Learning unit 1

FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS

LEARNING UNIT

1 THE NATURE AND FUNCTION OF ACCOUNTING

Contents
1.1 Introduction ................................................................................................................................3
1.2 What is accounting? ...................................................................................................................3
1.3 The nature of accounting ...........................................................................................................4
1.4 Forms of business ownership and users of financial statements ...............................................4
1.5 Internal controls .........................................................................................................................5
1.5.1 Built-in control measures ...............................................................................................6
1.5.2 Internal control systems/procedures ..............................................................................6
1.6 Financial frameworks .................................................................................................................7
1.6.1 The Conceptual Framework ..........................................................................................7
1.6.2 Accounting standards and statements...........................................................................8
1.6.3 Accounting policies ........................................................................................................8
1.6.4 Fundamental theoretical principles that all general financial statements must be based
on in terms of the IAS ....................................................................................................9
1.7 Financial statements ................................................................................................................11
1.7.1 The statement of financial position ..............................................................................12
1.7.2 The statement of profit or loss and other comprehensive income................................14
1.8 The double-entry principle .......................................................................................................15
1.9 What is a contra account .........................................................................................................16
1.10 Activities ...................................................................................................................................17
1.10.1 Find the accounting terms ............................................................................................17
1.10.2 Solution .........................................................................................................................18
1.11 Accounting crossword puzzle...................................................................................................19
1.11.1 Crossword puzzle ........................................................................................................19
1.11.2 Crossword clues ..........................................................................................................19
1.11.3 Solution ......................................................................................................................21
1.12 Flashcards ...............................................................................................................................21

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The following concept cards are available for this learning unit:

CONCEPT o What is accounting?

CARDS
o The nature of accounting
o Forms of business ownership and users of financial statements
o Fundamental theoretical principles in term s of IAS

Learning outcomes

After working through this learning unit, you should be able to:
• define what accounting is
• discuss the nature of accounting
• explain the different users of financial information and their needs
• explain the difference between financial and management accounting
• describe internal controls
• discuss the built-in control measures in a law practice
• discuss the internal control system and procedures applicable to a law practice
• explain acronyms IFRS, IASB, FRSC and SAICA
• name the financial frameworks that are regarded as acceptable in terms of the Rules
of the Attorneys’ Profession
• describe the concept “Conceptual Framework”
• describe the objectives of creating accounting standards and statements
• define what accounting policies are
• discuss fundamental theoretical principles that all general financial statement must
be based on in terms of the IAS
• discuss each of the following terms relating to underlying assumptions, fundamental
qualitative characteristics, enhancing qualitative characteristics and the cost versus
the benefit of financial reporting per IAS1
• going concern
• accrual basis of accounting
• relevance
• materiality and nature
• faithful representation
• completeness, neutrality and free from error
• comparability, verifiability, timeliness and understandability

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Acronyms, Rules of the Attorney’s Profession and Accounting Standard

IFRS International Financial Reporting Standards

IASB International Accounting Standards Board
FRSC Financial Reporting Standards Council (South African Body)
SAICA South African Institute of Chartered Accountants
The Rules The South African Legal Practice Council Rules made under the authority of
sections 95 (1), 95 (3) and 109 (2) of the Legal Practice Act, 28 of 2014 (as
amended)
IAS 1 Presentation of Financial Statements

1.1 Introduction
Accounting is the bookkeeping method, which generates a financial record of all the business
transactions entered into by a business (entity). An accounting system generates the financial
records of the business and produces a summary of the income and expenses (statement of
profit or loss) and assets and liabilities (statement of financial position). Therefore, the
accounting system generates financial information in the format of financial statements.

As the physical and digital worlds have integrated over time, today's accounting information
systems are typically computer-based methods with special accounting software. Whether the
accounting information is computerised or written up by hand the principles of the debits,
credits and the double-entry system are still relevant and form the basis for the accounting
system. This module deals with the financial accounting concepts and principles that are
relevant to law practitioners as well as the accounting and recording of transactions that are
specific to the practice of a law practitioner.

1.2 What is accounting?

Accounting is a process consisting of the following three activities:

The first activity involves identifying those events that are evidence of economic activity
(transactions) relevant to the particular business or entity.

and
The second activity relates to the recording of the monetary value of the economic events
(transactions) in order to provide a permanent history of the financial activities of the business.
Recording involves keeping a chronological diary of measured events in an orderly and systematic
fashion. This means that economic events are also classified and summarised.

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and
The third activity encompasses the communication of the recorded information to interested users.
The information is communicated through the preparation and distribution of accounting reports,
the most common of which are known as financial statements.

1.3 The nature of accounting

Accounting is a means of communication used to convey Accounting uses words and figures to
specialised information about the finances of an entity. convey financial information to the users
of such information. These words and
If the recipient of this specialised information (the user of figures are known as the
financial information) does not understand it, the  concepts,
information, which is conveyed, will have no value.  principles, and
 procedures of accounting.

This knowledge will ultimately result in an understanding of the message contained in financial
statements

Every person involved in an entity uses financial

information to a greater or lesser extent.
Accounting is a ‘‘language’’ used to
Financial resources are limited, or ‘‘scarce’’, and if convey financial information to
we are to spend them, we must plan properly. interested parties, i.e. users of the
Each of us also needs to know something about information.
accounting to manage our personal financial affairs.
Knowledge of accounting is thus also useful in this area.

1.4 Forms of business ownership and users of financial statements

The four main forms of ownership are:

 sole traders,
 partnerships,
 close corporations
 companies

Many users, who analyse the information for various decision-making purpose, require
financial information.
The following are the most common users:
 Investors
 Creditors
 Employees
 Government
 Management

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Users of financial information –

Are divided into the following two categories:
 Internal users, such as management or employees
 External users, such as investors, creditors, or government

The fields of accounting –

 Financial accounting is concerned with the provision of financial information to mainly
external parties,
 Management accounting is concerned with the provision of financial information to people
within the entity.

Financial Accounting is concerned with the recording of transactions and the preparation of
the financial statements for the entity as a whole. International Financial Reporting Standards
(IFRS) govern financial accounting reporting, which consists of adhering to external
international standards. These standards ensure the comparability of financial statements
between entities and countries.

Management Accounting provides financial information for specific purposes. Managers use
this information in their decision-making, which leads to the attainment of the objectives of the
entity. Without this financial information, it would be difficult for management to manage the
business effectively.

In this module, we will be concentrating on financial accounting.

1.5 Internal controls

Internal controls are the mechanisms, rules, and procedures put in place by an entity to ensure
the integrity of financial and accounting information, promote accountability and prevent fraud.
Internal control further ensures that the financial information provided by such a system is
complete, accurate and reliable, that the assets of the entity are protected against loss or fraud,
that management policies are implemented and that all parts of the system function properly.
The success of any accounting system depends on a good system of internal control. An
attorney’s practice is particularly dependent on such a system for its continued existence.

Internal control systems must be designed to suit the type of entity concerned, for example, a
sole proprietor, a partnership, or a personal liability company.

Rules 54.14.7.1 (54.14.7.1.1 to 54.14.7.1.4) of the South African Legal Practice Council Rules
(hereafter referred to as the Rules) require that internal controls are implemented to ensure
compliance with the Rules and to ensure that trust funds are safeguarded.

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1.5.1 Built-in control measures

Built-in control measures include:

 numbered source documents
 dates on source documents
 control accounts (refer to section 4.6 in learning unit 4) in respect of clients (also known as
trade receivables) and trust creditors (also known as trust payables)
 separate bank accounts (business and trust bank accounts)
 the keeping of petty cash according to the imprest 1 system
 the accurate analysis of all income and expenses
 a monthly trial balance which ensures that all accounts are properly balanced
 the reconciliation of bank accounts with bank statements
 the reconciliation of business creditors (also known as trade payables) with creditor
statements
 a non-current asset register.

1.5.2 Internal control systems/procedures

Internal control procedures include separation of duties, access controls, physical audits,
standardised documentation, trial balances, periodic reconciliations, and approval authority.

Examples of internal control procedures are:

 efficient banking of all cash received
 all payments must be made by EFTs (electronic fund transfers)
 proper authorisation for all transactions
 proper demarcation (limits) of authorisation
 the separation of duties (e.g. the person who issues receipts may not record them in the
relevant cash receipts journals)
 an internal checking system (e.g. at least two staff members to check important
transactions; rotation of staff etc.)
 the keeping of registers for receipt books, invoice/debit notebooks and credit notebooks
 the keeping of unused receipt books, invoice/debit notebooks and a credit note
 the review of receipts against deposits
 the initialling of changes and receipts
 cash to be banked regularly
 only authorised signatories are allowed to sign on behalf of the entity
 no cash to be issued.

1
The imprest system is a financial accounting method for paying out and subsequently replenishing a fund
such as petty cash. At any point in time the cash on hand plus the value of the petty cash vouchers for
expenses paid should be equal to the original fixed imprest petty cash amount.
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1.6 Financial frameworks

Rule 54.6 requires that a law firm shall keep in the official language of the Republic such
accounting records, which record both business account transactions and trust account
transactions. The Rules also require the preparation of financial statements, which reflect fairly
the state of affairs and business of the firm and explain the transactions and financial position
of the firm. The financial statements must also comply with an acceptable financial framework
as applied in South Africa.

The financial frameworks that are acceptable in terms of the Rules are:
 the International Financial Reporting Standards (known as “IFRS”), and
 the International Financial Reporting Standards for Small and Medium Entities (known as
“IFRS for SME’s”)
The International Accounting Standards Board (IASB) issues these frameworks from time to
time.

1.6.1 The Conceptual Framework

Accounting, as a specialised medium of communication (refer to 1.3 above), has its own
specific language (language of business) or jargon. If each business were to prepare financial
statements and reports according to its own accounting rules and its own interpretation of
accounting theory and principles, there would be chaos in the world of economics and
business.

The conceptual framework is a group of interrelated objectives and theoretical principles that
serve as a frame of reference for financial accounting and more specifically for general
purpose financial reporting. The objective of the conceptual framework is to provide
information that is useful to potential and existing investors, lenders, and other creditors.

All general-purpose financial statements must have the same objectives and must be based
on the same fundamental theoretical principles. The objective of general-purpose 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. These decisions involve buying, selling, or holding equity, debt instruments, and
providing or settling loans and other forms of credit. Potential and existing investors are
interested in the returns they expect, while creditors and other lenders are interested in
principal repayments and interest payments they expect.

The objective of creating standardised accounting rules, called accounting standards, for
particular issues (e.g. for the treatment of taxation in financial statements, etc.) is to limit the
variety of available accounting practices and the elimination of undesirable alternatives.

The accounting standards are not always rigid rules. Some standards allow more than one
desirable alternative for example inventory (refer to section 3.2 in learning unit 3) and
depreciation (refer to section 3.3 in learning unit 3).

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1.6.2 Accounting standards and statements

In South Africa, the Financial Reporting Standards Council 2 (FRSC) plays an important role in
the development of IFRS. The standardised accounting rules of the International Financial
Reporting Standards 3 (IFRS) and the International Accounting Standards 4 (IAS) are the
documented generally accepted accounting standards and practices as prepared by the
International Accounting Standards Board 5 (IASB), approved by the FRSC for use in South
Africa and thereafter issued by the South African Institute of Chartered Accountants 6 (SAICA).

The objective of creating accounting standards for particular issues (e.g. for the treatment of
interest paid in financial statements), is to limit the variety of available accounting practices,
but without striving for strict uniformity or creating a set of rigid rules for all circumstances. The
ultimate aim of accounting standards is to encourage widespread use of particular standards
in financial reporting and to eliminate undesirable alternatives.

1.6.3 Accounting policies

Transactions of a repetitive nature frequently occur, and the requirement of consistency means
that an entity must establish an accounting policy, which determines how such transactions
will be treated.

LBL
An accounting policy is thus a set of decisions about how the entity See
will treat the same type of transactions in order to ensure consistent FAC1503
Glossary
performance.

In the case of transactions that can be dealt with in various ways, it is necessary that the entity
discloses the accounting policy it adopted in its notes to the financial statements.
For example, an entity has to indicate what basis it has used to deal with the depreciation of
property, plant, and equipment.

2
https://www.thedtic.gov.za/legislation/legislation-and-business-regulation/statutory-committees/financial-reporting-standards-council/
3
https://www.ifrs.org/
4
https://www.investopedia.com/terms/i/ias.asp
5
https://www.ifrs.org/groups/international-accounting-standards-board/
6
https://www.saica.org.za/

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1.6.4 Fundamental theoretical principles that all general financial statements must be
based on in terms of the IAS

(a) Underlying assumptions

In accordance with the conceptual framework for financial reporting and the framework for
the preparation and presentation of financial statements issued by the IASB, the financial
statements are prepared on the accrual basis and based on the assumption that the
business is a going concern.

(i) Going concern (ii) Accrual basis

A business is a going concern when it will The effect of transactions and events
continue to trade in the foreseeable future on a business’s resources must be
and is not likely to cease trading imminently included in the periods in which those
and have its assets liquidated (sold off). The transactions and events occurred and
elements of the financial statements, i.e. not when the cash flow took place.
assets, liabilities, owners’ equity, income, Expenses incurred to produce income
and expenses. Assets, liabilities, and must be included in the same financial
owners’ equity will be included in the financial period, even if they occurred in
statements at their original cost less different periods. This is referred to as
depreciation/impairment and not at the “matching of costs with revenue”.
liquidation values (forced selling values).
Income and expenses will, however, be
included in the financial statements at their
actual costs.

(b) Fundamental qualitative characteristics

The information in the financial statements must be useful to the users of the statements.
To be useful, the information should be relevant and faithfully presented.

(i) Relevance (ii) Faithful representation

Only relevant information needs to be Financial information must faithfully
disclosed separately in the financial represent transactions and other
statements. The relevance of the information events. The following characteristics
is based on the nature and materiality of the will ensure faithful representation:
information. Completeness, neutrality and free
from error.

Materiality Nature
Information that is significant enough In certain instances, the nature of the
is disclosed separately. Minor items information alone is sufficient to determine its
are included in the financial relevance, for example, where information,

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statements but are not separately irrespective of its materiality, can affect the
disclosed. decisions of the user.

Completeness
All the information that a user needs in order to be able to understand the
economic events and transactions should be included in the financial
statements.

Neutrality
Reliable information should be neutral (without bias) in that it should not
present information in a manner that will achieve a predetermined result.

Free from error

The faithful representation of information does not imply that the information is
accurate. It implies, however, that the event or transaction is free from error
and that the process followed to provide the reported information was without
errors.

(c) Enhancing qualitative characteristics

The enhancing qualitative characteristics improve decision-usefulness of financial
reports. The conceptual framework also recognises that the enhancing qualitative
characteristics cannot make information useful if that same information is irrelevant or
not faithfully represented.

Comparability
Information should be comparable between different entities or time periods.

Verifiability
Independent and knowledgeable observers are able to verify the information.

Timeliness
Information is available in time to influence the decisions of users.

Understandability
Information shall be classified, presented clearly and concisely.

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(d) The cost versus the benefit of financial reporting

The cost of providing financial reporting must be justified by the benefits of reporting that information.

1.7 Financial statements

The objective of financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in
making economic decisions. To meet that objective, financial statements provide information
about an entity's:
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as owners)
 cash flows. [IAS 1.9]

In terms of IFRS, a complete set of financial statements of an entity should comprise the
following:

which reflects all assets, liabilities and equity of

a statement of financial position
an entity at a particular date

which reflects the financial performance of the

a statement of profit or loss and
entity, indicating a net profit or loss for a specific
other comprehensive income
period

which reflects the movement in:

(a) the capital and current accounts of the
a statement of changes in equity partners in a partnership; or
(b) the shareholding and retained profits or losses
of a company for a specific period

which reflects the actual cash movements in and

a statement of cash flows
out of the entity for a specific period

which reflect the accounting policy of the entity

and expand on the line items in the statement of
notes to the financial statements
financial position and the statement of profit or
loss and other comprehensive income

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Before we can discuss the basics of accounting, we need to know what the statement of
financial position and the statement of profit or loss and other comprehensive income consist
of.
In terms of the Conceptual Framework, the information that must be used in the preparation
of financial statements is grouped into elements according to their economic characteristics,
which make up the financial statements. These elements are grouped under two headings,
namely, the elements that pertain to the financial position in the statement of financial position
and the elements that pertain to the financial performance in the statement of profit or loss
and other comprehensive income.

Statement of Statement of
financial Statement of financial
position at the financial Contributions position at the
beginning of performance by and end of the
the period distributions period
to equity
Assets minus Income holders Assets minus
liabilities minus liabilities
equal equity expenses equal equity

1.7.1 The statement of financial position

The statement of financial position provides information about the following:

 The economic resources available to the entity to generate future benefits.

 The financial structure of the entity with emphasis on own and borrowed capital, which
may also be used to predict future borrowing needs.
 The liquidity position of the entity. Liquidity is an entity’s potential ability to pay its short-
term debts. In other words, it is the availability of cash and other items, which can easily
be converted into cash to pay short term debt. This information may also be used to
predict the availability of cash, after the settling of debts for the same period.
 The solvency of the entity’s position. Solvency refers to the extent to which an entity’s
assets exceed its liabilities. It may also be used to predict the availability of cash over
longer periods to meet debts as they fall due.
 The elements that are directly related to the financial position are assets, liabilities and
equity.

(a) Assets
Assets are defined as a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce economic benefits.

The asset definition identifies all cash accounts as assets because the economic benefits have
already flowed to the entity. In other words, bank accounts, savings accounts, petty cash
accounts and cash float accounts are classified under assets if the balances are favourable.

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There are also items, which are expected to result in future economic benefits flowing to the
entity i.e. trade receivables (also called client accounts). Debtors are individuals/firms, which
owe money to the entity. The money they owe is expected to flow to the entity in future (a
potential inflow) when the debtors pay their accounts.

All items that an entity has control over or can be resold will be regarded as assets. These
include inventory, vehicles, property, equipment, furniture, etc. Stationery and other
consumables are meant to be consumed by the entity within one year and are therefore treated
as expenses during the year.

At year-end, if there are material consumables and stationery on hand, it is considered to be

inventory, and a stocktake will be done to determine a value for the statement of financial
position.

(b) Liabilities
Liabilities are debts. If you have a liability in financial terms, it means that you owe money to
someone or some entity. A liability is defined as a present obligation of the entity to transfer
an economic resource as a result of past events. Examples of liabilities are mortgages, loans
from owners, loans from banks and other external parties, trade payables (business creditors)
and bank overdrafts.

(c) Owners’ equity

Equity is defined as the residual interest in the assets of the entity after deducting all its
liabilities. Equity represents the interest of the owners in the net assets of an entity, which
means the part of the assets against which there is no claim from other parties.

Equity differs from liabilities in that liabilities are obligations which must be settled out of the
assets of the entity, whilst equity is not an obligation which has to be settled. Equity is not a
claim against assets; it is what is left over after all liabilities are deducted from assets.

There are two methods by which the owner’s equity in an entity can be calculated.

 The first method is to make use of the basic accounting equation. If you have the total
value of the assets of the entity, as well as the total value of the liabilities of the entity,
then you can calculate the owner’s equity by subtracting the liabilities from the assets.
The figure you arrive at should indicate how much money the owner(s) may withdraw
from the entity if the business activities were to be terminated on that day.

The basic accounting equation can also be expressed as follows:

Equity = Assets ― Liabilities Notes

– or + – or + – or + A decrease in an account is a – and

an increase in an account is shown
as a +

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Please note: Refer to Learning unit 2.5 for a discussion of the accounting equation and
illustrated examples.
 The second method that can be applied to calculate the value of the owner’s equity in
the entity is to do the following calculation:
• In the case of a sole proprietor or a partnership:
Capital contributions by the owner/partners, plus profits and minus losses (past and
current) of the entity, minus drawings by the owner/partners.
• In the case of a company:
Issued share capital, plus accumulated reserves, plus retained earnings
(accumulated profits minus accumulated losses).

1.7.2 The statement of profit or loss and other comprehensive income

Profit or losses is used as a measure of performance or as the basis for other measures such
as return on investments or earnings per share. The elements that are directly related to the
financial performance are income and expenses. Profit or losses for the year is calculated by
subtracting the expenses from the income of an entity. [Profit/Losses = Income less
expenses]

(a) Income

Income is defined as increases in assets or decreases in liabilities that result in increases in

equity, other than those relating to contributions from holders of equity claims. The entity earns
income through its normal everyday business operations.

For instance, in the case of the sale of goods, the inflow of assets will be the money banked
in the bank account and the increase in profit is an increase in equity. Income consists of
revenue and gains. Revenue arises from the ordinary business activities of the entity and
examples are sales, fees, interest, dividends and rental income. Gains may or may not arise
from ordinary business activities of the entity. An example of a gain that arises from the
ordinary business activities is a profit on the sale of depreciable non-current assets such as
machinery. Examples of gains that do not arise from ordinary business activities are profit on
the sale of office buildings and profit on the sale of non-current assets.

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Revenue and gains

Revenue and gains arising from ordinary Gains not arising from ordinary
business activities business activities
 sales,  profit on the sale of office buildings,
 fees, and
 interest received,  profit on the sale of non-current
 dividends, assets.
 rental income
 profit on the sale of depreciable non-
current assets such as machinery

(b) Expenses
Expenses are defined as decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of equity claims.
Expenses are costs incurred by the business in order to run the business for the financial
accounting period.

Expenses include both losses and costs that arise in the course of the ordinary activities of the
entity. These are known as operating expenses, which are related to the entity’s primary
functions. Examples of operating expenses include the cost of goods sold, administrative fees,
office supplies, salaries and wages and rent. These expenses are incurred through the entity’s
routine, day-to-day operations.

On the other hand, expenses that do not arise from the entity’s regular business activities are
referred to as non-operating expenses. These are recorded separately from operating
expenses in accounting to help determine the earnings from core activities. Non-operating
expenses are not directly related to the main operations and occur outside of daily business
activities. Examples of non-operating expenses include interest charges, borrowing costs,
restructuring, and reorganizing, and obsolete inventory.

1.8 The double-entry principle

In accounting, an account is a record of an entity’s financial transactions, and a place to store

that information. Accounts are part of an entity’s financial ledger or balance sheet.

An account consists of a left-hand side and a right-hand side and is presented in a “T” format.

The left-hand side is referred to as the debit side and the right-hand side is referred to as the
credit side. The name of the “T-account” is written across the centre at the beginning of each
account (i.e. Motor vehicles).

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The double-entry principle states that for every debit entry into an account, there must be a
corresponding credit entry into another account, with each entry referring to its corresponding
entry in the other account. (https://www.youtube.com/watch?v=j71Kmxv7smk)

The reality for a financial accounting student is that the double-entry rules are not a concept
to understand – These are rules that must be learned.

When analysing a transaction, always ask the following four questions:

1. Which two accounts are involved in the transaction?

2. Do the accounts form part of assets, equity and/or liabilities?
3. Did the assets, equity and/or liabilities increase or decrease?
4. Which one (or more) of the accounts must be debited and which one (or more) must be
credited?

1.9 What is a contra account

As a general rule, we use the opposite or contra account to describe a transaction. In a

transaction, the contra account is capital. The source of this increase to the bank account
is capital - the owner investing in the business. If we were to describe each transaction
occurring within the T-account above as "bank," it would not adequately describe why our bank
account increased or decreased. All transactions would just be listed as "bank."

Using the opposite or contra account gives us a much better description of the transaction.

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1.10 Activities

1.10.1 Find the accounting terms

T F R T L M A T E R I A L I T Y
C D E P R E C I A T I O N Q R I
X E E U S A D P R O F I T Z J M
G B R B H C N G E P U N U Q W L
C I P M T C O S E U R C E C K I
R T R Q A O G H A R N O F A C A
W M O E M U R Y P C I M V I O B
I H P X H N R S D H T E F N Z I
D Z E P F T D R L A U I A V B L
G C R E D I T O R S R Q O E A I
M Z T N G N Z R T E E W C N N T
O K Y S T G J A S S E T R T K Y
K J F E V F V F U H T U E O F H
N Y F S E Q U I T Y O S D R M A
E Q U I P M E N T J A D I Y O O
C Q V D O U B L E - E N T R Y A

Accounting Property Creditors Expenses

Debit Equipment Journal Profit
Credit Furniture Ledger Materiality
Transaction Debtors Depreciation Purchases
Income Inventory Equity Bank
Asset VAT Liability Double-entry

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1.10.2 Solution

Notes

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1.11 Accounting crossword puzzle

1.11.1 Crossword puzzle

13 4

5 15

6 7

8 9

10

11 16

17

12

14

18

1.11.2 Crossword clues

Across Down
2. The residual interest in the assets of the 1. A complete collection of all the accounts and
entity after deducting all its liabilities. (6) transactions of a company. (6)
5. Any items that are bought with the 3. A present obligation of the entity to transfer
intention of selling the item to a customer. an economic resource as a result of past
(9) events. (8)
10. An instructed attorney acting on an 4. A qualitative characteristic of accounting
instructing attorney’s behalf. (13) information that makes a difference in
11. An accounting entry that either increases decision-making. (9)
an asset or expense account or 6. What money must be deposited in a
decreases a liability or equity account. (5) separate banking account? (5)
12. A tax that governments impose on income 7. A concept or convention within accounting
generated by businesses and individuals. relating to the importance/significance of an
(6) amount, transaction, or discrepancy. (11)
14. All transactions with credit suppliers will 8. A set of rules or procedures, which are
be recorded in the ........... ledger. (9) followed by an entity to prepare its financial
15. The acronym for Value Added Tax. (3) statements. (6)

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 Learning unit 1

18. Any items sold to customers in the normal 9. An accounting entry that either increases a
course of business. liability or equity account or decreases an
asset or expense account. (6)
11. All transactions with credit customers will be
recorded in the ......... ledger. (7)
13. Acronym for “Basic Accounting Equation”.
(3)
16. A present economic resource controlled by
the entity because of past events. (5)
17. A .......... is a detailed record of all the
transactions done by a business. (7)

Word Bank

Policy Credit Correspondent Equity Liability

Income Debit VAT Debtors Ledger
Purchases Relevance Creditors Asset Sales
Trust Materiality Journal

Notes

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 Learning unit 1

1.11.3 Solution

1
L
2
E Q U I T Y
D
G 3
L
E B 4
R I
5
P U R C H A S E S 15
V A T
E L B
6
T E 7
M I
R V A L
8
P 9
C U A T I
10
C O R R E S P O N D E N T
L E T C R Y
I D 11
D E B I T 16
A
C I E A S
Y T B L 17
J S
T 12
I N C O M E
O T U T
14
C R E D I T O R S Y R
S N
A
18
S A L E S

1.12 Flashcards

A flashcard is a card containing a small amount of information, i.e. a question or a statement,

with the answer or description on the back. A flashcard can be used as an aid to learn by
increasing your retention of information. (Print out the pages with the flashcards, cut out the
shapes and stick the statement and answer back-to-back. Use the flashcards to test your
knowledge.)

The following flashcards relate to accounting transactions:

(a) Identify how each of the following transactions affects the assets, liabilities or equity of
the business.

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 Learning unit 1

1.
Increase in Assets (Bank)
The owner pays capital into the bank.
Increase in Equity (Capital)

2.
Increase in Assets (Goods purchased)

Goods are purchased on credit terms. Increase in Liabilities

(Trade and other payables)

3.

Assets (Goods purchased) increase and

Goods are purchased for cash. decrease (Bank)

4.

Assets (Bank) increase and

Equipment is sold for cash.
(Equipment) decrease

5.
Decrease in Assets (Bank)
Trade and other payables is Decrease in Liabilities
settled in cash.
(Trade and other payables)

6.
Assets increase (Bank) and decrease
Trade and other receivables is
(Trade and other receivables)
settled in cash.

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 Learning unit 1

7.

The owner takes cash for personal use. Decrease in Equity (Drawings)
Decrease in Assets (Bank)

8.
Decrease in Liabilities
The owner pays a liability of the business
from personal funds. (Trade and other payables)
Increase in Equity (Loan to Owner)

9.
Assets (Equipment) increase and
Equipment is purchased using cash. decrease (Bank)

10.

Decrease in Assets (Bank) and

Employee wages are settled in cash.
Decrease in Equity (Expense - Wages)

11.
Increase in Assets (Supplies) and
Purchased supplies on account. Increase in Liabilities
(Trade and other payables)

12.

Increase in Assets (Bank) and

Received cash for performing a service.
Increase in Equity (Services rendered)

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 Learning unit 1

(b) What are the following general ledger accounts used for?

1.

Trade and other receivables Amounts due from customers or clients

2.
Trade and other payables Amounts owed to suppliers for goods
and services purchased

Notes

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