SACO PESP TRAINING ACCOUNTING & FINANCE

INTRODUCTION TO ACCOUNTING, THE ACCOUNTING EQUATION & LABOUR

Session 1 22 September 2021

Session 220 October 2021

Session 33 November 2021

Introduction to accounting General ledger Inventory methods

Accounting cycle Trial balanceStatement of Comprehensive Income

Accounting equation VAT & Mark-upsStatement of Financial Position

Labour Interest calculations Break even analysis

SESSIONS

At the end of the three sessions, artists should be adequatelyequipped to understand and apply basic financial accountingprinciples.

OBJECTIVES

The objectives are to develop an understanding of the principles of accounting at a levelthat is logical and practical to artists. The sessions will enable artists to apply the variousconcepts and fundamental practices of accounting.

After this session artists should:

• Understand the accounting cycle.

• Understand the effects of transactions in the accounting equation (A=O+L).

• Have sound knowledge of the double entry principle.

• Understand the nature and function of salaries and wages including basic salary

deductions and forms of payment.

INTRODUCTION TO ACCOUNTING

What is accounting?It is likely that you thought of something relating to money. If that is the case, you have anidea of what accounting is.

Accounting is a system of:• Gathering all financial information of a business• Analysing how the financial information will affect the business• Recording the financial information through proper accounting processes• Reporting all financial information for a given period• Interpret reports to allow users of financial information to make informed decision about

the business.

INTRODUCTION TO ACCOUNTING Cont.

The important thing we need to keep in mind is that individuals and businessesmake decisions based on money.

Therefore, accounting can be defined as an activity where users of financialstatements are provided with useful information to help them make soundeconomic decisions.

• Users: Entities that make use of the financial statements of the business.

• Financial statements: The financial documents that explain the performance ofa business.

• Useful: When the financial statements can be used by users.

• Information: Figures and facts that make sense to users.

• Economic decisions: Decisions management needs to make based on theoverall financial situation of the business.

INTRODUCTION TO ACCOUNTING Cont.Users of accounting informationInternal users:• Owners• Managers• Employees

External users:• Customers• Competitors• Lenders• Government• Suppliers

INTRODUCTION TO ACCOUNTING Cont.Different types of business entities in South Africa

Sole Trader Partnership Private Company

What are owners called?

Owner Partners Members/ Shareholders

How many owners? 1 owner 2-20 partners 1 – 200 members/ shareholders

Legal requirements None Agreement between partners

MOI represents the founding document in terms of the Companies Act.

Type of liability: Who is held responsible?

Unlimited liability. The owner is liable for all debt in his personal capacity

Unlimited liability. Partners are jointly liable for debts.

Limited liability. Shareholders are not liable for the debts.

Sole trader Partnership Private Company

Continuity Entity ceases to existPartnership is terminated on death or withdrawal of one of the partners

Unlimited

Tax Profits are taxed in the hands of the owner

Profits are taxed in the hands of the partners

Subject to double taxation.

INTRODUCTION TO ACCOUNTING Cont.

Important accounting terms:Term Explanation

Accounts payable or Creditor

A business or individual that we owe money

Accounts receivable or Debtor

A business or individual that owes us money

AssetA present economic resource, that is controlled by a business entity, resulting from a past event. This will result in a probable production of economic benefit.

LiabilityA present obligation, resulting from a past even, which relates to the transfer of an economic resource. This will result in a responsibility that cannot be avoided.

Account A summary of all transaction that influence a specific asset, equity or liability

Debit Refers to the left-hand side of an accountCredit Refers to the right-hand side of an account

INTRODUCTION TO ACCOUNTING Cont.Important accounting terms Cont.:

Term ExplanationCapital Assets that the owner(s) contribute to start the business

Income An increase in equity during an accounting period

Expense A decrease in equity during an accounting period

Inventory Items that a business buys (at a cost) with the purpose of selling it to customers (at a profit)

Profit When income is more than your expenses

Loss When expenses are more than your income

Selling price The price at which goods will be sold to customers

Cost price The price we pay for goods bought for resale

Transaction An action between two or more people where money is exchanged for another item

INTRODUCTION TO ACCOUNTING Cont.

Three elements of accounting

Assets: A present economic resource, that is controlled by a business entity, resultingfrom a past event. This will result in a probable production of economic benefit.

Non-Current Assets: These are assets that will be used for a period of 12 month orlonger (for example vehicles, equipment, land and buildings etc.)

Current Assets: These are assets that will be used for a period less than 12 months(for example inventory, bank, accounts receivable etc.)

INTRODUCTION TO ACCOUNTING Cont.

Three elements of accounting cont.

Liabilities: A present obligation, resulting from a past even, which relates to thetransfer of an economic resource. This will result in a responsibility that cannot beavoided.

Non-Current Liabilities: These are liabilities that will be paid off over a period of 12months or longer (for example mortgage loan).

Current Liabilities: These are liabilities that will be paid and used for a period lessthan 12 months (for example, accounts payable, bank over draft).

INTRODUCTION TO ACCOUNTING Cont.

Three elements of accounting cont.

Equity: Equity consist of Capital, Income, Expenses and Drawings.

How to calculate Equity:• Equity = Total assets – Total liabilities• Equity = Capital + Income – Expenses – Drawings• Equity = Capital + Net Profit – Drawings• Equity = Capital – Net Loss - Drawings

INTRODUCTION TO ACCOUNTING

The accounting cycle

ACCOUNTING EQUATION

Important accounting terms

Terms Explanation

Accounting equation Assets = Equity + Liabilities

Double entry system When a debit entry is recorded for an account, an equal and opposite credit entry should be recorded

Principle of duality For every debit there is an equal and opposite credit and vice versa

ACCOUNTING EQUATION Cont.Interpreting transactions and understanding debits and credits

DR ASSETS CR

+ -

DR EQUITY CR

- +

DR LIABILITIES CR

- +

DR DRAWINGS CR

+ -

DR EXPENSES CR

+ -

DR CAPITAL CR

- +

DR INCOME CR

- +

ACCOUNTING EQUATION Cont.

List of assets, equity and liabilitiesAssets Equity Liabilities

Accounts receivable Capital Accounts payableBank Drawings Bank overdraftLand and Buildings Income Long-term loansEquipment Expenses Mortgage bondsFurniture and fittings Short term loansInventoryMachinery

VehiclesInvestment

ACCOUNTING EQUATION Cont.

List of income and expensesIncome Expenses

Services rendered AdvertisingSales Cost of salesRent Income PrintingCommission Income Water and electricityInterest Income Salaries and wagesDonations Income Packing material

PetrolTelephoneStationery DepreciationRent expense

THE ACCOUNTING EQUATION TABLE• Identify the two accounts• Classify the accounts (either asset, liability or equity)• What’s happening to the accounts (increase or decrease)

ACCOUNTING EQUATION Cont.Example:1) Started a business with R500 000 as capital contribution.2) Purchased inventory on credit from Variety Wholesalers R13 3003) Cash sales R4 200, cost of sales R2 000.4) Paid the water and electricity account R2 750

Assets = Equity +Date DR + CR - Details DR - CR + Details

1 500 000 Bank 500 000 Capital

2 13 300 Inventory

3 4 200 Bank 4 200 Sales

2 000 Inventory 2 000 Cost of Sales

4 2 750 Bank 2 750 Water and Electricity

LiabilitiesDR - CR + Details

13 300 Creditors

PRACTICE QUESTIONCreative Works is an art shop owned by Miss Tony. The following transactions took place during the month

of June 2021 which is the first month of trading in the book of Creative Works:

• 1 Miss Tony made a capital contribution of R58 000. The contribution consist of R30 000 being the cash portionof her contribution and inventory to the value of R28 000.

• 7 Bought stationery from ABC stationers for R3 800 cash.

• 11 Sold goods to the local public at a flee market for R8 300 cash. (cost price 4 350).

• 15 Bought inventory and equipment on credit for R12 500 and R33 000 respectively from Big Bite Traders.

• 19 Mrs. Arty bought goods from Creative Works on credit R5 200. (cost price R2 325).

• 23 Miss Tony returned half of the stationery bought from ABC stationers on 7 June 2021.

• 25 Paid salaries and wages for the month in cash, R13 000

• 30 Paid the following cash:• Water and electricity R3 800• Rent R4 500• Bank charges R 728

RequiredShow how each transaction above affect the accounting equation, A = OE + L.

JOURNALS

Types of journals

• Cash receipts journal• Cash payments journal• Petty cash journal• Sales journal • Sales returns journal• Purchases journal• Purchases returns journal• General journal

LABOUR

Labour classification

Labour can be classified as either direct or indirect and is the physical and/or mental effortused to manufacture a product or provide a service.

Direct labour: the labour cost for work directly linked to providing a service and/ormanufacturing a specific product (such as production crew, assembly line workers, paintersetc.)

Indirect labour: the labour cost that is not directly linked to providing a service and/ormanufacturing of a specific product (such as accountant, secretary, marketing team etc.)

LABOUR Cont.Remuneration methods

Salary: a fixed amount paid to employees on a monthly basis. (managers, administrative workers and supervisors)

Wages: a specific rate paid to employees based on the number of hours spent at workWages = hours worked x rate per hour

Piecework pay: employees are paid based on the actual number of units that they produce.

Piecework pay = number of units produced x rate per unit

LABOUR Cont.Basic, Gross and Net salary and wages

Basic: The normal salary/wages that anemployee earns (before overtime andcompany allowances).

Gross: Includes the basic salary/wages,overtime, bonuses and any other companyallowances.

Net : Employees salary/wages after alldeductions (take home pay).

LABOUR Cont.

Deductions

Pension fund: The purpose of a pension fund is to provide an investment for an employee’s retirement. An employer is allowed to deduct 7.5% from an employee’s basic salary/wages and pay it over to the specific pension fund. Only permanent employees contribute to a pension fund.

Pay as you earn (PAYE): Is the personal tax that employees pay to the South African Revenue Services (SARS). PAYE is calculated as a percentage of taxable income.

Taxable income = Gross wages – Pension fund contribution

LABOUR Cont.

Deductions cont.

Unemployment Insurance Fund (UIF): UIF protects workers who become unemployed. Employers are entitled to deduct 1% of an employees basic salary/wages and pay it over to the fund. UIF has been established to provide short-term relief to workers when they become unemployed or are unable to work as a result of prolonged illness or being on maternity leave. The general rule is that a person is not entitled to UIF benefits if he/she resigns from his/her job.

Medical aid: The contribution made to a medical aid scheme for healthcare costs such as hospitalisation, treatments and medicine. Employee contribution depends on the medical aid plan chosen and whether or not your employer contributes towards medical aid.

LABOUR Cont.

Net wage calculation R R Basic wages xxx Add: Normal overtime xxx Add: Double overtime xxx Add: Bonus xxx Add: Allowances xxx Gross wage xxx Less: Pension fund (xxx) Taxable income xxx Less: Total deductions (xxx) Pay as you earn (PAYE) xxx Unemployment Insurance Fund (UIF) xxx Medical aid xxx Net wage xxx

LABOUR Cont.Example:Neliswa is an employee at a company that makes traditional handbags to sell to the public. Her normal working week consists of 40 hours, from Monday to Friday at a basic rate of R30 per hour.Hours worked: Monday to Friday = 47 hours; Saturday = 5 hours; Sunday = 5 hours

Normal overtime is calculated at time and a half, while overtime worked on Sundays and public holidays are calculated at double the normal rate per hour.

Contributions to the relevant funds are as follows:• Pension fund at 7.5% of her basic wages• Medical aid amounts to R150 per week of which Neliswa pay 60%• UIF at 1% of her basic wage• The PAYE rate is 18% of taxable income

LABOUR Cont.Solution:

R R Basic wages (40 hrs x R30) 1 200 Add: Normal overtime (12 hrs x 1.5 x R30) 540 Add: Double overtime (5 hrs x 2 x R30) 300 Add: Bonus - Add: Allowances - Gross wage 2 040 Less: Pension fund (R1 200 x 7.5%) (90) Taxable income 1 950 Less: Total deductions (453) Pay as you earn (PAYE) (R1 950 x 18%) 351 Unemployment Insurance Fund (UIF) (R1 200 x 1%) 12 Medical aid (R150 x 60%) 90 Net wage 1 497