Revision - Accounting concepts
This is what we should know so far.
Definitions
Make sure you do understand the following terms:
Sole trader - a self-employed person who owns a business. He/she runs the business alone, bears all the risks + losses, takes all profits.
Accounting - the way to communicate financial information on those who need it. Involves recording all transactions that take place in a business.
Transactions - activity that takes place between a business + an outside party, e.g. customer buys groceries at Checkers. Transactions are seen from the side of “What is the business doing?”
Entity rule - the business has a bank account + assets in its own name. The owner cannot use the business bank account to deposit or draw money for his personal use.
Capital - money contributed by the owner before the business starts. This money is used to get the business going, e.g. buy furniture, computers, etc that it needs in order to operate.
Owner’s equity - owner’s interest in the business. This means that when the owner puts money in the business he has to make it work so that he does not lose it.
Drawings - when the owner takes money out of the business so he can pay for his personal use, e.g. pay his children’s school fees or buy his wife a present, etc.
Assets - items of value owned by the business + are used to generate income for the business.
Tangible assets - have a long lifespan. Not bought to be resold, e.g. machines, furniture, vehicles, etc.
Investments - money that the business saves in an investment account
Current assets - can be converted into cash within a year, e.g. trading stock, debtors
Cash - money the business has in its bank account, till or petty cash box
Trading stock - items that the business has bought in order to resell at a profit, e.g. the items on the shelf at Checkers.
Debtors - people/businesses that owe our business money, e.g. if you have a store account at Woolworths, Woolworths will describe you as their debtor.
Liquidity - refers to how close a business is to converting its assets to cash. Cash is needed to repay loans. e.g. trading stock + debtors are very easy to convert to cash and so we would describe them as liquid. But land + buildings take awhile to convert to cash. Thus it is not liquid.
Liability - money our business owes to other businesses/people.
Non- current liabilities - debt that takes longer than 1 year to repay, e.g. mortgage bond (money borrowed to buy property)
Current liabilities - debt that takes less than 1 year to repay, e.g. creditors (businesses that have to be repaid within 90 days) + bank overdraft (arrangement with a bank to extend credit up to a maximum amount)
Income - money received, e.g. Fee income (money received by doing a service for a client) + sales (money from selling trading stock)
Expenses - costs incurred directly or indirectly so that the business can keep operating, e.g. rent, telephone, etc.
Finally we end up classifying all these business activities as in the table below
|
Assets |
Owner’s equity |
Liabilities |
|
|
NON-CURRENT ASSETS |
Capital |
Non-current Liabilities |
|
|
Tangible Assets |
Drawings |
Mortgage bond |
|
|
Land and buildings |
Expenses |
Income |
|
|
Vehicles |
Cost of sales |
Sales |
CURRENT LIABILITIES |
|
Equipment |
Trading licence |
Fee income |
Creditors |
|
Investments |
Rent expense |
Commission income |
Bank overdraft |
|
Fixed deposit |
Telephone |
Rent income |
|
|
|
Stationery |
|
|
|
CURRENT ASSETS |
Advbertising |
|
|
|
Trading stock |
Packing materials |
|
|
|
Debtors |
|
|
|
|
Bank |
|
|
|
|
Petty cash |
|
|
|
|
Cash float |
|
|
|
Accounting cycle - how financial information is generated in a business
See p.59 for the Accounting cycle
We have also completed notes “Who needs Accounting info?” Revise those notes.
Lastly, we have completed the following Journals:
CRJ
CPJ
DJ - Debtors Journal
CJ - Creditors Journal
PCJ - Petty Cash Journal
DAJ - Debtors Allowance Journal
We have done up to Task 4.10 together in class.
Do Task 4.9