Bookkeeping Concepts

INF 183

Learning Outcomes:

In this lesson, you will be introduced to the fundamental accounting structure.

At the end of this lesson, you will have an understanding of:

✅ Types of Companies

✅ Basic Bookkeeping (Types of Accounts & T-Accounts)

✅ The Bookkeeping and Accounting Cycle

✅ Transaction

✅ Source Documents

✅ Subsidiary Journals

✅ Reconciliation

✅ General Ledger

✅ Trial Balance

✅ Statement of Comprehensive Income

✅ Statement of Financial Position

INF 183 – Ciska Snyman & Kalisha Bheemraj

Types of Companies.

There are four main business models in South Africa.

Each type of company has a different structure and a different legal, taxation and
account structure. To be efficient as a bookkeeper, you need to know the requirements
of each of the different types of companies.

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Basic Bookkeeping

Bookkeeping is ensuring that all financial activities of a company are intact. This
means that for every transaction that takes place, there must be another balancing
entry to indicate the source of that transaction. For example, as the owner of a
business, you go to a supplier and buy stock to resell using cash.

• Here the owner took the cash from the company, so this is one side of a
transaction. To indicate the reason for it, we will record another side to say that
he bought stock, so we will have more stock in the accounting system to resell.
• This is referred to as the double-entry system.
• For every debit you enter your accounting system, you must enter a credit of
the same value and vice versa. The debits must equal the credits.
• All businesses keep a record or account of all income, expenses, assets, and
liabilities.
• Income items are credits, and expenses are debits and are recorded in the
income and expenditure section of General Ledger.
• Assets are debits, and liabilities are recorded in the Statement of Financial
Position (Balance Sheet) section of the General Ledger.
• To understand the double-entry system, you first need to understand the
different types of accounts.

INF 183 – Ciska Snyman & Kalisha Bheemraj

Types of Accounts

Accounts are classified based on the types of transactions they record. The categories
are detailed in the following table.

Income Income is commonly known as an

(Credit) increase of benefits for the company, for
example,
Sales Income,
Interest Received
Profit on the sale of fixed assets.
All of these indicate money coming into
the business.
Expenses Expenses decrease the benefits for the
(Debits) company, for example,
Cost of Sales
Salaries and Wages
Telephone
Electricity.
All of these indicate money going out of
the business. It is important to note that
it is for operational purposes, as a
company must spend money to operate.

The accounts discussed in the table will be used in a Statement of Comprehensive

Income (Income Statement) report to view the business’s profit or losses.

This table details the accounts reflected in a Statement of Financial Position (Balance
Sheet).

Capital or Owners This shows the business's net worth. We use two main
Equity types of accounts here, namely:
(Credits) Capital Contribution
Drawings.
In essence, this indicates the owner’s share of the
business. Capital Contribution can at times also be called

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 Share Capital, Share Contribution, Members’ Loans, etc.
This is what the owner has invested in the business.
Drawings are what the owner has taken for personal use
from the company.
Assets This is what the company owns. Assets can be either Non-
(Debits) current Assets or Current Assets.
Non-Current Assets - Motor Vehicles; Furniture & Fittings;
Office Equipment.
Current Assets - Trade Debtors, Stock, Bank, Deposits
Received, etc.
Non-current assets, formally known as fixed assets, are
those assets that the company does not wish to convert to
cash within a specific period. Current assets change value
quickly or can easily be converted into cash.
Liabilities This is what the company owes to third parties. We can
(Credits) classify liabilities as either current or non-current liabilities.
Non-Current Liabilities - Mortgage bonds, Vehicle
Finance, Instalment Creditors, etc.
Current Liabilities - Trade Creditors, Bank Overdrafts, and
so forth.
A Long-Term Liability is a money owing that will be paid
over a long period. Company policies may differ, but it is
generally five years or longer.
Current Liabilities are current when:
it expects to settle the liability in its normal operating cycle.
It holds the liability primarily for trading.
The liability must be settled within twelve months after the
reporting
period, or
it does not have an unconditional right to defer settlement
of the liability
for at least twelve months after the reporting period.

INF 183 – Ciska Snyman & Kalisha Bheemraj

This is used when formulating the business’s Statement of Financial Position (Balance
Sheet). This report shows the company’s net value. To do this, we use the accounting
equation, which is represented as follows:

Assets = Owners Equity + Liabilities

Or

Owners’ Equity = Assets – Liabilities

Or

Liabilities = Assets – Owners Equity

T-Accounts

When accounts are drawn up, they are put into frames called T-Accounts. A group of
these T-Accounts are referred to as your General Ledger. The left side of the ledger
is for debits, which is abbreviated to Dr, and the right side of the ledger is for credits,
abbreviated to Cr, as shown below.

To understand where we input the information, let’s look at the following:

• Assets and expenses increase on the debit side, while equity, income and liabilities
increase on the credit side.

• Assets and Liabilities are both Statements of Financial Position (Balance Sheet)
accounts, as they deal with the long term operation of the company.

• Expenses and Income are both Statements of Comprehensive Income (Income

Statement) Accounts, as they are used to calculate the company’s profitability.

• Statement of Financial Position (Balance Sheet) Accounts are recorded in the

Statement of Financial Position (Balance Sheet) section of the general ledger, and
Statement of Comprehensive Income (Income Statement) Accounts are recorded in

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the Statement of Comprehensive Income (Income Statement) section of the general
ledger.

Remember AEDLIC:

Assets and Expenses are debited, and Liabilities and Income are credited when they
increase.

Equity is the residual interest of the most junior class of investors in assets after paying
all liabilities. When the owner takes money or something with the value from the
business, the money owing to the owner decreases, so with drawings, we have a debit
balance.

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The Bookkeeping and Accounting Cycle

Transaction Transaction takes place

Source Do detail of the transaction
Subsidiary Journal Summary of the Source Document
Reconciliation Monthly recons confirm journals
General Ledger Summary of the Subsidiary Journal
Reports Trial Balance, Statement of Comprehensive Income
( Income Statement) & Statement of Financial
Position (Balance Sheet)
Trial Balance Summarises the general ledger
Statement of Indicates profitability
Comprehensive Income
(Income Statement)
Statement of Financial Outlines financial performance.
Position (Balance Sheet)

The accounting cycle is a yearly cycle, which includes the bookkeeping cycle.
In some businesses, the accounting cycle is quarterly or even monthly. The
bookkeeping cycle runs monthly. In this course, we will go through each of the
steps in the accounting cycle to understand the responsibilities of a bookkeeper.

Transaction

At this stage of the process, the transaction will take place. This is then recorded in
the next step of the cycle.

INF 183 – Ciska Snyman & Kalisha Bheemraj

Source Documents

Source documents are used to record a transaction and are kept as proof of the
transaction. The information is taken from the source document and written in the
subsidiary journal. Source documents must be filed safely as SARS (South African
Revenue Services) requires keeping them for five years. It is also essential that source
documents are kept in an orderly filing system. This makes it much easier to find
documentation that you might need, for example, to solve a query or prove that a
payment was made. Examples of source documents include

• Invoices (duplicate and original)

• Credit notes (duplicate and original)

• Receipts • Deposit books/slips,

• Cheque counterfoils.

Subsidiary Journals

Used to group and summarise the transactional information from the source
documents of a company. A business will use several subsidiary journals, in which
transactions of a particular type are recorded, depending on the size and diversity of
the business. Below are examples of the subsidiary journals that a company would
typically use and the source documents from which the information comes.

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Reconciliation

Once all of the source document entries for a month have been captured into a journal,
reconciliations are done to ensure that they have been done correctly. For example,
bank reconciliation is done by comparing the cash books with the bank statement, and
creditor reconciliation is done by comparing the purchases journal and the creditor’s
statements.

The reconciliation process is an essential and often neglected step in the bookkeeping
cycle. It is vitally important to a business that the financial records are accurate. You
will never know that your work is correct unless you check it against documents from
another source.

General Ledger

The general ledger is used to bringing all of the information from the subsidiary journals
into one place. Two entries are made for each transaction when transferring/posting
information from the journals into the general ledger. This process is called the “Double
Entry System”.

Trial Balance

A trial balance is a report or list showing all of the balances from the general ledger. It
can also be used to ensure that the balances on all of the accounts are correct, as it
will show if there is an entry missing. It does not show if entries have been made into
the incorrect accounts or if the value transferred from the journals to the general ledger
were incorrect.

Statement of Comprehensive Income (Income Statement)

Periodically, a Statement of Comprehensive Income (Income Statement) is drawn up

from the general ledger. This report shows all of the income versus the expenditure of
the business over the period and is used to show the business's profitability.

Statement of Financial Position (Balance Sheet)

A Statement of Financial Position (Balance Sheet) is periodically drawn up from the

general ledger. This report shows the assets, liabilities, and owners’ equity of the
company and indicates the business's long-term viability. Now that you understand
how transactions are recorded in the general ledger, we will process some
transactions.

INF 183 – Ciska Snyman & Kalisha Bheemraj