Explore step-by-step Financial Accounting tutorials designed to help you build confidence, improve your exam results, and master real-world accounting skills.
Accounting is the process of recording, summarising and reporting the financial activities of a business.
Every sale, purchase, payment and receipt is captured so that the owner can see how the business is performing.
Without accounting, decisions would be based on guesswork instead of facts.
Financial accounting focuses on preparing reports for users such as owners, investors, banks, SARS, suppliers and managers.
They use this information to decide whether to invest, lend, extend credit or continue doing business with the company.
The main reports are the Income Statement, which shows profit or loss; the Statement of Financial Position, which shows assets,
equity and liabilities; and the Cash Flow Statement, which explains how cash moved in and out of the business.
Together, these statements tell the financial story of the business.
Accounting concepts and principles provide the rules that guide how transactions are recorded.
They make financial information consistent and comparable from one year to the next.
A key concept is the accounting equation: Assets = Equity + Liabilities.
Every transaction must keep this equation in balance.
The going concern concept assumes that the business will continue operating in the foreseeable future.
The accrual basis requires income and expenses to be recorded when they are earned or incurred, not only when cash moves.
The prudence principle says profits should not be overstated and losses should not be understated.
The consistency principle requires the same methods to be used from period to period.
These principles build trust in the financial statements.
Every transaction starts with a source document. Examples include tax invoices, receipts, deposit slips, credit notes and
cheque counterfoils. These documents provide evidence that a transaction took place and are important for SARS and for audits.
Information from source documents is first recorded in journals, also called books of first entry.
The Cash Receipts Journal records all money received. The Cash Payments Journal records all money paid.
The Sales Journal records credit sales, while the Purchases Journal records credit purchases.
Unusual transactions go into the General Journal.
Journals group similar transactions together, making posting to the ledger faster and more organised.
They also create a clear audit trail, improving the reliability of the accounting records.
The general ledger is a collection of all the accounts used by a business. Each account shows increases, decreases and the balance
for items such as Cash, Capital, Sales or Rent Expense. Amounts from the journals are posted to the ledger using debit and credit rules.
At the end of the period, each ledger account is balanced. These balances are then listed in a report called the
trial balance. The trial balance has two totals: total debits and total credits, which should be equal if the
records are arithmetically correct.
The trial balance helps detect errors such as incorrect postings or transposed figures.
It is also the starting point for preparing year-end adjustments and financial statements.
At year-end, some income and expenses are not yet correctly recorded. Accrued expenses are costs that have been
incurred but not yet paid, such as electricity of R800 still to be billed. An adjustment is passed to recognise the expense
and create a liability.
Accrued income is income that has been earned but not yet received, such as interest earned but not yet credited.
An asset called income receivable is created. These adjustments follow the accrual basis and ensure that the correct profit is reported.
Prepayments are the opposite. When expenses are paid in advance, such as a 6-month insurance premium,
the portion relating to future periods is recorded as an asset (prepaid expense), not as a current-year expense.
Non-current assets such as vehicles, equipment and machinery are used for more than one year.
As they are used, they lose value through wear and tear and obsolescence. Depreciation is the systematic allocation
of the cost of an asset over its useful life.
In the straight-line method, the same depreciation amount is charged every year. For example, a vehicle costing R120 000 with a
residual value of R20 000 and a 5-year life will have annual depreciation of (R120 000 − R20 000) ÷ 5 = R20 000.
Recording depreciation ensures that assets are not overstated and that the Income Statement reflects the cost of using the asset
to generate income. Good asset management includes keeping an asset register and reviewing useful lives regularly.
When goods are sold on credit, some customers may not pay. If it becomes clear that a debtor will never settle an amount,
the balance is written off as a bad debt. This is recorded as an expense and the debtor’s account is reduced to zero.
To anticipate future non-payment, many businesses create a provision for doubtful debts.
This is an estimate of the portion of receivables that may never be collected. An expense is recognised and a contra-asset account
reduces trade receivables in the Statement of Financial Position.
These adjustments apply prudence by preventing assets and profit from being overstated.
They give a more realistic view of the amount that will likely be converted into cash.
Inventory includes goods held for resale in the normal course of business. There are two main systems to record inventory:
periodic and perpetual.
In the periodic system, inventory is counted at year-end and cost of sales is calculated using:
Opening inventory + Purchases − Closing inventory. In the perpetual system, inventory records are updated continuously after
each purchase and sale, often using barcode scanning or computer systems.
Both systems aim to value inventory correctly and report an accurate cost of sales and gross profit.
The perpetual system provides more up-to-date information, while the periodic system is simpler and cheaper to operate.
Even with good systems, mistakes occur in accounting. Some errors affect only one account, while others disturb the equality
of debits and credits. When the trial balance does not balance and the cause is not yet known, a temporary
suspense account is opened for the difference.
Once errors are identified, correcting entries are passed. Examples include posting an amount to the wrong account,
using the wrong side (debit instead of credit), or recording a figure twice. After all errors are corrected,
the suspense account should close to zero.
Correcting errors protects the reliability of the financial statements and helps maintain a clear audit trail.
The Income Statement summarises income and expenses for a period to show profit or loss.
It starts with sales or revenue. From this, the cost of sales is deducted to calculate gross profit.
Operating income is added, and operating expenses are deducted to arrive at net profit.
Figures are taken from the adjusted trial balance.
Only income and expense accounts appear in the Income Statement.
Asset, equity and liability accounts go to the Statement of Financial Position.
A clear Income Statement helps users see whether the business is profitable and which expenses consume most of the income.
It is also the starting point for performance analysis using ratios.
The Statement of Financial Position shows the financial position of a business at a specific date.
It lists assets, equity and liabilities using the accounting equation. Assets are divided into non-current and current categories.
Liabilities are also split into non-current and current.
Equity represents the owner’s interest in the business and includes capital contributed and retained income.
Non-current assets such as land, buildings and equipment are shown at carrying amount, which is cost less accumulated depreciation.
Notes to the financial statements provide extra detail, such as how depreciation was calculated or how asset
balances changed during the year. Notes improve transparency and help users understand the numbers better.
Profit and cash are not the same. A business can show a profit but still struggle to pay its accounts if customers pay late
or if large investments are made. The Cash Flow Statement explains how cash was generated and used during the period.
Cash flows are grouped into three sections: operating activities (day-to-day trading),
investing activities (buying and selling non-current assets) and financing activities
(loans, repayments and owners’ capital).
Understanding cash flow helps managers plan for loan repayments, asset purchases and daily expenses.
Healthy cash flow is essential for survival, even in profitable businesses.
Value Added Tax (VAT) is an indirect tax charged on most goods and services in South Africa. VAT vendors charge
output VAT on their sales and claim back input VAT on qualifying purchases.
The difference is either payable to SARS or refundable.
Tax invoices must contain details such as the vendor’s VAT number, the amount before VAT, the VAT amount and the total including VAT.
In the accounting records, VAT is usually recorded in a VAT control account.
Regular VAT reconciliations help ensure that the VAT return submitted to SARS agrees with the underlying records.
Correct VAT treatment is critical to avoid penalties and interest.
Reconciliations compare two independent records to ensure they agree. In a bank reconciliation, the business compares its Cash Book
with the bank statement. Differences arise from timing (unpresented cheques, deposits not yet reflected) and from items recorded
only by the bank, such as charges or debit orders.
Debtors and creditors reconciliations compare the balances in the business’s records with statements from customers or suppliers.
Differences may be caused by invoices not yet recorded, credit notes in transit or errors on either side.
Regular reconciliations improve the reliability of financial information, detect fraud or errors and strengthen internal control.
Internal control refers to the policies and procedures that a business uses to protect its assets, ensure reliable reporting and
encourage compliance with laws. Examples include segregation of duties, authorisation of transactions, physical safeguards and
independent checks such as reconciliations.
Ethical behaviour in accounting is just as important as technical accuracy. Accountants and bookkeepers must act with integrity,
objectivity and confidentiality. Manipulating figures to hide losses or avoid tax can lead to serious legal and professional consequences.
Strong internal controls and an ethical culture build trust with investors, banks, SARS and other stakeholders.
For students, developing these habits early is key to a successful, respected career in accounting.
