Grade 12 Accounting Flashcards

Accounting Teacher’s Manual Grade 12

Introduction

  • This manual is designed to assist teachers and learners in Accounting at the NSSCAS level.
  • It provides information on teaching methods and helps learners understand challenging concepts.
  • The manual aligns with the syllabus and caters to the needs of learners in a democratic society.
  • Topics are separated by Theme and Unit, covering syllabus extracts, notes, explanations, exercises, and mark schemes.
  • Due to the lack of available textbooks, this manual assists teachers in applying the subject content, supplemented by the recommended textbooks used with caution.
  • Teachers should prepare for 40-minute lessons effectively, using theoretical notes and examples.
  • Learners should practice layouts of accounting books and financial statements on A4 pages; financial statements should be prepared in vertical format.
  • Learners should be given a variety of exercises for each topic, and topic tests should follow each topic, focusing on assessment objectives like evaluation and decision-making questions.

THEME 1: BASIC ACCOUNTING SYSTEMS

UNIT 1.1 BASIC PRINCIPLES OF ACCOUNTING FOR SOLE TRADERS
Topic 1.1.1 Double entry system

  • The double-entry system states that every transaction affects two accounts: one is debited, and the other is credited i.e. duality principle.

  • The double-entry system ensures that every financial transaction has equal and opposite effects on the accounting equation.

  • The dual aspect principle states that every financial transaction has two aspects: a debit and a credit.

  • Double-entry rules:

    • ASSETS (A): Increase (+) on the debit side, decrease (-) on the credit side.
    • LIABILITIES (L): Decrease (-) on the debit side, increase (+) on the credit side.
    • OWNER’S EQUITY (OE): Decrease (-) on the debit side (Drawings), increase (+) on the credit side (Capital).
    • INCOME: Decrease (-) on the debit side, increase (+) on the credit side.
    • EXPENSES: Increase (+) on the debit side, decrease (-) on the credit side.

  • The accounting equation is: Assets = Owner’s Equity + Liabilities.

  • The double-entry system maintains the accounting equation in balance by recording each transaction in at least two accounts.

    • Every transaction must have two entries: a debit and a credit.
    • Debits must always equal credits.
    • Debits are recorded on the left side, while credits are recorded on the right side.
    • Assets, expenses, and drawings increase with debits and decrease with credits.
    • Liabilities, incomes, and capital increase with credits and decrease with debits.
Topic 1.1.2 The ledgers
  • Ledger accounts are the foundation of the double-entry system, using data from books of first entry.
  • Ledgers are divided into the general ledger, sales ledger, and purchases ledger.
  • Ledgers track financial transactions, including income, expenses, assets, and liabilities.
  • Division of ledger:
    • The general ledger:
      • Personal accounts of credit customers (trade receivables)
      • Personal accounts of credit suppliers (trade payables)
      • Other assets & liabilities
      • Owner’s Equity (capital & drawings)
      • Other expense and Income accounts
  • Ledgers are used to prepare the trial balance and financial statements.
  • T-account format includes Date, Details, Folio, and Amount columns.
  • Three-column format includes Date, Details, Folio, Debit, Credit, and Balance columns.
  • Balancing is done by calculating the difference between debit and credit sides.
  • The trial balance is a list of all accounts with their debit and credit balances, used to check the accuracy of ledger entries.
  • Debit balances: Assets, Drawings, Expenses
  • Credit balances: Capital, Liabilities, Income
Topic 1.1.3 Financial statements
  • The income statement and statement of financial position are key financial statements for sole traders.
  • Format of income statement includes Revenue, Cost of Sales, Gross Profit, Other Income, Other Expenses, and Profit for the year.
  • Statement of Financial Position includes Non-Current Assets, Current Assets, Owner’s Equity, Non-current Liabilities, and Current Liabilities.
  • NSSCAS vs NSSCO Financial Statements:
    • Income Statement: Same format and terminology for both.
    • Statement of Financial Position:
    • NSSCO: Two sections: capital employed and employment of capital, Calculation of working capital by subtracting current liabilities from current assets.
    • NSSCAS: No headings capital employed and employment of capital but show total assets (Non-current and current) and total equities and total liabilities (Non-current and current), No calculation of working capital
Unit 1.2 Accounting principles
  • Accounting principles are essential for preparing financial statements.
  • Key principles include business entity, accrual/matching, consistency, dual aspect, going concern, historical cost, materiality, money measurement, prudence, and realization.
  • Business entity Principle: The business and its owner are separate entities.
  • Accrual/matching principle: Income and expenses are recognized when they are related to in the accounting year rather than on a cash basis.
  • Consistency principle: The same accounting methods should be used from one period to the next.
  • Dual aspect principle: Every transaction has a double effect and is recorded twice.
  • Going concern principle: A business is seen as continuing for the foreseeable future.
  • Historical cost principle: A non-current asset is recorded at its original cost.
  • Materiality principle: Only items impacting decision-making are included in financial statements.
  • Money measurement principle: Only transactions in monetary terms are recorded.
  • Prudence principle: Revenues and profits should not be overstated, and losses and expenses should not be understated.
  • Realization principle: Revenue is recognized when the legal title of goods transfers from seller to buyer.

THEME 2: PREPARATION AND PRINCIPLES OF FINANCIAL STATEMENTS

Unit 2.1 Adjustments for financial statements
Topic 2.1.1 Adjustments for income and expenses
  • Adjustments are made to reflect true figures for a specific financial year, following the matching/accrual and prudence principles.
  • Accrued income: Income earned but not yet received.
  • Income received in advance: Income received but not yet earned.
  • Accrued expenses: Expenses incurred but not yet paid.
  • Prepaid expenses: Expenses paid but not yet incurred.
  • Adjustments involve adding outstanding amounts and subtracting prepayments/advances.
  • General ledger entries include adjustments for accrued, prepaid, and advance amounts.
  • The total of the balances appearing in the statement of financial position is other receivables and other payables.
  • Financial statements reflect adjustments by adding amounts accrued and subtracting prepaid/advance amounts; balances appear under Other Receivables or Other Payables.
Topic 2.1.2 Depreciation and disposal of non-current assets
  • Depreciation: An estimate of the loss in value of a non-current asset over its expected working life, recorded as an expense.
  • Provision for depreciation: The accumulated amount of depreciation written off on a non-current asset, reducing its book value.
  • Causes of depreciation include physical deterioration, economic reasons (obsolescence), passage of time, and depletion.
  • Depreciation ensures profits are not overstated (prudence) and matches value loss with benefits gained (matching).
  • Capital receipts: Money from the sale of non-current assets.
  • Revenue receipts: Money from sales of goods and other income.
  • Capital expenditure: Money spent to buy or add value to non-current assets.
  • Revenue expenditure: Money spent on day-to-day running expenses.
  • Depreciation methods:
    • Straight-line: Same depreciation each year, calculated on cost price.
    • Reducing balance: Different depreciation each year, calculated on book value; high in the early years.
    • Revaluation: Depreciation is the difference between the beginning and end values.
Topic 2.1.3 Bad debts and provision for doubtful debts
  • Bad debts: Uncollectible amounts owed to a business, recognized as expenses.
  • Provision for doubtful debts: An estimated amount set aside to cover potential future bad debts.
  • Bad debts recovered: Previously written-off debts that are subsequently collected.
  • Recording bad debts and provisions ensures accurate financial reporting and adheres to the matching principle.
  • The prudence principle ensures profits are not overstated and trade receivables are shown at a realistic value.
  • The provision of doubtful debts is subtracted from that of trade receivables in the Statement of financial position

THEME 3: COST AND MANAGEMENT ACCOUNTING

Unit 5.1. Cost structures
Topic 5.1.1 Material and labour costs
  • Direct materials: Materials directly used in production.
  • Indirect materials: Materials not directly related to production.
  • Direct labor: Labour involved in the hands-on production of goods.
  • Indirect labor: Labour which does directly linked to the manufacturing of the product.
  • Inventory valuation methods include FIFO (First In, First Out) and AVCO (Average Cost).
  • Inventory is valued at the lower of cost/NRV.
  • FIFO assumes oldest inventory is sold first; AVCO uses a weighted average cost.
Topic 5.1.2 Overheads - Absorption costing
  • Absorption costing: Assigns a fair proportion of overheads to each unit of production.
  • Overhead allocation and apportionment involve dividing costs between production and service departments.
  • Absorption overhead rates are calculated as:
    • Direct labour hour rate
    • Machine hour rate
    • Unit cost rate
  • Over-absorption: Overheads absorbed are more than actual overheads incurred.
  • Under-absorption: Overheads absorbed are less than actual overheads incurred.
Topic 5.1.2 Overheads - Marginal costing
  • Marginal costing: Focuses on the extra cost of producing one additional item.
  • Contribution = Selling price per unit - variable cost.
  • Break-even point: Where neither profit nor loss is made.
  • Break-even point = Fixed cost / (Selling price per unit - Variable cost)
  • Contribution to sales ratio: (Selling price per unit - Variable cost) / Sales.
  • Marginal costing helps in decision-making, pricing, special orders, make-or-buy scenarios, and continuation or discontinuation of production.

THEME 4: INTERPRETATION OF FINANCIAL STATEMENTS

Unit 4.1 Ratios and interpretation
Topic 4.1.1 Ratios
  • Ratios help compare companies, industries, or financial periods.
  • They measure a business’s performance in generating profits and managing resources.
  • Key ratio categories:
    • Profitability (e.g., markup, gross margin, profit margin, return on capital employed).
    • Liquidity (e.g., current ratio, quick ratio).
    • Efficiency (e.g., inventory turnover, receivables collection period, payables payment period).
    • Investment (e.g., earnings per share, price earnings, dividends per share).
Topic 4.1.2 Interpretation of financial statements
  • Accounting ratios inform owners, managers, creditors, and investors about a business’s performance, and progress of the business.
  • Ratios aid in better decisionmaking and assess their financial positions
  • Limitations of accounting ratios need to be consider like other financial and non financial figures before conclusions and recommendations are followed.