Financial Literacy: Answers

The answers are in ORANGE.

 

PLEASE CHECK YOUR WORK CAREFULLY

FINANCIAL LITERACY

Sole Trader

A sole trader is a business that only one person owns.  It is usually a small operation.  It is easy and cheap to start this type of business.  The profit belongs to the owner and the owner is responsible for the liabilities of the business.  We can group Sole Traders into three main types:

Manufacturing

 

 

 

Trading

Service

 

These are businesses that make products such as clothes, food and furniture among other things,  which they then sell to other businesses or consumers

 

 

Eg:

A small business making and selling jewellery.

 

 

 

 

 

 

 

These businesses buy products and then sell them to consumers or other businesses.

They usually buy goods at a certain price and sell them at a higher price.

 

Eg:

Spaza shops, clothing shops and supermarkets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

These businesses provide a service to other businesses and individuals and charge a fee in return for their services.

 

 

 

Eg:

Professional firms such as lawyers, accountants, doctors, hairdressers etc.

This terminology was discussed with you in previous lessons, read through the terms again from pages 2-5 and fill in the information on pages 6, 7 and 8.

TERMINOLOGY

1.      CAPITAL

Capital is the money that the owner uses to start the business with.

If the owner gives the business a vehicle or something else of value, it can also be seen as capital.

The owner can increase his capital contribution by investing more money in the business.

2.      DRAWINGS

When the owner takes money or something of value from the business for personal use.

3.      INCOME

 

Is the money generated by the business, for example money earned by renting a place to someone else.

4.      EXPENSES

 

 

 

Is money used or lost by the business which cannot be recovered again, for example paying the telephone account or buying stationery which gets used.

5.      GROSS PROFIT

For Trading Businesses:

 

GROSS PROFIT = SALES – COST OF SALES

 

It the amount made only from buying and selling goods.

6.      NET PROFIT

TOTAL INCOME – TOTAL EXPENSES = NETPROFIT

 

TOTAL INCOME =  CURRENT INCOME + OTHER INCOME

OR

TOTAL INCOME = GROSS PROFIT + OTHER INCOME

 

Net profit is the total amount of money made by the business after they received all forms of income and paid all expenses.

7.      OWNER’S EQUITY

The amount that the owner has invested into the business.

Note that since the owner owns the business, he gets the net profit. 

The business owes this amount to the owner.

 

OWNERS’S EQUITY = CAPITAL + NET PROFIT – DRAWINGS

 

 

 

 

 

8.      ASSETS

Are items of value which belong to the business.

 

There are two kinds of assets:

1.      Fixed Assets: Land and Buildings, Vehicles and Equipment

2.      Current Assets: Cash in the bank, Cash Float, Petty Cash, Trading Stock and Debtors

9.      LIABILITIES

This is the money owed to an outside party.

For example, loans, a bank overdraft and creditors

10.  TRANSACTION

An activity which involves money or items of value being exchanged.

Buying a vehicle, receiving money for providing a service, or selling goods.

11.  SOURCE DOCUMENTS

Each transaction must be recorded on a source document.

A source document has all the information available about the transaction that has taken place.

It will show the date, amount, who was involved and what was the reason for the transaction.

12.  JOURNAL

A book into which transactions are entered.

Transactions are classified and there is a journal for each type of transaction.

13.  CASH RECEIPTS

Include all monies that the business receives business normally receives several separate cash amounts daily as well as cheques

14.  CASH PAYMENTS

Include all monies that the business pays.

The business will make various payments to different parties daily, either in cash or by cheque.

15.  GENERAL LEDGER

Is a book or file which contains all of the businesses accounts.

There is an account for all activities the business is involved in.

 

16.  DEBTOR

 

 

People and businesses which owe our business money.

17.  DEBTORS LEDGER

A book or file which contains the details and information of all the people and businesses which owe our business money.

All the transactions with the debtor will be entered into the account of the debtor concerned.

18.  CREDITOR

People and businesses to which we owe money to.

19.  CREDITORS LEDGER

A book or file which contains the details and information of all the people and businesses which we owe money.

All the transactions with creditors will be entered into the account of the creditor concerned.

 

 

 

 

 

20.  DEBIT AND CREDIT

 

We call the left hand side of an account in the ledger the debit side.

DEBIT +

DEBIT -

Assets

Owners’ equity

Liabilities

 

We call the right hand side of an account in the ledger  the credit side

CREDIT -

CREDIT +

Assets

Owners’ equity

Liabilities

 

 

A

O

L

DR

+

-

-

CR

-

+

+

 

21.  NOMINAL ACCOUNT

These are all the Income and Expense accounts.

22.  BALANCE SHEET ACCOUNT

These are Accounts for Capital, Drawings, Assets and Liabilities.

23.  DOUBLE ENTRY RULE

This is the most basic Accounting Rule:

For each transaction there are TWO entries made in the General Ledger.

One on the Debit Side of an account and One on the Credit side of another account that is affected by the transaction.

24.  PETTY CASH

 

An amount of cash kept on the premises for small amounts that may need to be paid.

25.  CASH FLOAT

The money kept in the cash register/till from which customers are given change.

26.  TRADING STOCK

Consists of items which were bought with the aim to sell it and make a profit.

Also called merchandise or goods.

It is an asset.

NOTE: items like stationery would normally be an expense, but it becomes trading stock for a stationery shop.

27.  COST PRICE

Is the price at which the item was bought from the supplier or manufacturer.

 

 

 

 

 

 

 

 

 

 

 

 

 

28.  SELLING PRICE

A trading business sells trading stock at a higher price than the cost price in order to make a profit.  The price at which the goods are sold is the selling price.

 

29.  MARK-UP

Moat businesses determine their selling prince by adding a fixed percentage to the cost price.

This percentage is called the mark-up.

 

30.  COST OF SALES

Is the cost price of goods which has been sold.

31.  NETWORTH

PERSONAL WEALTH

Wealth measures the value of all the assets owned by a person.  Wealth is determined by taking the total value of all physical assets owned, then subtracting all the money that is owed to other people (liabilities)


ACCOUNTING EQUATION

The accounting equation is:

ASSETS = OWNERS EQUITY +LIABILITIES

 

ASSETS are: the possessions of a business or individual.

 

NON – CURRENT ASSETS

CURRENT ASSETS

 

TANGIBLE/FIXED ASSETS

 

These are possessions with a long life which are not purchased for the purpose of resale.

It is usually used by the business for a long period of time.

 

E.g.:

Land and Buildings

 

Vehicles

 

Equipment

 

 

 

 

FINANCIAL ASSETS

 

This is money of the business which is invested for specific periods.

 

 

 

E.g.:

Fixed Deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

These are possessions consisting of cash or something that can be converted into cash within a year.

 

 

 

E.g.:

Cash – Petty cash

            Bank

            Cash Float

 

 

Trading Stock

 

Debtors: Individuals or businesses who owe our business money.

     

 

All ASSET accounts INCREASE on the DEBIT SIDE and DECREASE on the CREDIT SIDE of the account.

ASSET

DEBIT

CREDIT

Increase (+)

Decrease (-)

 

 

 

 

OWNER’S EQUITY is: the owner’s monetary interest in the business

Capital

Money the owner invests in the business

 

Drawings

When the owner takes money/goods for personal use

 

Income

Money earned by the business

 

Expenses

Money used or lost by the business

 

All OWNER’S EQUITY accounts DECREASE on the DEBIT SIDE and INCREASE on the CREDIT SIDE of the account.

 

OWNER’S EQUITY

DEBIT

CREDIT

Decrease (-)

Increase (+)

 

LIABILITIES are: Money owed by the business to other businesses

 

NON-CURRENT LIABILITIES

CURRENT LIABILITIES

 

LONG TERM LIABILITIES

Are debts that are paid over a long period of time, over a year.

 

E.g.:

Loan for a large amount of money.

 

Mortgage Loan

 

 

SHORT TERM LIABILITIES

Are debts that have to be repaid within a period of 1 year.

 

E.g.:

Creditors: person to whom the business owes money.

 

Bank Overdraft: to be able to withdraw more money than what is available as the businesses in the bank account of the business.

 

 

 

 

 

 

 

 

 

 

All LIABILITIES accounts DECREASE on the DEBIT SIDE and INCREASE on the CREDIT SIDE of the account.

 

LIABILITIES

DEBIT

CREDIT

Decrease (-)

Increase (+)

 

Draw up a table to show all the accounts which belong to:

(You may add to the table as you work through the accounting sections of EMS)

ASSETS

OWNERS EQUITY

LIABILITIES

 

Bank

Vehicles

Land and Buildings

Cash Float

Petty Cash

Trading Stock

Debtors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

Drawings

 

Income:

Rent income

Fee income

Commission income

Interest income

 

Expenses:

Rent expense

Telephone

Water and Electricity

Stationery

Rates and Taxes

Salaries

Wages

Consumable stores

Interest Expense

Advertising

 

 

Loan

Mortgage loans

Creditors

Overdraft

 

 

 

 

 

 

 

 

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