2. Announcements Test details 2 Date: 09 March 2015 Venue: Engineering basement Time: 14:00 pm Scope: Chapter 1- 5 (p 1 – p 167) leave out: dates and names of people in Chapter 1 Also note: Do not write in pencil/use tip-ex Use black/ blue pen Need to keep track of time- bring watch Manage time- calculate time per question

3. Objective test 3 The financial effect of transactions and events are recognised in the accounting records of an entity in accordance with the double entry bookkeeping system. REQUIRED: Explain how the double entry bookkeeping system works and how it affects the accounting records of an entity.

4. Objective test 4 Double entry bookkeeping system: Each transaction that takes place affects at least two accounts (items). One account is debited and another account is credited with the same amount. (OR If the transaction or event affects more than two items, the sum of the debit entries is equal to the sum of the credit entries.)

5. Objective test 5 Effect on the records of an entity: Since all transactions and events are dually recognised in the accounting system, the total of the debit entries in a journal should equal the total of the credit entries in a journal. Furthermore, the total of all the debit balances should be equal to the total of all the credit balances which results in the total of the assets in the statement of financial position being equal to the total of the equities and liabilities in the statement of financial position.

6. Specific transactions 6 Application of the: - conceptual framework; - the double entry rules and; - the financial statements framework to specific transactions

7. Specific transactions 7 Transactions we will be looking at: - Cash purchase of assets - Credit purchase of assets - Expenses incurred for cash - Bank charges - Cash advances for incurring expenses - Expenses incurred on credit - Employee benefits expense

8. Source documents 8 A document on which each transaction and event is captured and therefore serves as proof of that transaction Purposes: - Internal control & audit trail - Provides details for journalising

9. Source documents 9 Examples: agreement/contract, invoice, goods received note, bank statement, cheque-stub, copy of EFT instruction & account bills Self-study: p 120 – p 122 -Summary of source documents

10. The accounting process 10 Transaction/ event Journal (prime entry) General ledger (accounts) Trial balance & adjustments AFS (Annual financial statements) of: -Profit and loss (P&L) -Statement of financial position (SFP) -Statement of changes in Equity (SCE) -Cash flow statement (C/F) -Notes & policies

11. The accounting process 11 Steps for each transaction: Identification & Classification 1.Source documents 2.Items 3.Elements (definitions) 4.Accounts

12. The accounting process 12 Steps for each transaction: Recognition 1.Recognition criteria & date 2.Double entry system/rules- Increase/decrease and Debit/Credit 3.Journalise 4.Post to ledger accounts

13. The accounting equation 13 Assets=Equity+Liabilities +--+-+ DRCRDRCRDRCR Income CR Expense s DR

14. The accounting process 14 Steps for each transaction: Initial Measurement 1.Historical cost price – cash price 2.Proof - source documents

15. The accounting process 15 Steps for each transaction: Presentation 1.Balancing accounts 2.Closing off of temporary accounts 3.Trial balance 4.Financial statements

16. Accounting process 16 Do we see that everything we’ve done in Chapter 2-4 makes up the accounting process? Now lets apply these chapters and therefore the accounting process to specific transactions

17. Cash purchase of assets 17 Transaction: Cash is utilised to purchase an asset Example: On 1 July 20.7, AC Entity issued a cheque to Supplier K for the purchase of a delivery vehicle, which was delivered to AC Entity’s premises on the same day. The invoice indicates the cost price of the delivery vehicle as R450 000.

18. Cash purchase of assets 18 - Identification & Classification 1.Source documents – p 123 2.Items – delivery vehicle & cash 3.Elements (definitions) – asset- element 4.Accounts – vehicle account & bank account

19. Cash purchase of assets 19 - Recognition 1.Recognition criteria & date – 1 July 20.7 2.Double entry system - Increase/decrease and Debit/Credit - Vehicle account increases  Debited Bank account decreases  Credited

20. The accounting equation 20 Assets=Equity+Liabilities +--+-+ DRCRDRCRDRCR Income CR Expenses DR

21. Cash purchase of assets 21 - Recognition 1.Journalise 20.7 NrDrCr 1 JulDelivery vehicle (SFP) A4. 1 450 000 Bank (SFP)A30 450 000 Recognise the purchase of delivery vehicle. Payment occurred with receipt of the vehicle. Assets=Liabilities+EquityClassification +450 000 -450 000 =0+0

22. Cash purchase of assets 22 - Recognition 1.Post to accounts Dr A4.1 Delivery vehicles Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Jul BankJ1 450 000 Dr A30 Bank Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Jul Delivery vehicles J1450 000

23. Cash purchase of assets 23 - Initial Measurement 1.Historical cost price (cash price) = invoice price/ amount per cheque/EFT 2.Proof - source documents – purchase invoice & cheque-stub/copy of EFT instruction

24. Cash purchase of assets 24 - Presentation ItemDelivery vehicle Bank StatementSFP ClassificationNon-current assets Current assets Line itemDelivery vehicles Cash and cash equivalents

25. Cash purchase of assets 25 Fixed term deposit - Investment An investment with the bank for a fixed period of time. Therefore the entity will transfer cash to the bank to earn interest on that amount for that period. Once that period lapses, the deposit is repaid to the entity. This fixed term deposit satisfies the definition and recognition criteria of an asset Therefore this transaction can also be seen as a purchase of an asset for cash and will be dealt with as done above.

26. Credit purchase of assets Trade credit 26 Transaction: Purchasing an asset by utilising trade credit Example: On 16 July 20.7, AC Entity purchased trading inventories from Supplier K, which was delivered to AC Entity’s premises on the same day. The invoice indicates the cost price as R240 000. Payment must occur by 14 August 20.7.

27. Credit purchase of assets on credit 27 Remember that in accordance with the accrual basis of accounting, whenever an item is purchased on credit, the purchase of the item on credit and the subsequent settlement of the debt are two separate transactions and will be recognised separately when they occur.

28. Credit purchase of assets Trade credit 28 - Identification & Classification 1.Source documents – p 130 2.Items – trading inventories & trade payable 3.Elements (definitions) – asset-element & liabilities-element 4.Accounts – trade inventories account & Payable K account

29. Credit purchase of assets Trade credit 29 - Recognition 1.Recognition criteria & date – 16 July 20.7 2.Double entry system - Increase/decrease and Debit/Credit – Inventories account increases  Debited Payable account increases  Credited

30. Credit purchase of assets Trade credit 30 - Recognition 1.Journalise 20.7 NrDrCr 16 JulTrading inventories (SFP) A2 0 240 000 Payable K (SFP)K1 240 000 Recognise the purchase of trading inventories on credit as well as the accompanying liability. Assets=Liabilities+EquityClassification +240 000= +0

31. Credit purchase of assets Trade credit 31 - Recognition 1.Post to accounts Dr A20 Trading inventories Cr Date Contra account NrAmountDateContra accountNrAmount 20.7 16 Jul Payable KJ1 240 000 Dr K1 Payable K Cr Date Contra account NrAmountDateContra accountNrAmount 20.7 16 Jul Trading inventories J1240 000

32. Credit purchase of assets Trade credit 32 - Initial Measurement 1.Historical cost price (cash price) = invoice price 2.Proof - source documents – purchase invoice

33. Credit purchase of assets Trade credit 33 - Presentation Item Trade inventories Trade payable StatementSFP Classification Current assets Current liabilities Line itemInventoriesTrade and other payables

34. Credit purchase of assets Supplier’s loan 34 Transaction: Purchasing an asset by utilising a supplier’s loan Example: On 1 June 20.7, AC Entity purchased a machine from Supplier L. The cash price of the machine is R820 000 and is, together with the interest at 12% per year, repayable on 31 December 20.9. The machine was delivered to AC Entity on 1 July 20.7

35. Credit purchase of assets Supplier’s loan 35 - Identification & Classification 1.Source documents – p 132 2.Items – machinery & supplier’s loan 3.Elements (definitions) – asset- element & liabilities-element 4.Accounts – machinery account & Loan account from Supplier L

36. Credit purchase of assets Supplier’s loan 36 - Recognition 1.Recognition criteria & date – 1 July 20.7 2.Double entry system - Increase/decrease and Debit/Credit - Machinery account increases  Debited Loan account increases  Credited

37. Credit purchase of assets Supplier’s loan 37 - Recognition 1.Journalise 20.7 NrDrCr 1 JulMachinery (SFP) A3. 1 820 000 Loan from L (SFP)L4 820 000 Recognise the purchase of machinery on credit as well as the accompanying liability. Assets=Liabilities+EquityClassification +820 000= +0

38. Credit purchase of assets Supplier’s loan 38 - Recognition 1.Post to accounts Dr A3.1 Machinery Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Jul Loan from LJ1 820 000 Dr L4 Loan from L Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Jul MachineryJ1820 000

39. Credit purchase of assets Supplier’s loan 39 - Initial Measurement 1.Historical cost price (cash price) = invoice price/price according to loan agreement 2.Proof - source documents – purchase invoice & loan agreement

40. Credit purchase of assets Supplier’s loan 40 - Presentation ItemMachinerySupplier’s loan StatementSFP Classification Non-current assets Non-current liabilities Line itemMachinerySupplier’s loan

41. Expenses 41 Equity = Capital + Retained earnings Retained earnings = accumulated profits Profit = Income – Expenses Therefore all income and expenses items are a component of RE and fall under equity-element. But to keep track of detail- all expenses incurred during period are accumulated in temporary expense accounts and not debited directly against RE. Only at YE the temporary accounts are closed off against RE

42. Expenses 42 Economic benefits associated with Asset vs Expense: Economic benefits is therefore the factor that distinguishes an expense from an asset. AssetExpense Gives entity access to future economic benefits Gives entity current economic benefits Economic benefits can flow over numerous years Economic benefits usually limited to one month

43. Expenses incurred in cash 43 Transaction: Cash is utilised to incur an expense Example: On 1 Jan 20.7, AC Entity entered into a lease agreement with Lessor V to rent a property from Lessor V. On 1 March 20.7, AC Entity paid the rent for March 20.7 to the amount of R32 000 by means of an EFT.

44. Expenses incurred in cash 44 - Identification & Classification 1.Source documents – p 141 2.Items – rental payment & cash 3.Elements (definitions) – equity(expense)-element & asset-element 4.Accounts – rent expense account & bank account

45. Expenses incurred in cash 45 - Recognition 1.Recognition criteria & date – 1 Mar 20.7

46. Recognition criteria Expense 46 An expense item that satisfies the definition of an expense is recognised when a decrease in an asset or increase in a liability, can be measured reliably. I.e. simultaneously with the decrease in the asset item or the increase in the liability item, at the same amount as the asset or liability.

47. Recognition criteria Expense 47 A decrease in future economic benefits associated with a decrease in an asset or an increase in a liability occurred, and The decrease in cash in the bank has already occurred that decrease can be measured reliably. The cost of the rent expense can be measured reliably at the historical cost price thereof, namely the amount indicated in the lease agreement.

48. Expenses incurred in cash 48 - Recognition 1.Double entry system - Increase/decrease and Debit/Credit – Rent expense account increases  Debited Bank account decreases  Credited

49. Expenses incurred in cash 49 - Recognition 1.Journalise 20.7 NrDrCr 1 Mar Rent expense (P/L)U1232 000 Bank (SFP)A30 32 000 Recognise rent expense in respect of property for March 20.7 Assets=Liabilities+EquityClassification -32 000=0+ Retained earnings - expense

50. Expenses incurred in cash 50 - Recognition 1.Post to accounts Dr A30 Bank Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Mar Rent expenseJ132 000 Dr U12 Rent expense Cr Date Contra account NrAmountDate Contra account NrAmount 20.7 1 Mar BankJ1 32 000

51. Expenses incurred in cash 51 - Initial Measurement 1.Historical cost price (cash price) = invoice price/price according to lease agreement. 2.Proof - source documents – invoice & agreement/contract

52. Expenses incurred in cash 52 - Presentation ItemBankRent expense StatementSFPSP/L Classification Current assets n/a Line itemCash and cash equivalents Other admin expenses

53. Expenses vs deposits 53 An expense and a deposit often stem from the same agreement but are two different items, e.g. a lease agreement can result in rental payments as well as the payment of refundable deposit by the lessee. Rental payments = expense Rent deposit = asset Example 5.3 (a) -rent deposit.