1.1 Users of financial information

Financial information is used by different stakeholders for different purposes. These include owners, investors, banks, SARS, employees and suppliers. Although they access similar statements, their interests differ—for example, investors focus on returns, SARS focuses on tax compliance, and employees assess job security and profitability.

1.2 Forms of business ownership

You must be able to distinguish between a sole proprietor, partnership, company and non-profit entity. Each has advantages and disadvantages relating to tax, liability, decision-making and legal status. A company has limited liability and a separate legal personality, while a sole proprietor does not.

1.3 Financial vs managerial accounting

Financial accounting focuses on historical information and must follow IFRS/IAS. Reports are prepared for external users such as investors, lenders and regulators. Managerial accounting supports internal decision-making and does not follow strict formats, focusing instead on budgets, planning and control.

1. The Accounting Equation

The accounting equation shows the relationship between the resources of the business and how those resources are financed. It must always balance.

Assets = Owner’s Equity + Liabilities

Every transaction must keep the equation in balance. If one item increases, another item on the same side must decrease, or an item on the opposite side must increase. This is why every transaction affects at least two accounts.

2. Elements of Financial Statements

The elements of financial statements describe the different types of items that appear in the statement of financial position and the statement of profit or loss and other comprehensive income.

2.1 Assets

Assets are resources controlled by the business from which future economic benefits are expected. They are used to generate income and support day-to-day operations.

Examples of non-current assets:
• Land and buildings
• Vehicles, equipment and machinery
• Computers and office furniture

Examples of current assets:
• Trading inventory
• Bank and petty cash
• Debtors (trade receivables)

2.2 Liabilities

Liabilities are the present obligations of the business. They arise from past events and will be settled by paying cash, delivering goods or providing services.

Examples of non-current liabilities:
• Mortgage loan
• Long-term bank loan

Examples of current liabilities:
• Creditors (trade payables)
• SARS – amounts owing for VAT, PAYE or income tax
• Bank over

2.3 Owner’s Equity

Owner’s equity represents the owner’s claim on the assets after liabilities are deducted.
It increases through:
• Capital contributions
• Profits
And decreases through:
• Drawings
• Losses

2.4 Income and Expenses

Income increases equity because it increases profit.
Expenses decrease equity because they reduce profit.

1. What is a transaction?

A transaction is a financial event that affects the business. It must be:

• Measurable in money
• Relevant to the business
• Supported by a valid source document

Examples of transactions:
• Buying inventory
• Paying creditors
• Receiving money from debtors
• Owner contributing capital
• Incurring expenses such as rent or wages

2. Source documents

Source documents provide written evidence that a transaction took place. They contain details such as date, parties involved, amounts and description.

Common source documents include:
• Tax invoices
• Credit notes
• Debit notes
• Cash register slips
• Receipts
• Bank statements
• Delivery notes
• Purchase orders

Good record keeping requires that source documents are stored, organised and accessible for reference, audits and SARS requirements.

3. The role of journals

Journals are the books of first entry. They group similar transactions together before posting them to the General Ledger.

Examples of journals used in BKTB:
• Cash Receipts Journal (CRJ)
• Cash Payments Journal (CPJ)
• Sales Journal (SJ)
• Purchases Journal (PJ)
• Returns Journals (DAJ/CAJ)
• General Journal (GJ)

When you record in journals:
• Use the correct journal for the type of transaction
• Ensure amounts are taken directly from source documents
• Check for accuracy before posting to the ledger

4. The double-entry principle

Every transaction affects at least two accounts:
• One account is debited
• One account is credited

Debits increase:
• Assets
• Expenses
• Drawings

Credits increase:
• Owner’s equity
• Liabilities
• Income

If the wrong side is used, the accounting equation becomes unbalanced.

5. Posting to the Ledger

Once journals are completed, totals or individual entries are posted to the General Ledger. The ledger groups accounts so that balances can be calculated at the end of the period.

Ledger accounts contain:
• Date
• Details
• Debit entry
• Credit entry
• Running balance

Understanding how journals flow into the ledger is essential before moving into the Trial Balance.

1. What is a Trial Balance?

A Trial Balance is a list of all the ledger accounts with their debit or credit balances on a specific date. The total of all debit balances must equal the total of all credit balances.

The Trial Balance checks:
• Mathematical accuracy of ledger posting
• Correct application of the double-entry principle
• Whether debits and credits are still in balance

If the totals do not balance, an error has occurred in the journals or ledgers.

Why the Trial Balance is important

The Trial Balance:
• Helps identify errors before preparing financial statements
• Confirms that double-entry was followed correctly
• Summarises all accounts in one place
• Forms the basis for the Statement of Profit or Loss and the Statement of Financial Position

Remember: the Trial Balance does not guarantee that all entries are correct — some errors do not affect the balance totals.

3. Steps in preparing a Trial Balance

Step 1: Calculate the balance of each ledger account.
Step 2: List all accounts in the correct order (Assets, Equity, Liabilities, Income, Expenses).
Step 3: Enter each balance in the debit or credit column.
Step 4: Add the columns and check if totals match.
Step 5: Investigate and correct differences if the totals do not balance.

4. Common errors revealed by the Trial Balance

The following errors cause the Trial Balance not to balance:
• Incorrect addition in the ledger
• Posting to the wrong side of an account
• Posting an amount twice
• Omitting one half of a double-entry
• Incorrectly transferring a balance to the Trial Balance

5. Posting to the Ledger

Once journals are completed, totals or individual entries are posted to the General Ledger. The ledger groups accounts so that balances can be calculated at the end of the period.

Ledger accounts contain:
• Date
• Details
• Debit entry
• Credit entry
• Running balance

Understanding how journals flow into the ledger is essential before moving into the Trial Balance.

5. Errors NOT revealed by the Trial Balance

The Trial Balance will still balance even if:
• An entry is recorded in the wrong account
• A transaction is completely omitted
• Equal debit and credit amounts are posted to the wrong accounts
• Compensating errors occur (two different errors cancel each other out)

These errors require deeper checking, not just balancing totals.

6. Suspense account

When the Trial Balance does not balance, a temporary suspense account is used to record the difference while errors are being investigated. Once all errors are corrected, the suspense account should return to zero.

1. Why adjusting entries are necessary

Adjusting entries ensure that:
• Income is recorded in the period it is earned
• Expenses are recorded in the period they are incurred
• Assets and liabilities reflect correct balances at year-end
• The matching principle is applied correctly

Adjustments bring the accounting records up to date before preparing the financial statements.

2. Common types of adjustments

The following adjustments are frequently tested in BKTB:

2.1 Accrued income (income earned but not yet received)

Example: Interest earned but not yet received from the bank.

Effect:
• Increase Income
• Increase Asset (Accrued Income)

2.2 Accrued expenses (expenses incurred but not yet paid)

Example: Telephone expense used but not yet paid.

Effect:
• Increase Expense
• Increase Liability (Accrued Expense)

2.3 Income received in advance (money received for services not yet rendered)

Example: Rental received for next month.

Effect:
• Decrease Income
• Increase Liability (Income Received in Advance)

2.4 Prepaid expenses (expenses paid in advance)

Example: Rent or insurance paid for future periods.

Effect:
• Increase Asset (Prepaid Expense)
• Decrease Expense for the current period

2.5 Depreciation (loss of value of non-current assets)

Depreciation spreads the cost of an asset over its useful life.

Effect:
• Increase Expense (Depreciation)
• Decrease Asset value (Accumulated Depreciation)

3. The matching principle

The matching principle requires that:
• Income earned in the period must be matched with
• The expenses incurred to generate that income

Adjustments ensure this principle is correctly applied.

4. How adjustments appear in the financial statements

Adjustments affect:
• The final balances of asset and liability accounts
• The income statement totals
• Owner’s equity (through profit or loss)

If adjustments are omitted, the business may:
• Overstate or understate profit
• Incorrectly value assets or liabilities
• Prepare inaccurate financial statements

1. What is VAT?

VAT is a tax charged on most goods and services in South Africa. Registered businesses (vendors) collect VAT on behalf of SARS. VAT is charged at the standard rate of 15%.

VAT affects:
• Selling price of goods and services
• Purchases from suppliers
• Cash and credit transactions
• Amounts owed to or receivable from SARS

2. Input VAT and Output VAT

There are two types of VAT:

Input VAT:
• VAT that the business pays on purchases
• Deducted from the amount owed to SARS

Output VAT:
• VAT charged by the business on sales
• Payable to SARS

3. VAT Control Account

The VAT Control Account is a liability account. It records:
• Output VAT (increases the amount owed to SARS)
• Input VAT (reduces the amount owed)

Formula for VAT payable:
Output VAT – Input VAT = VAT owed to SARS

If Input VAT is greater than Output VAT, the business has a refund due from SARS.

4. How to calculate VAT

VAT is always calculated at 15%.

VAT = Amount × 15%

To calculate VAT-inclusive amounts:
Total = Amount × 1.15

To calculate VAT-exclusive amounts:
Exclusive = Total ÷ 1.15
VAT = Total – Exclusive

5. Zero-rated and exempt supplies

Zero-rated items:
• VAT rate = 0%
• Examples: brown bread, milk, vegetables, exports

Exempt items:
• No VAT is charged at all
• Examples: interest received, rental of a residential property, salaries and wages

6. Recording VAT in journals

Sales Journal:
• Record selling price exclusive of VAT
• Calculate Output VAT separately

Purchases Journal:
• Record cost price exclusive of VAT
• Calculate Input VAT separately

Cash Receipts & Cash Payments Journals:
• VAT appears only when the transaction involves a VATable good or service

7. Posting VAT to the general ledger

Output VAT is credited to VAT Control.
Input VAT is debited to VAT Control.

The balance in VAT Control at month-end represents the amount owed to SARS or refundable by SARS.

1. What is inventory?

Inventory represents goods purchased by a business for the purpose of resale. It is a current asset because it is expected to be sold within the normal operating cycle.

Examples of inventory include:
• Trading stock
• Raw materials
• Work in progress
• Finished products

Trading businesses focus mainly on stock purchased for resale.

2. The perpetual inventory system

The perpetual system records inventory continuously. Every time stock is bought or sold, the inventory account is updated immediately.

When goods are sold:
• Cost of Sales (COS) is recorded
• Inventory decreases

When goods are purchased:
• Inventory increases
• Cash or creditors increase

This system provides up-to-date inventory balances throughout the period.

3. Cost of sales

Cost of Sales represents the cost price of goods sold during the period. It is recorded as an expense in the Statement of Profit or Loss.

Formula for cost of sales:
Opening Inventory
+ Purchases
– Closing Inventory
= Cost of Sales

If inventories increase, cost of sales goes down.
If inventories decrease, cost of sales goes up.

4. Mark-up and selling price

Trading businesses often calculate selling price using a mark-up percentage on cost.

Formulas:
Selling Price = Cost Price + Mark-up
Cost Price = Selling Price ÷ (1 + Mark-up %)
Mark-up % = (Selling Price – Cost Price) ÷ Cost Price

Understanding the relationship between cost price and selling price helps when calculating profit and analysing stock performance.

5. Gross profit

Gross profit measures the profit made after deducting the cost of goods sold.

Formula:
Gross Profit = Sales – Cost of Sales

Gross profit is a key indicator of the business’s performance.

6. Recording inventory transactions

Purchases:
Debit Inventory
Credit Bank or Creditors

Sales:
Debit Cost of Sales
Credit Inventory
Debit Bank or Debtors
Credit Sales

At period-end, the closing inventory balance appears on the Statement of Financial Position as a current asset.

1. Cash Receipts Journal (CRJ)

The CRJ records all money received by the business. This includes both cash and electronic payments.

Examples of receipts recorded in the CRJ:
• Cash sales
• Debtors paying their accounts
• Rental income
• Interest received
• Commission income
• Capital contributions from the owner

CRJ structure typically includes:
• Date
• Details
• Bank column
• Analysis of receipts
• VAT (if applicable)
• Other income columns

When money is received:
Debit Bank
Credit Sales, Debtors Control, Interest, Rent Income or other relevant accounts

2. Cash Payments Journal (CPJ)

The CPJ records all payments made by the business. These include both cash and electronic funds transfers (EFTs).

Examples of payments recorded in the CPJ:
• Purchases of inventory for cash
• Payments to creditors
• Operating expenses (e.g., rent, wages, telephone)
• Vehicle or equipment purchases
• Owner’s drawings

CPJ structure includes:
• Date
• Details
• Bank column
• VAT (if applicable)
• Analysis of payments and expense columns

When money is paid:
Debit Expense, Creditor or Asset
Credit Bank

3. VAT in cash journals

VAT appears only when the transaction involves a VATable good or service.

Examples:
• Cash sale → Output VAT in CRJ
• Cash purchase → Input VAT in CPJ

Non-VAT items include:
• Wages and salaries
• Interest received or paid
• Drawings
• Donations (in most cases)

4. Posting to the general ledger

After completing the CRJ and CPJ:
• Each entry is posted to the relevant ledger account
• The bank account reflects all receipts and payments
• Income and expense accounts are updated
• VAT Control account is adjusted for Input or Output VAT

5. Importance of cash journals

Cash journals help the business:
• Track all cash inflows and outflows
• Detect cash shortages or surpluses
• Prepare accurate bank reconciliations
• Maintain proper internal control over money

1. Sales Journal (SJ)

The Sales Journal records all credit sales of goods. No cash sales are recorded here.

A credit sale occurs when:
• Goods are sold
• The customer pays later
• Debtors Control increases

Source document: Tax Invoice issued to the customer.

Accounting entry for credit sales:
Debit Debtors Control
Credit Sales

If VAT applies, Output VAT is credited as well

2. Purchases Journal (PJ)

The Purchases Journal records all credit purchases of goods that will be resold by the business.

A credit purchase occurs when:
• Goods are bought on credit
• The business pays later
• Creditors Control increases

Source document: Tax Invoice received from the supplier.

Accounting entry for credit purchases:
Debit Inventory
Credit Creditors Control

If VAT applies, Input VAT is debited.

3. Debtors Allowances Journal (DAJ)

The DAJ records goods returned by customers or allowances granted to them.

Reasons for returns:
• Wrong goods delivered
• Goods damaged
• Pricing errors
• Quality issues

Source document: Credit Note issued to the customer.

Accounting entry:
Debit Debtors Allowances
Debit Output VAT (if applicable)
Credit Debtors Control

4. Creditors Allowances Journal (CAJ)

The CAJ records goods returned to suppliers or allowances received from them.

Reasons for returns:
• Incorrect stock delivered
• Damaged stock
• Overcharged amounts

Source document: Credit Note received from the supplier.

Accounting entry:
Debit Creditors Control
Credit Inventory
Credit Input VAT (if applicable)

5. Why credit journals are important

Credit journals:
• Group similar credit transactions together
• Make ledger posting easier
• Assist in monitoring debtors and creditors
• Create an audit trail through source documents

Credit journals ensure that the business can follow up on outstanding amounts and maintain proper control over credit sales and purchases.

1. What is a bank reconciliation?

A bank reconciliation is a comparison between:
• The bank balance according to the bank statement, and
• The bank balance according to the business’s Cash Journals

The purpose is to:
• Identify differences
• Correct errors
• Update journals
• Produce an accurate and reliable bank balance

2. Reasons for differences

Differences occur because some transactions appear in the bank statement before they appear in the business’s books, or vice versa.

Common causes include:

2.1 Outstanding deposits

These are deposits recorded in the CRJ but not yet reflected on the bank statement.

2.2 Outstanding cheques / EFTs

Payments recorded in the CPJ that the bank has not yet processed.

2.3 Bank charges

Fees deducted by the bank but only known by the business once the statement arrives.

2.4 Interest received

Interest added by the bank which must later be recorded in the CRJ.

2.5 Dishonoured cheques

Deposited cheques that are rejected by the bank.

2.6 Debit orders

Automatic bank deductions (e.g., insurance, subscriptions) that must be recorded in the CPJ.

2.7 Stop orders and bank errors

These require special attention and adjustments.

3. Updating the Cash Journals

Before preparing the Bank Reconciliation Statement (BRS), the business must update its Cash Journals using information from the bank statement.

Examples:
• Bank charges → CPJ
• Interest received → CRJ
• Debit orders → CPJ
• Dishonoured cheques → CPJ
• Bank errors → Adjusted appropriately

After the journals are updated, the bank account in the ledger is adjusted accordingly.

4. Preparing the Bank Reconciliation Statement

The BRS starts with either:
• Bank Statement balance, or
• Bank Ledger balance

Typical format (starting with Bank Statement balance):

Bank Statement balance
Add: Outstanding deposits
Less: Outstanding cheques / EFTs
= Corrected bank balance

The corrected bank balance must equal the updated balance in the business’s ledger.

5. Importance of bank reconciliation

Bank reconciliations:
• Detect errors in the Cash Journals or bank statement
• Strengthen internal control over cash
• Identify fraud or unauthorised withdrawals
• Ensure accurate financial statements
• Help keep the business compliant with audit requirements