzzle 1 2 3 13 4 5 15 6 7 8 9 10 11 16 17 12 14 18 1.10.2 Crossword clues Across Down 2. The residual interest in the assets of the 1. A complete collection of all the accounts and entity after deducting all its liabilities. (6) transactions of a company. (6) 5. Any items that are bought with the 3. A present obligation of the entity to transfer intention of selling the item to a customer. an economic resource as a result of past (9) events. (8) 10. An instructed attorney acting on an 4. A qualitative characteristic of accounting instructing attorney’s behalf. (13) information that makes a difference in 11. An accounting entry that either increases decision-making. (9) an asset or expense account or 6. What money must be deposited in a decreases a liability or equity account. (5) separate banking account? (5) 12. A tax that governments impose on income 7. A concept or convention within accounting generated by businesses and individuals. relating to the importance/significance of an (6) amount, transaction, or discrepancy. (11) 14. All transactions with credit suppliers will 8. A set of rules or procedures, which are be recorded in the........... ledger. (9) followed by an entity to prepare its financial 15. The acronym for Value Added Tax. (3) statements. (6) 16  Learning unit 1/2024 18. Any items sold to customers in the normal 9. An accounting entry that either increases a course of business. liability or equity account or decreases an asset or expense account. (6) 11. All transactions with credit customers will be recorded in the......... ledger. (7) 13. Acronym for “Basic Accounting Equation”. (3) 16. A present economic resource controlled by the entity because of past events. (5) 17. A.......... is a detailed record of all the transactions done by a business. (7) Word Bank Policy Credit Correspondent Equity Liability Income Debit VAT Debtors Ledger Purchases Relevance Creditors Asset Sales Trust Materiality Journal Notes 17  Learning unit 1/2024 1.10.3 Solution 1 L 2 E Q U I T Y D G 3 L E B 4 R I 5 P U R C H A S E S 15 V A T E L B 6 T E 7 M I R V A L 8 P 9 C U A T I 10 C O R R E S P O N D E N T L E T C R Y I D 11 D E B I T 16 A C I E A S Y T B L 17 J S T 12 I N C O M E O T U T 14 C R E D I T O R S Y R S N A 18 S A L E S 1.11 Flashcards A flashcard is a card containing a small amount of information, i.e. a question or a statement, with the answer or description on the back. A flashcard can be used as an aid to learning by increasing your retention of information. (Print out the pages with the flashcards, cut out the shapes and stick the statement and answer back to back. Use the flashcards to test your knowledge.) The following flashcards relate to accounting transactions: (a) Identify how each of the following transactions affects the assets, liabilities or equity of the business. 1. Increase in Assets The owner pays capital into the bank. Increase in Equity 18  Learning unit 1/2024 2. Increase in Assets Goods are purchased on credit terms. Increase in Liabilities 3. Goods are purchased for cash. Assets increase and decrease 4. Equipment is sold for cash. Assets increase and decrease 5. Decrease in Assets (Bank) Accounts payable is settled in cash. Decrease in Liabilities 6. Accounts receivable is settled in cash. Assets increase (Bank) and decrease 7. The owner takes cash for personal use. Decrease in Equity (Drawings) Decrease in Assets (Bank) 19  Learning unit 1/2024 8. The owner pays a liability of the business Decrease in Liabilities from personal funds. Increase in Equity (Loan to Owner) 9. Equipment is purchased using cash. Assets increase and decrease (Bank) 10. Decrease in Assets (Bank) and Employee wages are settled in cash. Decrease in Equity 11. Increase in Assets and Purchased supplies on account. Increase in Liabilities 12. Increase in Assets and Received cash for performing a service. Increase in Equity (Revenue) (b) What are the following general ledger accounts used for? 1. Accounts receivable Trade receivables Amounts due from customers or clients Debtors 20  Learning unit 1/2024 2. Accounts payable Amounts owed to suppliers for goods Trade payables and services purchased Creditors (c) Identify whether the following accounting entry is a debit or as credit 1. The owner of the business invests R100 000, is the accounting entry to the Credit capital account a debit or a credit? 2. Rent is prepaid for an office for the business, is the accounting entry to the Debit prepaid rent account a debit or a credit? 3. Office equipment is purchased on account from a supplier, is the double-entry to the Debit equipment account a debit or a credit? 4. Stationery is purchased for cash, is the double-entry posting to the stationery on Debit hand account a debit or a credit entry? 5. The business carried out work for a customer and was paid in cash, is the entry Credit to the revenue account a debit or a credit? 21  Learning unit 1/2024 6. Work was completed and invoiced to a customer for payment within 30 days. Is the Debit posting to accounts receivable a debit or a credit? 7. Insurance for the next year was paid in advance in cash, is the double-entry Credit bookkeeping entry to the cash account a debit or a credit? 8. Cash was paid to a supplier for goods supplied by them on credit terms, is the Debit entry to accounts payable a debit or credit entry? 9. Cash was received on account from a customer for partially completed work, is the Debit entry to the cash account a debit or a credit? Notes 22  Learning unit 2/2024 FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS LEARNING UNIT 2 DOUBLE-ENTRY SYSTEM AND SOURCE DOCUMENTS Contents Learning outcomes................................................................................................................... 2 Key concepts............................................................................................................................ 2 Acronyms................................................................................................................................ 2 2. Introduction...................................................................................................................... 3 2.1 The double-entry system................................................................................................. 4 2.2 Summary of types of accounts and impact of transactions.............................................. 6 2.3 Descriptions of individual accounts.................................................................................. 7 2.4 The basic accounting equation........................................................................................ 9 2.4.1 Right-hand side and left-hand-side of BAE........................................................... 9 2.4.2 How to apply the basic accounting equation....................................................... 10 2.4.3 4-STEPS to determine the result of a transaction............................................... 11 2.4.4 Examples illustrating the application of the double-entry system....................... 14 2.5 Recordkeeping............................................................................................................... 22 2.5.1 What is the accounting cycle?............................................................................. 22 2.5.2 Completion of source documents........................................................................ 24 (a) Internal source documents......................................................................... 24 (b) External source documents (also referred to as supporting documents).... 25 2.5.3 Recording of source documents.......................................................................... 26 2.6 Overview of the recording of transactions...................................................................... 40 2.7 Completion of books of first entry................................................................................... 40 2.8 Self-assessment exercises............................................................................................ 41 2.9 Terminology and definitions – cheat sheet..................................................................... 44 The key to success in accounting is practice, practice and more practice. The following concept cards are available for this learning unit: CONCEPT o Effect of transactions on specific types of accounts CARDS o The accounting cycle (x2) o Overview of the recording of transactions 1  Learning unit 2/2024 Learning outcomes After working through this learning unit, you should be able to: define cash transactions define source documents explain the difference between internal source documents and external business documents explain the applicable source documents involved in different cash transactions complete different business documents Key concepts Double-entry system Accounting equation Assets Liabilities Owners’ equity Recordkeeping Accounting cycle Cash transactions Source documents Internal source documents External source documents Purchase order Sales order Delivery note Goods received note Cash slips Cash register rolls cash invoices receipts delivery note Petty cash voucher credit card slip deposit slip internet banking: Notice of payment (EFT) Acronyms BAE Basic accounting equation LPA Legal Practice Act 28 of 2014 LPC Rules Legal Practice Council Rules 2  Learning unit 2/2024 2. Introduction The financial records of an entity only deal with transactions that are measured in monetary terms. The duality of the financial accounting system better known as the double-entry system is a method whereby the transactions are recorded systematically to show the giving and receiving of value. The accounting cycle details the formal accounting process. The steps discussed in this learning unit are as follows (indicated by yellow shading): Transactions ― The accounting process starts once a transaction has taken place. Source documents ― Source documents provide the evidence for a transaction having taken place Books of prime entry ― The source document is prepared and the information is entered into the books of prime entry Ledger accounts ― The entries from the books of prime entry are posted to the general ledger, creditors’ ledger, and debtors’ ledger. Trial balance ― The trial balance is drawn up from the accounts in the general ledger Financial statements ― The financial statements are drawn up from the trial balance Please remember the following points at all times: RECAP Total debits in the transaction must equal the total credits in that transaction! For every debit, there must be a credit! Debits are on the left, credits are on the right! The equation must balance! 3  Learning unit 2/2024 2.1 The double-entry system The double-entry system implies that there are two sides or aspects to every business transaction and this translates to – LBL See Lessons For every debit there must be a corresponding credit Debit.Credit See the following example: If you buy a pair of soccer boots for R250. – You receive the pair of boots (Side 1) – The store gives you the boots (Side 2) If you pay R250 to the shop assistant. – The shop assistant receives the cash (Side 1) – You give the cash to the shop assistant (Side 2) LBL When an entity receives cash – the bank account is debited See Lessons Bank account When an entity pays cash – the bank account is credited This means that every transaction of the entity will result in an amount being recorded in at least TWO accounts. Luca Pacioli introduced the rules of the Double-Entry System in 1494. The double-entry principle provides a logical method of recording transactions. In using the double-entry system the monetary (money value) of each transaction must be entered on the debit side of one ledger account as well as on the credit side of another ledger account. The entry in one ledger account refers to the corresponding entry in the other ledger account. As the entries in the two ledger accounts have been entered on opposite sides, the use of the double-entry system allows for cross references. Each transaction is entered in two separate accounts on opposite sides, and it is therefore possible to check and control the arithmetical and accounting accuracy of the work. If each transaction is recorded so that the debit and credit entries are equal, the same sum of all the debits to the account must equal the sum of all the credits. This can be explained by way of the accounting equation. The rules will be applied as follows: – All asset and expense accounts must be increased on the left (debit) side of the account and decreased on the right (credit) side of the account. Dr ASSETS & EXPENSES Cr + (increase) - (decrease) 4  Learning unit 2/2024 – All liability and income accounts must be increased on the right (credit) side of the account and decreased on the left (debit) side of the account. Dr LIABILITIES & INCOME Cr - (decrease) + (increase) In short, a ledger is a book/record containing a set of individual accounts in which transactions of the same kind are grouped together. An account looks like a T-form with the left side called the debit side and the right side called the credit side. An example follows: Debit (abbreviated to Dr) Account name Credit (abbreviated to Cr) The debit side of the account is The credit side of the account is the side that shows gains in value the side that shows value given In this learning unit, we will be discussing the general ledger, which contains all the assets, liabilities, owners’ equity, income and expense accounts of the business. As part of your preparation for this learning unit you must know the following categories of items in the general ledger and what they are – LBLL What is an asset? Assets are resources owned by the business, See Lessons which have economic value and a business uses to Assets generate income. LBLL What is a liability? Liabilities are creditors’ interest or interests of See Lessons parties other than the owner(s). Liabilities are Liabilities therefore the debts of the business. LBLL What is an expense? An expense is a cost related to the day-to-day See Lessons running of a business. An expense is a debit. Expenses LBLL What is income? Income is the revenue a business receives from See Lessons selling services and goods to clients or customers Income and returns on investments. LBLL What is equity? Equity is the interest which the owner has in the See Lessons business and which the entity therefore owes to Equity him. 5  Learning unit 2/2024 2.2 Summary of types of accounts and impact of transactions The following table summarises the effect of the transactions on the specific types of accounts: - Costs and Assets = Liabilities + Owner's Equity + Income - Drawings Expenses Normal balance Debit Credit Credit Credit Debit Debit Increase to account Debit Credit Credit Credit Debit Debit balance Left Column of Acc Right Column of Acc Right Column of Acc Right Column of Acc Left Column of Acc Left Column of Acc Decrease to Credit Debit Debit Debit Credit Credit account balance Right column of Acc Left Column of Acc Left Column of Acc Left Column of Acc Right Column of Acc Right Column of Acc Account example NON-CURRENT NON-CURRENT OWNER'S EQUITY INCOME EXPENSES DRAWINGS ASSETS LIABILITIES Capital Commission received Advertising Drawings Land and buildings Long-term loan Fees Audit fees Equipment Mortgage bond Interest received Credit losses Furniture Office rent received Insurance Vehicles CURRENT Sales Interest paid Computer equipment LIABILITIES Services rendered Fuel Investments Short-term loan Office rent paid Law library Bank overdraft Rental paid CURRENT ASSETS (Negative) Repairs and Inventory Accounts payable maintenance Accounts receivable (Creditors) Salaries and wages (Debtors/Clients) Trust creditors Stationery Bank account Telephone (Positive) Water and electricity Cash on hand Acc = Account 6  Learning unit 2/2024 2.3 Descriptions of individual accounts Accounts form the basis of the accounting system. The following are descriptions of generally used accounts in the books of legal practitioners: (a) ASSETS – Non-current assets Property The account for the recording of the transactions relating to land and buildings (property) purchased for the business. Equipment or The account for the recording of the transactions relating to equipment computer equipment or computer equipment purchased for the business. Furniture The account for the recording of the transactions relating to furniture purchased for the business. Motor vehicles The account for the recording of the transactions relating to motor vehicles purchased for the business. Law library An account for the recording of the transactions relating to the accumulation of legal books. Investment (longer Long-term investments are assets that a business intends to hold for than 12 months) more than a year. It is not the intention of the business to realise the investment within the next 12 months from the financial year-end. (b) ASSETS – Current assets Accounts receivable Accounts receivable are amounts due to the business from customers/clients that have received goods or services on credit. The amounts arise from providing services or products to clients and they have not yet paid the business. Accrued income Accrued income is income that has not been received in the accounting period when the underlying obligation was fulfilled. Since the obligation was fulfilled, the business is entitled to the corresponding income and therefore the income is recognised and a liability is created for the amount owing. (See Learning unit 5) Bank account A bank account is a financial account held between a bank i.e. ABSA and the customer i.e. SA Attorneys. This account records the cash transactions (cash inflows and outflows) between the bank and the customer. If the bank owes money to the business, it is referred to as a favourable balance. If the business owes the bank money, it is referred to as an unfavourable balance. Deposit This account is used to record deposits e.g. a deposit paid to the municipality for the connection of water and electricity. 7  Learning unit 2/2024 Inventory The account for the recording of the transactions relating to inventory purchased by the business for resale or for the manufacturing of a product. Investments (short- Short-term investments are assets that a business does not intend to term) hold for more than a year. The intention is to realise the investment within a period of less than 12 months from the financial year-end. Petty cash The petty cash account is the account used for the recording of small cash payments that are impractical to pay by EFTs. Prepaid expenses A prepaid expense is an expenditure paid for in one accounting period, but for which the underlying asset will not be consumed until a future period. When the asset is eventually consumed, it is charged to expense. (See Learning unit 4) Trust clients account The trust clients account are the accounts for recording the money owed by the clients to an attorney’s practice (i.e. debtors of the attorney’s practice). The trust clients accounts arise from credit transactions. VAT control account The account for the recording of the transactions relating to VAT. VAT is payable to SARS. Both output VAT (Credit side) and input VAT (Debit side) are recorded in the VAT control account. This account may be an asset from time to time as the business can be entitled to a refund from SARS. (c) LIABILITIES – Non-current liabilities Long-term loans A loan is an amount of money that has been loaned from a bank or financing institution and has to be repaid to the lender. The term long- term refers to loans that are repaid in specific instalments over a longer period of time (i.e. a term of 5 – 10 years). Long-term loans may have a fixed interest rate, or a floating interest rate (based upon the reserve bank prime rate). Mortgage loan A mortgage loan is a long-term loan for the financing of the purchase of a property or building. The property or building serves as security for the mortgage loan. (d) LIABILITIES – Current liabilities Accounts payable Accounts payable is money owed by a business to its suppliers. The (business) amounts arise from people who have supplied the business with goods and services, but the supplier has yet to be paid. 8  Learning unit 2/2024 Accrued expenses An accrued expense is an expenditure for which the underlying asset was consumed but was not yet paid. The business therefore incurred the expense and should recognise the expense together with the liability to pay the expense. The liability is called an accrued expense. (See Learning unit 4) Bank overdraft A bank account where the business owes the bank money. It is (Negative) referred to as an unfavourable balance. Income received in Income received in advance is income received in one accounting advance period, but for which the underlying obligation will only be fulfilled in the next accounting period. When the obligation is eventually fulfilled, it is recognised as income. (See Learning unit 4) Short-term loan A loan is an amount of money that has been loaned from a bank or financing institution and has to be repaid to the lender. Loans are repaid in instalments and interest is charged on the outstanding amount. Short-term loans refers to loans that are generally repaid within a few months or a year. Trust creditors The money that is in a trust account at any point in time belongs to the clients of the legal practice and the clients are referred to as trust creditors of the legal practice. VAT control account The account for the recording of the transactions relating to VAT. VAT is payable to SARS. Both output VAT (Credit side) and input VAT (Debit side) are recorded in the VAT control account. 2.4 The basic accounting equation The financial position of an entity is indicated by this equation. By using the equation, any unknown elements of the statement of financial position can be calculated. In the accounting records, all the figures must “balance”. This is what makes the recording process so effective. All transactions must balance in the form of an equation. This equation is termed the basic accounting equation (BAE). 2.4.1 Right-hand side and left-hand-side of BAE When preparing an equation, the right-hand side will always equal the left-hand side. The assets are on the left-hand side and the equity and liabilities are on the right-hand side. The transactions can affect the BAE in four different ways.  An increase on the left-hand side and an equal increase on the right-hand side – Left-hand side = Right-hand side Assets Equity + Liabilities +100 000 +100 000 9  Learning unit 2/2024  A decrease on the left-hand side and an equal decrease on the right-hand side – Left-hand side = Right-hand side Assets Equity + Liabilities –100 000 –100 000  An increase and an equal decrease on the left-hand side – Left-hand side = Right-hand side Assets Equity + Liabilities +100 000 –100 000  An increase and an equal decrease on the right-hand side Left-hand side = Right-hand side Assets Equity + Liabilities +100 000 –100 000 2.4.2 How to apply the basic accounting equation The equation is as follows: OWNERS’ EQUITY = ASSETS – LIABILITIES; OR ASSETS = OWNERS’ EQUITY + LIABILITIES RECAP Memorising the simple accounting equation will help you learn the debit and credit rules for entering amounts into the accounting records. As you can see, assets equal the sum of liabilities and owner's equity. This makes sense when you think about it because liabilities and equity are essentially just sources of funding for companies to purchase assets. The expanded accounting equation is as follows: ASSETS = LIABILITIES + CAPITAL + REVENUE – EXPENSES – DRAWINGS 10  Learning unit 2/2024 The following is the expanded accounting equation in the format of a diagram: LBL The owner’s drawings represent cash taken out of the business See Lessons Drawings by way of a salary or goods taken for own use. 2.4.3 4-STEPS to determine the result of a transaction All transactions measurable in monetary value will have an effect on the financial results of the entity. With the recording of every transaction, there will be a change in the financial position of the entity and since the basic accounting equation (BAE) reflects the financial position of the entity, each recorded transaction will affect the BAE. Notes 11  Learning unit 2/2024 The following table represents a logical method of recognising a transaction. STEPS Step 1 Identify the accounts affected by the transaction. What is the account? (i.e. Equipment) Step 2 Will the transaction cause an increase or decrease in the account? (i.e. Account is increasing as equipment was purchased) Step 3 Classify the account. What is the type of account? (i.e. Asset, Expense etc.) Step 4 Step 2 PLUS Step 3 equals effect on Step 1 EXAMPLE 2.1 S Africa deposited R100 000, as capital into the business bank account of SA Attorneys. Recognise the transaction in the accounting records of the business using the 4-step method. EXPLANATION 2.1 Transaction Deposit of R100 000 Deposit of R100 000 Step 1 Bank Capital Step 2 The transaction will increase the The transaction will increase the “bank account” “capital account” Step 3 Asset Equity Step 4 Debit the asset, Bank, to increase it. Credit the equity, Capital, to increase it. Prepare the BAE incorporating the information from the above table: Assets = Equity + Liabilities LBLL +100 000 +100 000 ― bank account dr capital account cr ― Notes See Lessons Explanation The BAE is an accounting equation that must balance after each transaction. 2.1 S Africa deposited R100 000, as capital into the business bank account of SA Attorneys. To increase the bank account (an asset) debit the account. The opposite entry is a credit to the Capital account. The equity account is credited to increase the owner’s equity in the business. 12  Learning unit 2/2024 EXAMPLE 2.2 SA Attorneys purchased computer equipment and paid R85 000 for the equipment. Recognise the transaction in the accounting records of SA Attorneys using the 4-step method. EXPLANATION 2.2 Transaction Payment of R85 000 Payment of R85 000 Step 1 Computer equipment Bank Step 2 The transaction will increase the The transaction will decrease the “computer equipment account” “bank account” Step 3 Asset Asset Step 4 Debit the asset, computer Credit the asset, Bank to increase it. equipment, to increase it. Prepare the BAE incorporating the information from the above table: Assets = Equity + Liabilities LBLL +85 000 ― ― Computer equipment dr -85 000 ― ― Bank account cr See Lessons Notes Explanation 2.2 The BAE is an equation that must balance after each transaction. SA Attorneys purchased computer equipment and paid R85 000 for the equipment. To increase the computer equipment account (an asset), debit the account. The opposite entry is a credit to the Bank account. The Bank account is an asset and an asset account is decreased by crediting the account. Notes 13  Learning unit 2/2024 2.4.4 Examples illustrating the application of the double-entry system The following examples illustrate the double-entry system: EXAMPLE 2.3 Assume a business buys equipment for R2 000 by EFT. How would the bookkeeper record this transaction? EXPLANATION 2.3 In this case the business has paid money to purchase equipment. The double entry will be made as follows: Dr Bank account Cr - R2 000 Dr Equipment Cr + R2 000 STEPS – The bookkeeper must show that cash of R2 000 has left the business. – Since cash is an asset, the principles pertaining to assets will be used. – The cash balances have decreased, and assets decrease on the credit side. ∴ the bank account is credited. – In return for the cash payment, the business has received equipment. – Equipment is an asset and therefore assets have increased. – Assets increase on the debit side of the account ∴the equipment account is debited. The rules of double-entry state that all debits should equal all credits. In this case, we have debited the equipment account and credited the bank account. The double-entry rule has been applied successfully. EXAMPLE 2.4 Assume a business receives a loan of R10 000 from the bank. How would the bookkeeper record this transaction? 14  Learning unit 2/2024 EXPLANATION 2.4 In this case, the business has received a loan from the bank. The double entry will be made as follows: Dr Bank account Cr + R10 000 Dr Bank loan Cr + R10 000 STEPS – The bookkeeper must show that cash of R10 000 has flowed into the business. – Since cash is an asset, the principles pertaining to assets will be used. – The cash balances have increased and assets increase on the debit side. ∴ the bank account is debited. – At the same time, the business has incurred a debt (a liability). – The bank loan is a liability, and the rule that applies to liabilities states that liabilities increase on the credit side. – Loan debts increase on the credit side of the account ∴the bank loan account is credited. The rules of double entry state that all debits should equal all credits. In this case, we have debited the bank account and credited the loan account. The double entry rule has been applied successfully. EXAMPLE 2.5 Assume a business pays the telephone account of R550. How would the bookkeeper record this transaction? EXPLANATION 2.5 In this case, the business has paid money. The double-entry will be made as follows: Dr Bank account Cr - R550 Dr Telephone expenses Cr + R550 15  Learning unit 2/2024 STEPS – The bookkeeper must show that cash of R550 has flowed out of the business. The business has spent money on an item that cannot be changed back into cash. – Since cash is an asset, the principles pertaining to assets will be used. – Cash has decreased (credit bank) and an expense has been incurred (telephone expense). – Expenses have increased and the telephone account should be debited. Remember: expenses increase on the debit side. Once again, an account has been debited and another account credited. The rules of double entry state that all debits should equal all credits. In this case, the expense account (telephone) has been debited and the bank account credited. The double entry rule has been applied successfully. EXAMPLE 2.6 Assume a business receives R3 500 cash for services rendered. How would the bookkeeper record this transaction? EXPLANATION 2.6 In this case, the business has received money. The double-entry will be made as follows: Dr Bank account Cr + R3 500 Dr Services rendered Cr + R3 500 STEPS – The bookkeeper must show that cash of R3 500 has flowed into the business. – Since cash is an asset, the principles pertaining to assets will be used. – The balance of the bank account will therefore increase and assets increase on the debit side. ∴ the bank account is debited. – The money was received for services rendered. – This means that the services rendered account will be credited. – This is an income account, and all income accounts increase on the credit side. 16  Learning unit 2/2024 Once again, we have debited one account and credited another. The rules of double-entry state that all debits should equal all credits. In this case, the expense account (telephone) has been debited and the bank account credited. The double entry rule has been applied successfully. EXAMPLE 2.7 SA Products opened its doors on 1 April 2020. The entity uses the periodic inventory system and is not registered as a VAT vendor (inventory systems will be discussed in more detail in learning unit 3). The following transactions took place during the first month of business: Date Transactions 2 The owner, Mr South made a capital contribution to the business, being R5 000 cash and equipment with a fair market value of R2 000. 5 Purchased trading inventory per cheque, R1 000. 9 Sold inventory for cash, R2 500. 12 Purchase trading inventory on credit, R600. 19 Paid monthly insurance of R1 000. 23 Sold inventory on credit, R7 000. 27 Purchased equipment per electronic funds transfer (EFT), R3 000. 29 Paid wages per cash, R800. 30 Paid the water and electricity account, R1 100. REQUIRED: Indicate the effect of the transactions under the accounting equation. EXPLANATION 2.7 DAY ASSETS = OWNERS’ EQUITY + LIABILITIES R R R 2 + 2 000 Equipment + 2 000 Capital 0 + 5 000 Bank + 5 000 Capital 5 - 1 000 Bank - 1 000 Purchases # 0 9 + 2 500 Bank + 2 500 Sales * 0 12 0 - 600 Purchases # + 600 Accounts payable 19 - 1 000 Bank - 1 000 Insurance # 0 23 + 7 000 Accounts receivable + 7 000 Sales * 0 27 - 3 000 Bank 0 0 + 3 000 Equipment 29 - 800 Bank - 800 Wages # 0 30 - 1 100 Bank - 1 100 Water and electricity # 0 # * Expenses Income ^ Periodic inventory system see Learning unit 3.2.2 17  Learning unit 2/2024 EXAMPLE 2.8 SA Traders entered into the following transactions during July 2020. The entity uses the periodic inventory system and is not registered as a VAT vendor. Date Transactions 1 Sold inventory on credit to A South – R1 300. 3 Bought stationery for cash – R1 000. 4 Purchased office furniture and paid by business credit card from Africa Bank – R20 000. 6 B Africa owed SA Traders R1 780 and paid R1 700 in full settlement of his account. 8 Credit card sales of R15 000. 11 A delivery vehicle was purchased on credit from Natal Motors for R75 000. A deposit of R35 000 was paid immediately and the outstanding balance is still due to Natal Motors. 13 Paid printing costs by electronic funds transfer (EFT) – R1 200. 15 Paid the insurance account by EFT – R1 345. 22 Received an invoice from SA Traders for the purchase of packing material – R1 450. 25 Paid R6 350 by EFT for a computer purchased for the owner’s son. 26 Paid the business telephone account – R1 005. REQUIRED: Indicate the effect of the transactions under the accounting equation. EXPLANATION 2.8 DAY ASSETS = OWNERS’ EQUITY + LIABILITIES R R R 1 + 1 300 Accounts receivable + 1 300 Sales * 0 3 - 1 000 Bank - 1 000 Stationery # 0 4 + 20 000 Office furniture + 20 000 Accounts payable 6 + 1 700 Bank - 80 Discount allowed # - 1 780 Accounts receivable 8 + 15 000 Accounts receivable + 15 000 Sales * 11 - 35 000 Bank + 40 000 Loan liability + 75 000 Motor vehicle 13 - 1 200 Bank - 1 200 Printing # 0 15 - 1 345 Bank - 1 345 Insurance # 0 18  Learning unit 2/2024 ASSETS OWNERS’ EQUITY LIABILITIES DAY = + R R R 22 - 1 450 Packing materials # + 1 450 Accounts payable 25 - 6 350 Bank - 6 350 Drawings 0 26 - 1 005 Bank - 1 005 Telephone # 0 # Expenses * Income EXAMPLE 2.9 List each of the following ledger accounts under one of the categories in the table below. “Furniture” is inserted as an example. ASSETS EQUITY LIABILITIES Non- Current Capital Income Expenditure Non-current Current current assets liabilities liabilities assets Furniture Ledger accounts to be classified: (a) land and buildings (b) mortgage (c) petty cash (d) postage (e) interest income (f) vehicles (g) salaries (h) debtors (Accounts receivable) (i) creditors (Accounts payable) (j) bank overdraft (k) fees earned (l) electricity deposit (m) subscriptions 19  Learning unit 2/2024 EXPLANATION 2.9 ASSETS EQUITY LIABILITIES Non-current Current Capital Income Expenditure Non-current Current assets assets liabilities liabilities (a) land and (c) petty (e) interest (d) postage (b) mortgage (i) creditors buildings cash income (g) salaries (j) bank (f) vehicles (h) debtors (k) fees (m) subscriptions overdraft (l) electricity earned deposit * * Electricity deposit is an amount paid by the entity to serve as security for the payment of the electricity account. The amount will be paid back to the entity if they sell the land and buildings and will no longer make use of the electricity; therefore, it is not an expense but a current asset. EXAMPLE 2.10 A South Poll is a partner in SA Attorneys. SA Attorneys commenced operations on 1 May 2020. The following transactions took place during the first month: May 1 Cash deposited in the bank as opening capital, R25 000. 2 A South made his private computer equipment available to the business, R9 000. 3 Additional equipment purchased and paid for by EFT, R12 000. 4 Fees were charged for work done on account for North Suppliers, R4 200. 6 Vehicle purchased on credit from Zulu Limited, R22 400. 10 SA Attorneys received R2 000 in cash for fees earned from West Finance. 17 North Suppliers paid R2 200 on their account. 28 Wages paid, R4 000. 30 Paid R9 000 to Zulu Limited in part settlement of the business’s account. REQUIRED: Use the accounting equation in the format below to analyse the above-mentioned transactions. Date Assets = Equity + Liabilities Effect on accounts NB: (1) Show the effect of each transaction on the accounting equation with a plus sign (+) for an increase and a minus sign (–) for a decrease. 20  Learning unit 2/2024 EXPLANATION 2.10 Date Assets = Equity + Liabilities Effect on accounts 01/05 + 25 000 + 25 000 Cash received will increase the bank, therefore assets increased. The cash was received 02/05 + 9 000 + 9 000 Equipment received from partner. Assets, equipment increases and capital, equity increases. 03/05 + 12 000 Cash used to purchase equipment. Assets, - 12 000 equipment increased and an asset, bank decreased. 04/05 + 4 200 + 4 200 Services rendered on account. Assets, debtors increased and income (fees) therefore equity increased. 06/05 + 22 400 + 22 400 Vehicle purchased on credit. Assets, vehicles increased and liabilities, long-term loan increased. 10/05 + 2 000 + 2 000