Financial Accounting 178 Notes
FINANCIAL ACCOUNTING 178
Topics:
1. The Accounting Cycle (integrated with other
topics)
2. Conceptual Framework (IFRS, definition,
recognition criteria of elements)
3. VAT
4. Property, Plant and Equipment
5. Inventory
6. Inventory on Consignment
7. Introduction to Group Statements
8. Companies
9. Close Corporations
10.Liquidations
11.Partnerships
1
,Financial Accounting 178 Notes
1. The Accounting Cycle
Transactions and their respective journals: (new ones)
Bad debts
Writing off of bad debts:
Dr Bad Debts (P/L)
Cr Debtors Control (SFP)
Recovering bad debts (if the debt was written off and then subsequently recovered in the
current financial period)
Dr Bank (SFP)
Cr Bad Debts (P/L)
Recovering bad debts (If the debt was written off in a previous period and then recovered in
the current financial period)
Dr Bank (SFP)
Cr Bad Debts Recovered (P/L)
Allowance for credit losses of debtors
Increase in allowance:
Dr Movement in allowance for credit losses of debtors (P/L)
Cr Allowance for credit losses of debtors (SFP)
Decrease in allowance:
Dr Allowance for credit losses of debtors (SFP)
Cr Movement in allowance for credit losses of debtors (P/L)
Bank reconciliation
Entries are compared to ensure:
Complete and accurate recording of cheques
Complete and accurate recording of deposits
The recording of bank charges, interest and other sundry items
Writing back of stale cheques. A cheque is stale when it has not been cashed after six
months. Entry: Dr Bank, Cr Creditor or expense
Unpaid cheques are written back: Dr Debtor or income, Cr Bank
Stop orders are recorded
2
,Financial Accounting 178 Notes
Differences between the bank account and the bank statement balances must be adjusted. If
the error is in the cash receipt or cash payment journals, it must be corrected in the general
journal. An error made by the bank remains a reconciling item until the bank does the
correction.
A debit bank balance in the entity’s books is a positive balance (asset), while a credit balance
indicates an overdrawn balance. The bank statement is the opposite: a debit balance is an
overdraft and a credit balance is an asset.
The steps to be followed when a bank reconciliation is done are:
1. Check whether the previous month’s corrections were done.
2. Check the bank statement for errors, for example cheques not written out by the entity,
items incorrectly cast instead of subtracted and vice versa.
3. Compare the entries on the bank statement, bank account and the journals one-by-one.
Example:
Favourable balance Overdraft balance
Balance per bank statement 500 (500)
Outstanding cheques (100) (100)
Outstanding deposits 200 200
Balance per bank account 600 (400)
Creditors’ Reconciliation
The total of the creditor list from the creditor ledger is reconciled with the balance of the
creditor control account. If there are any differences, the necessary adjustments must be
made.
An additional control measure is the monthly reconciliation between the creditor monthly
statement and the creditor account in the creditor ledger. The balances on these two
accounts should agree, except for goods already invoiced by the creditor but not yet received
or payments to the creditor not yet received. If the reconciliation indicates any errors in the
entity’s books, it must be corrected. Errors in the creditor’s books will be reconciling items.
The steps to be followed when a creditor reconciliation is done are:
1. Check the castings in the creditor ledger, as well as in the monthly statement.
3
,Financial Accounting 178 Notes
2. Inspect the creditor ledger and the monthly statement, confirm that the items appearing
there are appropriate and whether they have been cast or subtracted correctly as
necessary.
3. Compare the items in the monthly statement and the ledger one by one.
Example
Reconciliation (Creditor's books):
dr cr Balance
Balance per statement 2 500 dr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made, not yet deducted 1 000
Trade discount mistakenly not deducted from statement 10 .
Balance per creditor ledger 1 390 dr
Reconciliation (Entity’s books)
dr cr Balance
Balance per statement 2 500 cr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made not yet deducted 1 000
Trade discount mistakenly not deducted on statement 10
.
Balance per creditor ledger 1 390 cr
4
, Financial Accounting 178 Notes
2. Conceptual Framework
Important acronyms regarding the framework:
– IFRS series: International Financial Reporting Standards
– IAS series: International accounting standards
– SIC: Standards Interpretations Committee
– IFRIC: International Financial Reporting Interpretations Committee
– AC500 series: South African interpretations (VAT, BEE)
– ED’s: exposure drafts
Purpose:
a. Sets out concepts underlying the preparation of financial statements for
external users
b. Supports IASB in
i. the development/review of accounting standards and
ii. promoting harmonisation
c. Supports national standard setting bodies in developing national standards
d. Supports preparers of financial statements in the application of IFRS and
treatment of items not covered by IFRS
e. Supports auditors to form an audit opinion on whether financial statements
comply with IFRS
f. Supports users of financial statements in the interpretation thereof
What are the objectives of general purpose financial statements?
The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources to the entity.
Decisions= buying, selling or holding/ providing or settling loans and other forms of
credit.
This all depends on expected returns, being:
- dividends,
- market price
- providing or settling loans / interest receive/payable
• Expected returns depend on assessment of the amount, timing and uncertainty of
future net cash inflows
Assess information about the resources of the entity, claims against the entity
Primary users to whom general purpose financial statements directed at:
Existing and potential investors
Lenders and other creditors
5
FINANCIAL ACCOUNTING 178
Topics:
1. The Accounting Cycle (integrated with other
topics)
2. Conceptual Framework (IFRS, definition,
recognition criteria of elements)
3. VAT
4. Property, Plant and Equipment
5. Inventory
6. Inventory on Consignment
7. Introduction to Group Statements
8. Companies
9. Close Corporations
10.Liquidations
11.Partnerships
1
,Financial Accounting 178 Notes
1. The Accounting Cycle
Transactions and their respective journals: (new ones)
Bad debts
Writing off of bad debts:
Dr Bad Debts (P/L)
Cr Debtors Control (SFP)
Recovering bad debts (if the debt was written off and then subsequently recovered in the
current financial period)
Dr Bank (SFP)
Cr Bad Debts (P/L)
Recovering bad debts (If the debt was written off in a previous period and then recovered in
the current financial period)
Dr Bank (SFP)
Cr Bad Debts Recovered (P/L)
Allowance for credit losses of debtors
Increase in allowance:
Dr Movement in allowance for credit losses of debtors (P/L)
Cr Allowance for credit losses of debtors (SFP)
Decrease in allowance:
Dr Allowance for credit losses of debtors (SFP)
Cr Movement in allowance for credit losses of debtors (P/L)
Bank reconciliation
Entries are compared to ensure:
Complete and accurate recording of cheques
Complete and accurate recording of deposits
The recording of bank charges, interest and other sundry items
Writing back of stale cheques. A cheque is stale when it has not been cashed after six
months. Entry: Dr Bank, Cr Creditor or expense
Unpaid cheques are written back: Dr Debtor or income, Cr Bank
Stop orders are recorded
2
,Financial Accounting 178 Notes
Differences between the bank account and the bank statement balances must be adjusted. If
the error is in the cash receipt or cash payment journals, it must be corrected in the general
journal. An error made by the bank remains a reconciling item until the bank does the
correction.
A debit bank balance in the entity’s books is a positive balance (asset), while a credit balance
indicates an overdrawn balance. The bank statement is the opposite: a debit balance is an
overdraft and a credit balance is an asset.
The steps to be followed when a bank reconciliation is done are:
1. Check whether the previous month’s corrections were done.
2. Check the bank statement for errors, for example cheques not written out by the entity,
items incorrectly cast instead of subtracted and vice versa.
3. Compare the entries on the bank statement, bank account and the journals one-by-one.
Example:
Favourable balance Overdraft balance
Balance per bank statement 500 (500)
Outstanding cheques (100) (100)
Outstanding deposits 200 200
Balance per bank account 600 (400)
Creditors’ Reconciliation
The total of the creditor list from the creditor ledger is reconciled with the balance of the
creditor control account. If there are any differences, the necessary adjustments must be
made.
An additional control measure is the monthly reconciliation between the creditor monthly
statement and the creditor account in the creditor ledger. The balances on these two
accounts should agree, except for goods already invoiced by the creditor but not yet received
or payments to the creditor not yet received. If the reconciliation indicates any errors in the
entity’s books, it must be corrected. Errors in the creditor’s books will be reconciling items.
The steps to be followed when a creditor reconciliation is done are:
1. Check the castings in the creditor ledger, as well as in the monthly statement.
3
,Financial Accounting 178 Notes
2. Inspect the creditor ledger and the monthly statement, confirm that the items appearing
there are appropriate and whether they have been cast or subtracted correctly as
necessary.
3. Compare the items in the monthly statement and the ledger one by one.
Example
Reconciliation (Creditor's books):
dr cr Balance
Balance per statement 2 500 dr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made, not yet deducted 1 000
Trade discount mistakenly not deducted from statement 10 .
Balance per creditor ledger 1 390 dr
Reconciliation (Entity’s books)
dr cr Balance
Balance per statement 2 500 cr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made not yet deducted 1 000
Trade discount mistakenly not deducted on statement 10
.
Balance per creditor ledger 1 390 cr
4
, Financial Accounting 178 Notes
2. Conceptual Framework
Important acronyms regarding the framework:
– IFRS series: International Financial Reporting Standards
– IAS series: International accounting standards
– SIC: Standards Interpretations Committee
– IFRIC: International Financial Reporting Interpretations Committee
– AC500 series: South African interpretations (VAT, BEE)
– ED’s: exposure drafts
Purpose:
a. Sets out concepts underlying the preparation of financial statements for
external users
b. Supports IASB in
i. the development/review of accounting standards and
ii. promoting harmonisation
c. Supports national standard setting bodies in developing national standards
d. Supports preparers of financial statements in the application of IFRS and
treatment of items not covered by IFRS
e. Supports auditors to form an audit opinion on whether financial statements
comply with IFRS
f. Supports users of financial statements in the interpretation thereof
What are the objectives of general purpose financial statements?
The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources to the entity.
Decisions= buying, selling or holding/ providing or settling loans and other forms of
credit.
This all depends on expected returns, being:
- dividends,
- market price
- providing or settling loans / interest receive/payable
• Expected returns depend on assessment of the amount, timing and uncertainty of
future net cash inflows
Assess information about the resources of the entity, claims against the entity
Primary users to whom general purpose financial statements directed at:
Existing and potential investors
Lenders and other creditors
5
