ALP 101 – Semester 1 (2009)

Lecture 1

Study units 1-5

TOPIC LEARNER PREPARATION

THE NATURE AND FUNCTION OF ACCOUNTING SU 1 &
Ex. 1.7
 Introduction Page 7
 What is accounting
 Universal accounting denominator
 Forms of ownership
 Users of financial information
 Fields of accounting
THE NATURE OF ACCOUNTING THEORY SU 2 &
Ex. 2.6
 Accounting principles Page 12
 Accounting policy
 Disclosure of accounting policy
 Generally accepted accounting practice (GAAP)
 Accounting standards and statements
THE FINANCIAL POSITION SU 3 &
Rev. Ex. 1
 Introduction Page 17
 Accounting entity
 Financial position Rev. Ex. 2
 Net asset value Page 18
 Application of the basic accounting equation
 The double-entry principle
THE FINANCIAL RESULT SU 4 &
Rev. Ex. 1
 Introduction Page 22
 The financial result
 Income Rev. Ex. 2
 Expenditure Page 23
 Influence of profits and losses on equity
 Income statement
 Statement of changes in equity
 Accounting policies and explanatory notes

Notes: introduction, accounting principles

Question 1

Use the necessary information and calculate the Owners Equity of John Smooth, the
owner of Smooth Attorneys on 31 March 2007.

Vehicle R135 000

Bank 42 000
Equipment 12 000
Petty Cash 500
Creditors 16 500
Long-term loan 25 000
Debtors 17 600

Question 2

The financial position of S O’Toole, an attorney on 1 March 2006, the start of the
financial year, was as follows:

Total assets: R680 000

Total liabilities 112 000
Total equity 568 000

For the year ended 28 February 2007, he had the following income and expenditure:

Fees from services rendered R220 000

Salaries paid 60 000
Stationery purchased 15 000
Other administrative expenses 22 500

Calculate the equity of owner S O’Toole on 28 February 2007

SUMMARY OF ACCOUNTS CLASSIFICATION:

STATEMENT OF FINANCIAL POSITION ACCOUNTS

ASSETS OWNER’S EQUITY LIABILITIES
Non Current Assets Non Current Liabilities

 Land and Buildings  Mortgage Loans

 Vehicles  Capital  Long term loan
 Equipment  Drawings
 Investments
 Fixed Deposits
 Goodwill
 Patents

Current Assets Current Liabilities

 Inventory  Trade Creditors

 Stationery on hand  Accrued Expenses
 Consumables on  Income Received
hand in advance
 Trade Debtors  Bank overdraft
 Accrued Income  SARS - VAT
 Prepaid Expenses
 Bank(favourable)
 Petty Cash
 Cash Float

NOMINAL ACCOUNTS
EXPENSES INCOME

 Cost of Sales  Sales

 Salaries and Wages  Services Rendered
 Telephone  Rent Income
 Stationery  Settlement Discount Received
 Settlement Discount Allowed  Interest on investments
 Rent Expense  Credit Losses Recovered
 Interest Expense
 Advertising
 Credit Losses
 Depreciation

ACTIVITY
From the list of accounts, classify the accounts under the following headings:
ASSET, LIABILITY, EQUITY, INCOME OR EXPENSE.
No Name of account Asset Liability Equity Income Expense
1 Telephone
2 Inventory on hand
3 Consumable inventory (used)
4 Delivery Vehicle
5 Machinery
6 Petty Cash
7 Fees earned
8 Salaries
9 Wages
10 Deposit for water and
electricity
11 Fixed deposit
12 Long term loan
13 Bank overdraft
14 VAT payable
15 Debtors
16 Interest on fixed deposit
17 Stationery
18 Land and Buildings
19 Interest expense
20 Creditors
21 Deposit – received for a
service to be rendered
22 Rent expense
23 Sales
24 Bank (favourable)
25 Settlement discount allowed
THE BASIC ACCOUNTING EQUATION

The accounting equation has 3 elements. These three elements are:

Assets (A) Owner’s Equity (OE) Liabilities (L)

These elements can be expressed arithmetically as follows:

Assets = Owners Equity + Liabilities

Every business transaction has an effect on the elements of the accounting

equation.

Assets either increase or decrease in value

Equity either increases or decreases in value
Liabilities either increase or decrease in value

The following table illustrates the effect of transactions:

ASSETS OWNERS EQUITY LIABILTIES

DR CR DR CR DR CR
+ - - + - +

EXPENSES INCOME
DR CR DR CR
+ - - +

ACTIVITY
The following transactions were taken from the books of Parsons Traders, who make
use of the periodic inventory system.
1. The owner deposit R900 000 as his capital contribution.
2. Purchased a property from Golding estates for R1 500 000. A deposit of
R300 000 was paid and the balance of the account was settled with a loan
granted by City Building Society.
3. Paid the telephone account of the business, R670.
4. Bought merchandise on credit from Makro Suppliers, R55 600.
5. Sold merchandise on credit to customer, P Storm, R12 300.
6. P. Storm returned merchandise delivered to him, which he did not order,
R1 100.
7. Received a cheque from P Storm to settle his account less 10% discount.
8. The owner took merchandise with a cost price of R1 200 and a selling price of
R1 800 for private use.
9. Paid Makro Suppliers on account, R25 000 and received R1 000 discount.

REQUIRED
1. Analyse the following transactions in tabular format as follows:
NO ACCOUNT ACCOUNT ASSETS OWNERS LIABILI-
DEBITED CREDITED EQUITY TIES
EXERCISE 1 (Periodic System)

NO TRANSACTION

1 The owner contributes R90 000 to the business

2 Cash sales for R600

3 Purchased stationery on credit R115

4 Received R50 000 as a loan from ABSA

5 Buys equipment for R2 000 cash from OCS

6 Pays XYZ R800 to settle account of R1 000

7 The owner withdraws R100 for his personal use

8 Pays wages of R2 500 to workers

9 Credit sales for R750

Exercise 2 ( ACN 101 Assignment )
The following information relates to Nkabs-Jabs Swop Shop. The periodic inventory
system is in use:

Transactions during July 20.1

1 Paid a rent deposit, R500, and one month's rent, R500 in advance, to Rent
Agent.
2 Purchased foam matresses on credit from Sleepy Suppliers for R1 200
subject to a trade discount of 15% and a further 5% cash discount if the
account is settled within 20 days.
5 Sold merchandise on credit to F.Flower, R600.
7 Paid the water and electricity account, R340.
12 Purchased a stand from R.Roos for R15 000. A deposit of R3 000 was
paid and the Premium Bank granted a mortgage loan for the outstanding
amount.
17 The owner took an antique grandfather clock with a cost price of R2 500
and a selling price of R4 500 for his personal use and withdrew R250
cash.
21 Settled Sleepy Supplier's account.
28 F.Flower paid his account. A discount of R10 was allowed.
30 Paid the monthly instalment on the bond, R750. The amount was made
up as follows:
Capital repayment R 650
Interest R 100
Exercise 3 (taken from Accounting An Introduction and adapted)
K. Wiese started his own business Wiese Parts and Services on 1 September 2008.
The business uses the periodic inventory system.

The following transactions took place in Wiese Parts and Services during
September 2008:

1 Wiese deposited R50 000 in the cheque account of the entity as his capital
contribution.
2 Purchased parts for R1000 cash and received 10% trade discount.
Purchased equipment on credit from Elite Equipment for R4000.
3 Purchased parts on credit from Parts Centre, R2 000.
4 Purchsed stationery for R300 and paid by cheque.
5 Sold parts cash for R1 500
6 Paid Elite Equipment R3 800 in full settlement of account
7 Sold parts on credit to A. Swartz for R1 700
8 The owner withdrew parts worth R150 for his own use.
9 The account of D. Kotze is overdue by R500. Debited his account with 8% interest
for 3 months.
10 Received a cheque from A. Swartz for R1 620 and allowed him R80 discount.
11 D. Niehaus, a debtor, was declared insolvent and his estate paid 50 cent in the
Rand. The rest of his account of R800 should be written off as irrecoverable.
Question 1

No ACCOUNT DEBITED ACCOUNT CREDITED ASSETS OWNERS EQUITY LIABILITIES

9
Question 2

No ACCOUNT DEBITED ACCOUNT CREDITED ASSETS OWNERS EQUITY LIABILITIES

Question 3

No ACCOUNT DEBITED ACCOUNT CREDITED ASSETS OWNERS EQUITY LIABILITIES