Summary FAC3704 Financial Accounting I Financial Accounting Concepts, Principles and Procedures ACCOUNTING REPORTING

ACCOUNTING REPORTING Learning outcome You should be able to prepare the financial statements (i.e., the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of financial position) and the notes to the financial statements of a sole proprietor and, a non-profit organisation and you should be able to prepare proper books from incomplete records. 3 Study units 15 FINANCIAL STATEMENTS OF A SOLE PROPRIETORSHIP 16 NON-PROFIT ENTITIES 17 INCOMPLETE RECORDS CONTENTS 4 STUDY UNIT 15 Financial statements of a sole proprietorship Learning outcome You should be able to record all transactions related to a sole proprietor and to prepare the financial statements of a sole proprietor. Contents Page Key concepts 5 15.1 Introduction 5 15.2 Establishment of a sole proprietorship 5 15.3 Further capital contributions and profit 7 15.4 Drawings 8 15.5 The presentation of equity in the statement of changes in equity and the statement of financial position 9 15.6 Revision exercises and solutions 13 15.6.1 Revision exercise 1 13 15.6.2 Revision exercise 2 13 15.6.3 Revision exercise 3 13 Self-assessment 13 5 KEY CONCEPTS • sole proprietor/sole trader • equity • capital • profit/loss for the period/year • drawings • additional investment 15.1 INTRODUCTION A sole proprietorship (also known as a sole trader) is the simplest form of business ownership. A sole proprietorship is often managed by the owner him-/herself. There is no legislation prescribing how a sole proprietorship should be established. Cash and/or any other type of asset, for example, a motor vehicle is necessary to start this kind of business entity. The equity of a sole proprietorship simply consists of the capital invested in the business entity plus the profit made (or less a loss suffered) and less any money and/or goods withdrawn by the owner for personal use. 15.2 ESTABLISHMENT OF A SOLE PROPRIETORSHIP A sole proprietor usually contributes capital in the form of cash and/or non-current assets in the form of property, plant and equipment towards starting the business. The following example illustrates the accounting entries that are made when a sole proprietorship is established. EXERCISE 15.1 On 1 March 20.1, J Brewis invests R25 000 to start JB Television Services, a service entity. His investment consists of R3 000 cash, equipment valued at R8 000 and a motor vehicle valued at R14 000. REQUIRED Show the journal entry that will be made to record the relevant information of JB Television Services on the date of the investment. 6 SOLUTION: EXERCISE 15.1 JB TELEVISION SERVICES GENERAL JOURNAL 20.1 Mar 1 Bank Equipment Motor vehicle Capital Deposit of cash in the bank account of the entity and recording of other assets brought into the entity at valuation R 3 000 8 000 14 000 R 25 000 COMMENTS • On 1 March 20.1 "capital" indicates the interest of J Brewis (the owner) in his business. Different meanings are attached to the word "capital" in the financial and accounting worlds. You will have to learn to differentiate between the various meanings by noting the context in which the word is used. • The cash portion of the capital is usually recorded in the cash receipts journal.