Introductory Accounting N4

Book Title
BookBook
Title
Student’s
Student’s
Book
FET FIRST
Level 3
FET FIRST
NATED SERIES
Author
Level
3
Introductory
Author
Accounting N4
Student’s Book
C. Esterhuyse and A. Janse van Rensburg
FET FIRST Introductory Accounting N4
NQF Level 4 Student’s Book
© C. Esterhuyse and A. Janse van Rensburg, 2012
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First published 2012 by
Troupant Publishers [Pty] Ltd
P. O. Box 4532
Northcliff
2115
Copy editing by John Henderson
Proofreading by Moira Richards
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ISBN: 978-1-430800-63-7; eISBN: 978-1-430802-32-7
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Contents
Syllabus grid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
MODULE 1: ACCOUNTING THEORY, PRINCIPLES AND CONCEPTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unit 1.1: Profit, wealth and capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The principles of entrepreneurship regarding the profit motive and capital increase by
rendering a service and trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The principles of the increasing and decreasing of wealth from the viewpoint of
the entrepreneur .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How the owner of an enterprise can increase his or her wealth by means of profit activities . . . . .
1
1
7
8
Summative assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MODULE 2: FORMS OF OWNERSHIP .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Unit 2.1: Kinds of enterprises .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Identifying the kinds of enterprises, defining each, and pointing out their similarities and
differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
MODULE 3: DOCUMENTS AND AUTHORISATION OF TRANSACTIONs .. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Unit 3.1: Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Types of documents in use .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purpose and use of source documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Filing of documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorisation of transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
18
26
26
28
MODULE 4: OPENING OF A TRADING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Unit 4.1: Primary components to be opened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Management decisions when starting a business .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Unit 4.2: Other opening preparations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Preparations before starting your business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Unit 4.3: Opening of a current account with the bank .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Procedure and documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank deposit slip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cheques as a form of payment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
34
35
36
Summative assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
MODULE 5: ACCOUNTING PRINCIPLES AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Unit 5.1: Definitions .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Accounting concepts .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Unit 5.2: The accounting equation and the trading activity cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
The accounting equation .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The trading cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Analysis of transactions on the equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
MODULE 6: TRADING CONCERNS – PRINCIPLES REGARDING DOUBLE ENTRIES . . . . . . . . . . . . . . . 57
Unit 6.1: The principle of the double-entry system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Application of the double-entry principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Unit 6.2: Posting .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Illustration of basic accounting entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Unit 6.3: The General Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
General Ledger entries .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Module 7: Trading concerns – Subsidiary Journals and posting to the Ledger . . 72
Introduction to Subsidiary Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Unit 7.1: Cash Receipts Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The CRJ and the debit side of the Bank account .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The CRJ as a summary .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis columns .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entries from source documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Folio references to the Ledger .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to the Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
73
73
74
76
77
80
80
80
Unit 7.2: Cash Payments Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The CPJ and the credit side of the Bank account .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The CPJ as a summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis columns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entering of transactions from source documents (cheque counterfoils) . . . . . . . . . . . . . . . . . . . . .
Folio references to the Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balancing the CPJ .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Posting to the Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
84
84
85
86
90
90
90
Unit 7.3: Analysis Cash Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Relationship between Analysis Cash Book and the Bank account . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Analysis columns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Cash received and paid out .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Balancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Posting to the Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Unit 7.4: Petty Cash Journal .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Purpose of the Petty Cash Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Money transfers from Bank to the Petty Cash account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Using petty cash vouchers .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Opening the Petty Cash Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Cash payments from petty cash .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Posting of the Petty Cash totals and entries to the Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Balancing the Petty Cash account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Unit 7.5: Wages and Salaries Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Types of wage systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overtime remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wages Journal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recording wage and salary transactions in the CPJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
111
112
113
115
119
Summary .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Summative assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
MODULE 8: BANK RECONCILIATION .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Unit 8.1: Purpose of bank reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Bank reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Unit 8.2: Bank statements .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Definition of ‘Bank Statement’ .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Purpose of a Bank Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Unit 8.3: Difference between a Bank Statement and a Bank account .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding deposits .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding cheques .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items that appear on the Bank Statement but not in the Journals .. . . . . . . . . . . . . . . . . . . . . . . . . .
Errors in the Cash Journals/Cash Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Errors on the Bank Statement .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127
127
127
127
128
130
Unit 8.4: Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Recording transactions omitted from the Cash Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131
Drawing up a Bank Reconciliation Statement (‘Supplementary Bank Statement’). . . . . . . . . . . . . 133
Positive (favourable) balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Negative (unfavourable) balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Unit 8.5: Reconciliation with the previous month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Outstanding deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Outstanding cheques .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Unit 8.6: Payment of stopped cheques .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Lost cheques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Stale cheques .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Unit 8.7: Postdated cheques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Postdated cheques received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Postdated cheques issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Summary .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Summative assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
MODULE 9: PROCEDURE AT END OF ACCOUNTING PERIOD .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Unit 9.1: The Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purpose of the Trial Balance .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to the Trial Balance .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tracing of errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opening accounts in the Ledger from the Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152
153
153
155
156
Unit 9.2: Calculating profit .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Profit as the enterprise’s financial results .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158
Calculating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Unit 9.3: Balance Sheet (also called ‘Statement of Financial Position’) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Summary .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Summative assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Syllabus grid
Page in
book
Learning content
Learning objectives
Students should be able to …
Module 1: Accounting theory, principles and concepts
Unit 1.1: Profit, wealth
and capital
2–5
• The profit motive
Briefly describe the principles of entrepreneurship regarding the profit
motive
Briefly describe capital increase by rendering a service and trading
7–8
8
• Principles of
increasing and
decreasing wealth
Explain the principles of increasing wealth from the viewpoint of an
entrepreneur
• Capital increase by
rendering a service
and trading
Explain how the owner of an enterprise could increase his wealth by
means of profit activities
Explain the principles of decreasing wealth from the viewpoint of an
entrepreneur
Didactic guidelines
1. Topics must be illustrated by means of practical examples.
2. Background on the satisfaction of needs and the role of the entrepreneur to generate a profit by satisfying the
needs of other.
Evaluation
1. Theory as well as application questions required.
2. Evaluation must take place on a daily basis.
Module 2: Forms of ownership
10
Unit 2.1: Kinds of
enterprises
11–12
• Sole trader
(proprietor)
Briefly describe
11–13
• Partnership
Briefly describe
11–12
14
• Company with limited
liability
Briefly describe
11–12
14
• Close corporation
Briefly describe
11–12
15
• Co-operation
Briefly describe
11–13
• Similarities and
differences
Point out the similarities and differences between the kinds of enterprises
Didactic guidelines
Topics must be illustrated by means of practical examples.
Evaluation
Theory as well as application questions can be used in this module for internal evaluation purposes.
Module 3: Documents and authorisation of transaction
18
Unit 3.1: Documents
18
• Types of documents
in use
18–25
• Source documents
Define and explain function of documents
25
• Supporting
documents
Define and explain function of documents
26
• Internal documents
Define and explain function of documents
vi
Page in
book
Learning content
Learning objectives
Students should be able to …
26
• External documents
Define and explain function of documents
26
• Purpose and use of
source documents
Explain the application of source documents in the recording process
26
• Filing of documents
Explain the purpose of filing
26–28
• Safe-keeping
Explain the purpose of the safe-keeping of documents as well as
procedure for safe-keeping
28
• Authorisation of
transactions
Briefly describe why it is necessary to authorise transactions
Explain the difference in the use of the original documents and the
duplicates
Briefly describe who should authorise transactions
Didactic guidelines (for 3.1–3.3)
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 4: Opening of a trading concern
32
Unit 4.1: Primary
components to be
opened
32
• Business activities
Explain the purpose of this opening decision
32
• Capital acquisition
Explain the purpose of this opening decision
32
• Form of the
undertaking
Explain the purpose of this opening decision
32
• Size
Explain the purpose of this opening decision
32
• Basis on which to do
business
Explain the purpose of this opening decision
32
• Equipment needed
Explain the purpose of this opening decision
32
• Opening initial stock
needed
Explain the purpose of this opening decision
33
Unit 4.2: Other opening
preparation
33
• Opening date
Explain the need for this opening decision
33
• Introduction
Explain the need for this opening decision
33
• Opening
Explain the need for this opening decision
33
• Advertising
Explain the need for this opening decision
33
• Printing of documents
Explain the need for this opening decision
33
• Appointing
employees
Explain the need for this opening decision
33
• Tax registration
Explain the need for this opening decision
33
• Connecting water and
electricity
Explain the need for this opening decision
33
• Telephone
connections
Explain the need for this opening decision
34
Unit 4.3: Opening a
bank account
34
• Procedure and
documents
Explain the procedure of opening a bank account
Identify, interpret and complete the applicable documentation
vii
Page in
book
Learning content
Learning objectives
Students should be able to …
35
• Bank deposit slip
35
• The purpose of a bank
deposit slip
Explain the purpose of the deposit slip
35
• Particulars on the
deposit slip
Understand the particulars on the slip by means of making a deposit
36
• Cheques
Identify the different kinds of cheques and the procedures surrounding
them providing reasons
41
• Cheque as a
negotiable document
Explain and provide reasons
37
• Parties to a cheque
Explain and provide reasons
37
• Completion of a
cheque
Explain how to do this and why
37
• Order cheque
Explain and provide reasons
38
• Bearer cheque
Explain and provide reasons
38–41
• Safety measures
Explain and provide reasons
38
• Endorsement
Explain and provide reasons
39–40
• Crossing
Explain and provide reasons
41
• Changes made to
cheques
Explain and provide reasons
41
• Post-dated
Explain and provide reasons
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 5: Accounting principles and definitions
43
Unit 5.1: Definitions
43
• Defining concepts
44–45
• Assets
Define and explain concept and provide an applicable example
46
• Owner’s equity
Define and explain concept and provide an applicable example
47–8
• Liabilities
Define and explain concept and provide an applicable example
• Capital contribution
by the owner
Define and explain concept and provide an applicable example
• Acquisition of fixed
assets
Define and explain concept and provide an applicable example
• Current assets
• Current liabilities
Define and explain concept and provide an applicable example
44
48
46
• Current income
Define and explain concept and provide an applicable example
46
• Rendering of a service
Define and explain concept and provide an applicable example
46
• Trading activities
Define and explain concept and provide an applicable example
46
• Purchase and sale of
trading stock
Define and explain concept and provide an applicable example
49
Unit 5.2: Trading
activity cycle and
accounting equation
viii
Page in
book
Learning content
Learning objectives
Students should be able to …
49
• The accounting
equation
Explain the functioning of the accounting equation
50
• The trading activity
cycle
Give a schematic representation of trading activity cycle
Use examples to aid in the explanation
Briefly explain the representation
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 6: Trading concerns – Principles regarding double entries
57
Unit 6.1: The principle
of the double-entry
system
57–59
• The principle of the
double-entry system
59
Unit 6.2: Posting
59
• Capital contribution
by owner
59
• The purchase of stock
60
• Payment of operating
expenses
61
• Cash withdrawals
61
• Purchase of fixed
assets
60
• Sale of stock (periodic
system)
63
Unit 6.3: The general
ledger
63
Explain and practically apply the principle of the double entry
Identify and determine which account must be debited and which
credited
Enter the different transactions mentioned in the contents column directly
from the source documents into the ledger
• The purpose of the
general ledger
Explain and practically apply the purpose of a ledger account
• The structure of
a general ledger
account
Explain and practically apply the structure of a ledger account (different
columns and debit and credit sides)
• The structure of the
general ledger
• The balance sheet
section
• The nominal account
section
Explain and practically apply the structure of a ledger (balance sheet
section and nominal section)
Explain and practically apply the grouping of accounts in the different
ledger sections
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 7: Trading concerns – Subsidiary journals and posting to the ledger
73
Unit 7.1: Cash receipts
journal
73
• The CRJ and the
debit side of the bank
account
Explain why CRJ is used as book of first entry
Indicate the relationship between CRJ and debit side of bank account
ix
Page in
book
Learning content
Learning objectives
Students should be able to …
73
• CRJ as summary
Explain CRJ as a subsidiary journal that summarises all cash receipts (bank
column on the right hand side)
74–75
• Analysis columns
Open appropriate analysis columns – see Annexure 1.
76
• Entries from source
documents
Write down all cash receipts from the source documents – duplicate
receipts, cash register roll and duplicate deposit slips
76
• Cash received for sales
Record cash received from sales in the CRJ
77
• Other income
Record other income in the CRJ
78–79
• Cash received from
debtors
Record cash received from debtors in the CRJ
80
• Folio references to the
ledger
Use folio references
80
• Balancing
Cross balance the cash receipts journal
80–82
• Transfer to the ledger
Post from the CRJ to the ledger
83
Unit 7.2: Cash payments
journal
84
• The CPJ and the credit
side of the bank
account
Explain why CPJ is used as book of first entry
84
• CPJ as summary
Explain CPJ as a subsidiary journal that summarises all cheques paid from
cheque account (bank column on the right hand side)
85–86
• Analysis columns
Open appropriate analysis columns
86
• Enter transactions
from source
documents
Enter from source documents the payments as indicated in the contents
column
86
• Purchase of fixed
assets
Record payments for fixed assets
87
• Payment of current
expenditure
Record expense payments
87–88
• Purchase of trading
stock
Record purchases of trading stock
88
• Cash withdrawals
(owner)
Record cash withdrawals by the owner
89
• Other payments on
behalf of the owner
Record other payments made on behalf of the owner
90
• Folio references to the
ledger
Use folio references to the ledger
Indicate the relationship between CPJ and credit side of bank account
90
• Balancing the CPJ
Cross balance the cash payments journal
90
• Posting to the ledger
Post from the CPJ to the ledger
92
Unit 7.3: Analysis cash
book
92
• Relationship between
analysis cash book
and the bank account
Explain reason for using ACB as book of first entry
93
• Analysis columns (See
Annexures 1 and 2)
Open the appropriate analysis columns
93
• Cash received and
paid out
Enter all the amounts received and paid out from source documents into
the ACB
Explain the difference between the cash journals and ACB
Understand the connection between the ACB and the bank account
x
Page in
book
Learning content
Learning objectives
Students should be able to …
93
• Balancing
Balance the ACB
Post the analysis columns to the general ledger
94
• Posting to the ledger
99
Unit 7.4: Petty cash
journal
99
• The purpose of the
petty cash journal
Explain the purpose of the petty cash journal
99
• Money transfers from
bank to the petty cash
account
Enter the transfer of money to the petty cash account
100
• Using petty cash
vouchers
Complete petty cash vouchers and attach them to supporting documents
101
• Opening the petty
cash journal
Open with appropriate columns with the Total column in the front – see
Annexure 3
102
• Cash payments from
petty cash
Enter payments as indicated in the contents column from petty cash
vouchers into the petty cash journal
102
• Purchase of fixed
assets
Record purchases of fixed assets
103
• Purchase of trading
stock
Record the purchase of trading stock
103
• Payment of
expenditure
Record other expenses
104
• Cash withdrawals for
own use
Record cash withdrawals for the owner’s use
105
• Other payments
by the owner for
personal purposes
Record payments made by the owner for own use
106
• Posting of the petty
cash totals and entries
to the ledger
Balance the petty cash journal and post the amounts to the petty cash
account and other ledger accounts
107
• Balancing the petty
cash account
Balance the petty cash account according to the imprest system or system
of varying balance
107
• The system of varying
balance
Balance the petty cash account using the system of varying balance
108
• The imprest system
Balance the petty cash account using the imprest system
111
Unit 7.5: Wages and
salaries journal
111
• Types of wage
systems
Identify and briefly define an hourly wage system and a piece wage
system
111
• Hourly wage system
Identify and briefly define
111
• Piece wage system
Identify and briefly define
112
• Overtime
remuneration
Describe the different ways in which to exercise control over overtime
remuneration
113
• Deductions
Define purpose of listed deductions
Calculate overtime remuneration
Determine the split between employer and employee contributions – see
Annexure 4
113
• Pension fund
Define purpose and determine split between employer and employee
xi
Page in
book
Learning content
Learning objectives
Students should be able to …
113
• Income tax
deductions
Define purpose and determine split between employer and employee
114
• UIF
Define purpose and determine split between employer and employee
115
• Medical aid fund
Define purpose and determine split between employer and employee
115–117
• Wages journal
Draw up a wages journal
118
• Salaries journal
Draw up a salaries journal
119–120
• Recording wage and
salary transactions
in CPJ
Record appropriate accounting entries regarding the wages and salaries
journals in the CPJ
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 8: Bank reconciliation
125
Unit 8.1: Purpose of
bank reconciliation
125
• Bank reconciliation
125
Unit 8.2: Bank
statements
126
• Purpose of bank
statements
Explain the purpose and function of a bank statement
127
Unit 8.3: Difference
between bank
statement and bank
account balances
Compare the bank statement with the cash journals and identify and
record the differences
Explain the purpose of bank reconciliation
127
• Outstanding deposits
Record differences with respect to outstanding deposits
127
• Outstanding cheques
Record differences with respect to outstanding cheques
127
• Items that appear on
bank statement but
not in the journals
Record differences with respect to items that appear on a bank statement
but not in the journals
128
• Bank charges
Record differences with respect to bank charges
128
• Interest on overdraft
Record differences with respect to interest on overdraft
128
• Debit orders
Record differences with respect to debit orders
128
• Dishonoured cheques
Record differences with respect to dishonoured cheques
128
• Interest on current
account
Record differences with respect to interest on a current account
128–129
• Errors in the cash
journals/cash book
Record differences with respect to errors in the cash journals/cash book
130
• Errors in the bank
statement
Record differences with respect to errors in the bank statement
130
• Deposits erroneously
credited on bank
statement
Record differences with respect to deposits erroneously credited on the
bank statement
130
• Cheques erroneously
debited on the bank
statement
Record differences with respect to cheques erroneously debited on the
bank statement
xii
Page in
book
Learning content
Learning objectives
Students should be able to …
131
Unit 8.4: Reconciliation
Steps taken to reconcile the bank statement and the cash journals
131
• Record the
transactions omitted
from the cash journals
Record the reconciled entries in the cash journals and draw up a bank
reconciliation statement
133
• Draw up a bank
reconciliation
statement
Draw up a bank reconciliation statement
137
• Positive balance
137
• Negative balance
140
Unit 8.5: Reconciling
with previous month
Compare the balance of the bank statement with the reconciled cash
journal
Compare the bank statement with the cash journals of the current month
to the reconciliation statement of the previous month
Make the necessary entries
140
Unit 8.6: Payment of
stopped cheques
Describe the procedure to stop a cheque
Describe how to record the cancellation of the cheque in the appropriate
cash journals
Describe how to record the issuing of a new cheque
141
• Lost cheques
Describe how to process a lost cheque
141
• Stale cheques
Describe how to process a stale cheque
141
Unit 8.7: Postdated
cheques
Follow the correct procedure for dealing with post-dated cheques
Make the correct entries
141
• Received
Describe how to process post-dated cheques received
142
• Issued
Describe how to process post-dated cheques issued.
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
Module 9: End of accounting period procedure
153
Unit 9.1: Trial balance
154
• Purpose of the trial
balance
Explain the purpose of the trial balance
154
• Transfers to the trial
balance
Transfer the balances and totals from the ledger to the trial balance
156
• Tracing errors
Test the correctness of the double entries by means of the trial balance
157
• Opening accounts in
the ledger from the
trial balance
Open accounts in the ledger from the trial balance
Trace errors if trial balance does not balance by using the trial balance
159
Unit 9.2: Calculate profit
159
• Profit as enterprise’s
financial results
Explain that the calculation of the net profit signifies the completion of the
financial cycle
160
• Calculating profit
Explain and execute the procedure regarding the calculation of the profit
xiii
Page in
book
Learning content
Learning objectives
Students should be able to …
160
• Stock taking
Determine the opening stock and the final stock according to the periodic
stock system
Only make final stock adjustment in ledger account
160
• Trading account
Determine the gross profit by drawing up the trading account
161
• Profit and loss account
Determine the net profit by drawing up the profit and loss account
164
• Income statement
Draw up the income statement in vertical form
Explain that it is supplementary to the final accounts
166
Unit 9.3: Balance sheet
(also called ‘Statement
of financial position’)
Didactic guidelines
Please see curriculum documents.
Evaluation
Please see curriculum documents.
xiv
Module 1
Accounting theory, principles
and concepts
Overview
When you have completed this module, you should be able to:
• Briefly describe the principles of entrepreneurship regarding the profit motive and
capital increase by rendering a service and trading.
• Explain the principles of the increasing and decreasing of wealth from the
viewpoint of the entrepreneur.
• Explain how the owner of an enterprise could increase his or her wealth by means
of profit activities.
Unit 1.1: Profit, wealth and capital
The principles of entrepreneurship regarding the profit motive and capital
increase by rendering a service and trading
The concept ‘accounting’
Accounting:
• identifies
• records
• measures and
• communicates financial information
• to enable an enterprise to make financial management decisions.
Who are the users of accounting information?
Internal users
• The owner
• Managers
• Employees
External users
•
•
•
•
The government
Competitors
Suppliers
Customers
Figure 1.1: The users of accounting information
1
There are many users of accounting information.
Activity 1.1
Self-assessment
In each of the following cases, indicate why the internal/external user is interested in
accounting information.
Table 1.1: Reasons why the internal/external user is interested in accounting information
The owner
The government
Managers
Suppliers
The profit motive
Note: Making a profit is a different concept from making money. A business can show
a profit, yet have no money, and vice versa.
When starting a business, the owner/entrepreneur is always at risk, as there is no guarantee
that a profit will be made. It is therefore very important to draw up a business plan, to do
market research and to test whether the business concept will be financially viable.
2
Drawing up a business plan and doing market research are
two of the important things to do when starting a business.
The main objective of most businesses is to make a profit.
A trading concern generates a profit by:
• Buying stock (called purchases) at cost price
• Adding a profit
• Then reselling it at selling price.
Example 1.1
• This is called purchases
• The cost price (CP) is R4 000
Buy goods
from AB
Dealers for
R4 000
• Calculation: 25% x R4 000
= R1 000
Add a
mark-up of
25%
• Selling price (SP) = CP + Profit
• SP = R4 000 + R1 000 = R5 000
Selling price
R 5000
Figure 1.2: Determining the selling price
3
Remember: Gross profit = SP − CP
Activity 1.2
Self-assessment
Complete the following table:
Table 1.2: Finding the cost price, the gross profit or the selling price
No
Cost price
1.2.1
R5 600
1.2.2
R3 400
1.2.3
R6 800
1.2.4
Gross profit
Selling price
R8 700
30%
R12 700
R17 500
R35 000
The owner of an enterprise has to calculate both the gross and the net profit. A business
has certain operating expenses that must be deducted from the gross profit to get the net
profit. Examples of operating expenses are:
• Salaries
• Wages
• Rent paid/rent expense
• Advertisements
• Stationery.
The cost of advertising the business is one example
of an operating expense.
Gross profit minus operating expenses equals net profit.
4
Example 1.2
Sipho opened a trading concern, Sipho Traders. His transactions for February this year
were as follows:
3 Bought merchandise for cash, R2 000
5 Paid wages for the week, R400
6 Sold goods for cash, R3 400
9 Paid for advertisements, R300
11 Paid for electricity, R540
13 Bought merchandise for cash, R700
14 Sold merchandise for cash, R1 200
(Assume that all the stock bought was sold.)
Calculate the gross and the net profit.
Solution:
Sales
4 600
Less: Cost of sales
2 700
GROSS PROFIT
1 900
Minus operating expenses:
1 240
Wages
400
Advertisements
300
Electricity
540
NET PROFIT
R 660
Activity 1.3
Self-assessment
Complete the following table:
Table 1.3: Calculating sales, cost of sales, gross profit, expenses, or net profit/net loss
No
Sales
Cost of sales
Gross profit
Expenses
Net profit/net loss
1.3.1
R50 600
(a)
R30 200
R12 700
(b)
1.3.2
(c)
R16 700
R2 099
(d)
R2 600
1.3.3
R102 450
R51 225
(e)
(f)
R28 750
1.3.4
(g)
R24 560
R56 900
R32 160
(h)
1.3.5
R35 890
R23 540
(i)
R13 600
(j)
A service undertaking generates an income by rendering a service. An example would
be a hairdressing salon. In such a case, the net income will be calculated by simply
subtracting the expenses from the current income received from the rendering of the
service.
5
The purpose of accounting
The main purpose of accounting is to have a permanent record of all monetary transactions
that affect the enterprise during a definite financial period. To achieve this objective, an
enterprise will have to adhere to the following accounting cycle:
Recording of
transaction
on a source
document
Drawing up
an Income
Statement and
a Balance Sheet
Entering
transactions
in Subsidiary
Journals
Compiling a
Trial Balance
Posting to the
Ledger
Figure 1.3: The accounting cycle
The above cycle will be explained in Module 5.
A short history of accounting
Modern accounting came into being in the 15th century with the development and rapid
expansion of trade and commerce. Luca Pacioli, an Italian priest, realised that there was
a need for specific principles in accounting and can thus be regarded as the father of the
double-entry system of accounting. This system became common practice in different
parts of the world within a short time and is still used today.
The double-entry system means that a credit must be recorded for each debit.
The owner and the enterprise
Most principles in accounting are based on the accounting equation.
ASSETS
=
• The possessions
of the enterprise
OWNER'S EQUITY
• The money
contributed by the
owner (capital)
plus profit, minus
drawings
Figure 1.4: The accounting equation
6
+
LIABILITIES
• Money that the
enterprise owes
to outsiders
(creditors)
Owner’s equity is the owner’s ‘interest’ in the business. Who
are the ‘owners’? This depends on the legal form of the entity,
which may be a sole trader, a partnership or a company. A
sole trader is a business owned by one person, and therefore
the ‘equity’ refers to a single capital account. A partnership is
owned by between 2 to 20 people, with its equity consisting of
separate capital accounts for each partner. A company is a legal
entity and the ownership is represented by shares taken up by
shareholders.
Two ‘parties’ have claims against the assets, namely the owner
and creditors (outsiders).
Creditors are persons to whom the business owes money.
Creditors have a claim against the assets of the business until
they (the creditors) are paid. The owner(s) also has a claim
against the assets for money he or she invested in the business.
The principles of the increasing and decreasing of wealth
from the viewpoint of the entrepreneur
As discussed above, the objective of most enterprises is to make
a profit for the owner. It should be clear that all income received
increases the wealth of the owner, while all expenses decrease
the wealth of the owner. The wealth of the owner can also be
increased by additional contributions of the owner, over and
above the initial contribution with which the enterprise was
established (referred to as capital). It can also be decreased
where the owner withdraws money or takes stock for own use
(referred to as drawings).
The objective of most enterprises is to make a profit for the owner.
7
Owner’s equity:Is the
owner’s ‘interest’ in the
business, that is, the
money contributed by
the owner (capital) plus
profit, minus drawings.
Owner:Depends on
the legal form of the
entity, but may be a sole
trader, a partnership or
a company.
Sole trader:Is a
business owned by one
person, with the equity
referring to a single
capital account.
Partnership:Is owned
by between 2 to 20
people, with its equity
consisting of separate
capital accounts for
each partner.
Company:Is a legal
entity, with the
ownership thereof
being represented by
shares taken up by
shareholders.
Capital:The initial
contribution made in
order to establish the
business.
Drawings:Money
withdrawn by the owner
for own use or stock
taken by the owner for
own use.
Activity 1.4
Self-assessment
Choose a description from Column B to match the term in Column A. Write only the
applicable letter next to the question number.
Table 1.4: Choosing the correct term and description
Answer
Column A
Column B
1.4.1
Assets
A Advertisements
1.4.2
Gross profit
B CP + profit
1.4.3
Capital
C For each debit a credit must be recorded
1.4.4
Creditor
D 2 – 20 owners
1.4.5
Net profit
E Possessions of the enterprise
1.4.6
A partnership
F SP minus CP
1.4.7
Cost price
G Price at which merchandise is bought
1.4.8
Selling price
H Management
1.4.9
Internal user
I Gross profit minus operating expenses
1.4.10
External user
J Suppliers
1.4.11
Expense
K Interest received
1.4.12
Income
L A person to whom the enterprise owes money
1.4.13
Double entry
M Capital consists of shares
1.4.14
Company
N Money taken by the owner for own use
1.4.15
Drawings
O Money contributed by the owner
Remember: Always argue from the point of view of the enterprise and not from that of
the owner. The accounts of a business are totally separate from the personal accounts
of the owner.
How the owner of an enterprise can increase his or her wealth by means of profit
activities
The owner can increase the amount that he or she invested in the enterprise by making a
profit, as the profit belongs to the owner.
Remember to distinguish between a trading concern and a service undertaking.
A trading concern generates profit by buying stock at cost price, then adding a percentage
mark-up in order to sell the goods at the selling price.
Selling price less cost price = Gross profit
Gross profit plus other income = Gross income
Gross income less operating expenses = Net profit
In the case of a service undertaking, the net income will be all the current income received
minus the operating expenses.
8
Summative assessmentTotal: 20 marks
1. Define the following concepts:
Gross profit
Net profit
A trading concern
A service undertaking
Capital
Drawings
Purchases
Expenses
Cost price
Selling price
9
Module 2
Forms of ownership
Overview
When you have completed this module, you should be able to:
• Identify the following kinds of enterprises, briefly define each and point out their
similarities and differences:
–– Sole trader (proprietor)
–– Partnership
–– Company
–– Close corporation
–– Cooperative.
Unit 2.1: Kinds of enterprises
Identifying the kinds of enterprises, defining each, and pointing out their
similarities and differences
Introduction
In South Africa, a person who wishes to start his or her own business may choose between
the following forms of business:
• A sole trader
• A partnership
• A company, which can be either a public or a private company.
A very popular business form until recently was the close corporation (CC), but, since
the implementation of the new Companies Act 71 of 2008, no new CCs can be formed.
Current CCs continue as normal.
Characteristics, advantages and disadvantages of the sole trader, a partnership
and a company
A number of factors must be taken into account when considering the form of business,
including the following:
• Number of owners
• Capital contribution
• Liability
• Management
• Risk
• Tax implications
• Continuity
• Legal requirements (formalities).
10
The characteristics of a sole trader, a partnership and a company may be set out as follows:
Table 2.1: Characteristics of a sole trader, a partnership and a company
Characteristic
Sole trader
Partnership
Company
Number of
owners
1
2–20
Private company – 1 or more
shareholders.
Public company – no restriction
on the maximum number of
shareholders.
Name
No legal requirements.
No legal requirements.
Private company – name must end
in ‘(Pty) Ltd’.
Public company – name must end
in ‘Ltd’.
Capital
contribution
Contributed by the
owner.
Contributed by 2–20
members. Can include
money, assets and also skills.
Raised by the issuing of shares.
Disadvantage:
Limited to the wealth
of the sole trader.
Liability
Personal liability – carries
all the risk in his/her
private capacity, as the
sole trader is not a legal
entity.
Disadvantage:
Sole trader may lose
personal belongings
should the business
run into financial
difficulties.
Management
The owner can be the
manager.
Advantage:
This can be an
advantage if the
owner wants to take
control of the business
himself/herself.
Advantage:
More capital can be raised.
Disadvantage:
Capital is limited by the
contributions made by
the number of partners.
A partnership is not a legal
entity and, therefore, there
is no separation between
the partners and the
partnership. Partners are
jointly and severally liable.
Disadvantage:
As a partnership is not a
legal entity, a partner can
lose all his/her personal
belongings should the
partnership run into
trouble.
All partners have the
right to participate in
the management of the
partnership.
A company is a legal entity, which
means that the company itself is
the bearer of rights and duties.
Shareholders have limited liability.
Advantage:
The company carries the rights
and the duties, and should it
run into financial difficulties,
the personal belongings of the
shareholders cannot be touched.
A company is managed by directors.
Disadvantage:
All partners might not
have managerial skills
and the actions of one
partner will bind the
whole partnership.
Advantage:
Directors are bound by the MOI
(Memorandum of Incorporation)
and the Act itself. Codified duties
of directors stipulated in the Act
may result in directors becoming
personally liable should they do
anything to the disadvantage of
the company.
Advantage:
All partners can
participate in
management.
Disadvantage:
Company is run by directors, and
shareholders have voting rights
only.
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Characteristic
Risk
Sole trader
Disadvantage:
The sole trader is not
a legal entity and
therefore the owner
carries all the risk.
Partnership
Disadvantage:
As a partnership is not
regulated by an Act,
there is less statutory
protection for the
partners.
Company
Advantage:
As the company is a legal entity,
regulated by the Companies
Act, all parties involved enjoy
statutory protection.
Taxation
Owner is taxed in his/her
private capacity and not
in that of the business.
Partners are taxed in their
private capacities and not in
that of the partnership.
The company is taxed, as a business
form.
Continuity
No continuity when
owner dies or retires.
As soon as there is a
change in membership, a
partnership dissolves. A
‘change’ may refer to the
admission of a new partner,
the retirement of a partner,
or the death of a partner.
A company has good continuity
until liquidated. When a shareholder
dies, the shares are carried over to
the heirs or are sold.
Advantage:
Very good continuity.
Disadvantage:
No continuity.
Assets
Assets belong to the
owner.
Assets represent the
common interest of the
partnership and can be used
by the partners.
Assets belong to the company.
Legal
requirements/
formalities
Easy to establish. No
formalities required.
A partnership agreement
may be concluded orally.
No written contract is
necessary. However, it is
very strongly recommended
that the agreement be in
writing.
A company is a complicated
business structure and the
establishment is regulated by
the Companies Act 71 of 2008.
Although the new Act has made
establishment much easier, it
remains a complicated procedure.
Advantage:
Easy and cheap to
establish.
Advantage:
Very easy to establish.
Sharing of
profit and loss
Advantage: Profit belongs
to the owner.
Disadvantage:
Loss is carried by the
owner.
Profit and losses are shared
by the partners.
This may be in a
predetermined ratio,
according to the capital
contribution or equity of
each partner.
Disadvantage:
A complicated form of business –
not so easy to establish.
The profit belongs to the company.
Shareholders benefit from the profit
in the form of dividends, but only if
dividends are declared.
Jointly and severally:As a group and individually.
Legal entity:Means that the business itself (such as a company) is the bearer of rights and duties.
Ltd:Stands for ‘Limited’ and indicates a public company.
(Pty) Ltd:Stands for ‘Proprietary Limited’ and indicates a private company.
12
A summary of the advantages and disadvantages of a partnership
Table 2.2: The advantages and disadvantages of a partnership
Advantages
Disadvantages
• Simple to set up and manage.
• Not a separate legal entity.
• Greater financial strength than in the case of a sole
proprietorship.
• Sharing decision making can slow down the process.
• All the partners’ skills are to the benefit of the entity.
• All business debts are each partner’s responsibility.
• Each partner has a personal interest in the entity.
• Restricted to a maximum of 20 people.
• All partners may participate in the management of
the partnership.
• Partners are jointly and severally liable.
Formation of a company in comparison with a partnership
As mentioned above, no formalities are needed for the establishment of a partnership. A
partnership can be formed in the following ways:
• Orally
• In writing
• By conduct.
Two or more persons can simply agree
orally to establish a partnership.
The establishment of a company, however, is a complicated procedure and its formation
is prescribed by the Companies Act 71 of 2008. In short, the procedure is the following:
• The name of the company must be registered
• An MOI (Memorandum of Incorporation) must be drawn up
• Registration fees must be paid.
13
Features of a private limited company
The features of a private limited company can be presented as follows:
Not easy to transfer
shares
Accounts must be available
for public to see
Limited liability for
shareholders
Features of private
limited companies
Separate legal
identity
Legal formalities
Continuity
Cannot sell shares to
the public
Mindmap downloaded from www.dineshbakshi.com
Figure 2.1: Features of a private limited company
A close corporation
As mentioned before, close corporations (CCs) cannot be established anymore. Close
corporations in existence continue to operate until further notice.
The following are the characteristics of a close corporation:
• 1–10 members
• Regulated by an Act
• Legal personality
• All members contribute money, assets and skills
• Each member holds a percentage interest in the business (totalling 100%)
• All members participate in the management of a CC. A CC does not appoint directors
• All members share in the profit as agreed.
All members of a CC share in the profit made by the CC.
14
A cooperative
A cooperative is a business undertaking in which a group of
individuals strive on a voluntary basis to meet their mutual
economic and social needs in such a way that the economic
advantages derived are greater than those which the individual
could achieve on his or her own. It is a legal entity managed by a
board of directors elected by the cooperative’s members.
Cooperative:A
business undertaking
in which a group of
individuals strive on a
voluntary basis to meet
their mutual economic
and social needs in such
a way that the economic
advantages derived
are greater than those
which the individual
could achieve on his/
her own.
The following are the characteristics of a cooperation
(cooperative):
• It cannot be formed by a single person.
Requisites:Something
• It is made up of a group of people who work together
that is essential.
voluntarily.
Vests:Is placed in,
• The group that forms a cooperative has a mutual or common
is in the hands of or
resides in a person(s)
need or purpose (e.g. a group of farmers may establish a
or an organisation, for
cooperative to buy farm requisites [say, fertiliser or farm
example the power to
equipment] on a collective basis by combining their orders
do something.
so that they can buy in bulk and thus get a discount).
Proportionate:Means
according to the
• The highest authority vests (is placed) in the members
share of, say, business
through a general meeting.
done. So, if 80% of the
• A member who puts the most into the cooperative (e.g. by
business is done by one
doing the most business with the cooperative) receives the
person, that person’s
share of, for instance,
greatest benefit from the cooperative, for example by way of
profits will be 80%.
a bonus as well as votes at a general meeting.
• Capital contribution takes the form of entrance fees,
membership fees, member loans and funds of members.
• Members do not earn dividends but share in the profit by receiving a bonus,
proportionate to the business done with the cooperation.
Activity 2.1
A friend wants to start his own business. He does not have enough money, does not
want to carry the risk alone, and also wants the business to have good continuity.
Which form of enterprise would you advise him to establish? Give reasons for your
answer.
15
Activity 2.2
Self-assessment
Identify the kind of enterprise in each of the following cases.
2.2.1
Amla (Pty) Ltd.
2.2.2
In this form of enterprise, the risk is carried by one
person only.
2.2.3
Business form with 2–20 persons.
2.2.4
The main document of this form of enterprise is
the Memorandum of Incorporation (MOI).
2.2.5
Members are jointly and severally liable for debts.
2.2.6
All members can participate in management.
2.2.7
Managed by directors.
2.2.8
Members have limited liability.
Activity 2.3
Self-assessment
Research companies on the internet and then answer the following questions:
1. What is meant by the codified duties of a director?
2. List any five aspects that are dealt with in the MOI of a company.
Activity 2.4
Self-assessment
Complete the following mind-map indicating the advantages and disadvantages of a
partnership:
Able to raise capital
from all partners
No limited liability
No continuity
Features of partnerships
Partners can
specialise
Responsibilities
shared
More ideas from
new pertners
Mindmap downloaded from www.dineshbakshi.com
Figure 2.2: Mind-map (to be completed) showing the advantages and disadvantages of a
partnership
16
Activity 2.5
Self-assessment
Complete the following mind-map to illustrate the advantages and disadvantages of
a sole trader.
Owner in complete
control
Easy to set up
Features of sole traders
Incentive to work
hard
No sharing of profits
No continuity
No limited liability
Mindmap downloaded from www.dineshbakshi.com
Figure 2.3: Mind-map (to be completed) showing the advantages and disadvantages of a sole trader
17
Module 3
Documents and authorisation
of transactions
Overview
When you have completed this module, you should be able to:
• Define and explain the purpose and function of:
–– Source documents
–– Supporting documents
–– Internal documents
–– External documents.
• Explain the application of source documents in the recording process, as well as
the difference in the use of the original documents and the duplicates.
• Explain the purpose of filing, namely the safekeeping of documents as well as the
procedure for safekeeping.
• Briefly describe why it is necessary to authorise transactions, and by whom it
should be done.
Unit 3.1: Documents
Types of documents in use
Source documents
A source document is a written document providing details of a transaction and serving
as evidence that a transaction has taken place.
Source documents therefore form the basis of all accounting entries.
This can be illustrated as follows:
Source
document
Subsidiary
Journal
Ledger
Financial
statements
Trial Balance
Figure 3.1: The source document as the basis of all accounting entries
18
From the above, it is clear that no transaction can be recorded
unless a source document has been completed.
Source documents include the following:
• Receipts
• Cheques and cheque counterfoils
• Cash register slips
• Petty cash vouchers
• Invoices
• Credit notes
• Deposit slips
• Bank statements.
Source document:Is
a written document
providing details of a
transaction and serving
as evidence that a
transaction has taken
place. It forms the basis
of all accounting entries.
Remember: No transaction can be recorded unless a source document has been
completed.
Receipts
A receipt serves as an acknowledgement for payment received. The original copy is given
to the person who pays and the duplicate is retained to enable the business to make the
necessary accounting entries.
Example 3.1
29 July 201... Issue receipt no 001 to Nicol Solomons for rent received, R2 030,00
001
GD Traders
Received from Nicol Solomons
29 July 201…
the amount of Two thousand and thirty rand and nil cents
Amount: R2 030,00
For: Rent
G. Gouws
Thank you for payment received
Figure 3.2: Example of a receipt
A receipt provides the following details:
• Date of issue
• Number of document
• Name of business
• Name of person who made the payment
Receipt: Is as an
acknowledgement for
payment received.
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