[Music] [Music] how's it going so today we are starting with a brand new topic called financial accounting of a sole trader now remember what is a sole trader sole trader will be a one-man show a one-owner business we can also call it assault proprietor so that is when we have one person running the business and he's normally the owner of that business but let's go and look at the overview of what we are doing today we will look at the core principles today we're going to look at the ethical thing to do when you compile your accounting records we're going to look at the internal control so internal control how do you control your assets and especially your trading stock and money with in a sole trader we're going to look at the bookkeeping of the sole trader today and we're going to look at the accounting equation so let's start with the terminology you need to know what terminology so i'm going to give you about three minutes to go through these phrases and hopefully you get all the correct answers to them firstly what is a transaction so explain a transaction to your friend next door again then the car principles can you still name the six crore principles we've done see if you can name all six and maybe explain one to a friend then give me a few source documents what source documents do we have and then very easy distinguish between receipts and payments so three minutes starts now okay guys i hope you got all five of these questions correct let's go and look at the very first one transaction now what is a transaction now firstly know that it's a negotiation it's normally negotiation between two parties and i'll give you an example it's when you walk into the shop you take a product off the shelf you go to the cashier you exchange money for the product and then you leave so therefore that's a transaction another transaction can be you walk into maybe a clothing store you take a nice shirt off the shelf you swap the account card so you're buying it on account so there's again a transaction taking place between you and a second party so that's more or less a transaction let's go and look at the god principles what six car principles do we have the very first one will be your historical cost now remember what does historical cost mean historical cost means whatever i buy especially vehicles and equipment that's your cost price if i pay 2 000 rand for a cell phone what did you pay now and yes it will be 2 000 what would you have paid in three years again maybe 2 000 that's what you've paid and i'm just going to quickly name the other five because we're going to look at all of them in detail we have the matching principle we have the principle of materiality we have the prudence principle the going concern and the business entity so that's more or less what i wanted you had to name all six but explain one to a friend now let's go and look at the source documents now remember a source document is the first place something will be recorded after transaction took place now to give you examples we have a duplicate receipt remember your client came into the shop we tore off the original receipt out of the book we keep the duplicate also a check counter for will be a source document or a bank statement an invoice all of those are first points of recording a transaction so that we'll have millions of these documents and then we will sift through the information and make it easier and more readable to those who need it another one the receipt what is a receipt now the receipt is issued to someone who gave the business money now remember put yourself in the business shoes you are the business when you work in accounting so if you need to receive money so you are the business you can receive in various ways you can receive capital from the owner remember you are the business you receive money from the owner so therefore you receive money you can sell items so if you sell items to your customers you'll receive money another way you can receive money is when your data comes into the shop or even if it does eft online the business will receive money let's look at one more a donation if someone sees that you are a young entrepreneur maybe a family friend can give you a small donation to start off your sole proprietorship now let's look at the last one payments a payment is again a type of transaction that takes place what type of transaction when the business you the business need to pay now you can pay for various reasons again you can pay your water electricity bill you can pay a telephone bill remember all businesses will have people working within them so you'll have to pay wages remember wages will be your weekly payment you can pay salaries monthly insurance and advertising can also be payments you can pay your creditor or you can buy certain things you can buy trading stock or equipment or even vehicles so that was your answer now let's continue with today's lesson now very important terminology and for these six i'm adamant you need to know them you need to go and study them you need to know what will be included under each of these headings now i'm going to quickly ask you to go through them with me but then i want you to write down a few examples of each so let's look at them firstly what is the word assets mean what does liabilities mean what does oneness equity mean within a sole trader capital what does income mean and lastly expenses and drawings so i'm going to give you two minutes to quickly look at them and give me an example of each okay guys i hope you got all the answers remember we covered this in great detail in grade 8 nine so let's go and look at the answers assets are items the business or sole trader will own remember these are belongings belongings to the business now we have two broad categories i'm quickly going to explain it we have the non-current and the current assets now what is non-current non-current means i'm going to use these things for longer than a year like your land and buildings your vehicles your equipment maybe if the business will have an investment they will use it or invest for longer than a year then we get to current assets what current assets do we get now you need to know that current assets are within a year we are going to hopefully sell all our trading stock within a year i don't want to keep milk in my business for longer than a year so hopefully you'll be able to sell it within a year so your inventory or trading stock will be a current asset your debt is controlled you're not going to wait for 10 years for them to come and pay you you have to get that money as soon as possible so if you sell on credit within maybe a month or two you need your money as you can see it's shorter than 12 months and then your cash on hand and remember we'll keep cash in your bank accounts better cash remember petty cash for small payments and then cash flow changing the toll those are all parts of your assets now let's look at liabilities that's complete the opposite of assets liabilities are stuff that i owe so i again either business ow different individuals maybe institutions other companies but again we'll split them in two we'll have your non-current liabilities and your current liabilities very important to distinguish again non-current longer than 12 months so more than a year will have them more than a year and then your current shorter than 12 months we need to pay these liabilities in maybe a month or two or three up to 12 months so let's look at examples your non-current liabilities will be things like a mortgage loan when you bought property you go to the bank you ask for a nice loan and they will give you a mortgage loan a current liability example creditors control when you buy on credits or when you went into a bank overdraft remember you can go and ask the bank for overdraft facility and then you can use it but then if you use it it will be a liability so therefore you'll owe the bank until you've paid it will be a liability now i have owners equity owners equities everything connected to the owner remember you as one-man show you as a sole trader you are going into business to make a profit so that's your very first aim but remember we need to put in money and what do we call that money let's go and see owner's equity will be firstly capital so that's our very first type of an account your capital and mean by capital will be anything the owner gives it can be a vehicle can be equipment it can be cash so any of those forms will be regarded as capital when the business receive it from the owner but let's continue now remember all businesses will need income so income is needed now remember income is the way and the source of generating money so we'll have sales we have current income for rendering services we'll have interest income so there's quite a few incomes we'll deal with during the year and then lastly expenses and drawings and i'm putting them together today remember when the owner takes money it's regarded as a drawing so always keep the owner's transaction separate but then we'll have expenses remember businesses need certain things to operate so we'll have to pay rent we'll have a telephone account we need to pay water electricity our salary owners our wage earners we need all of these things within a business to generate that income and hopefully your income will be more than your expenses and that's when your business is making a profit so i'll see you now after the break okay guys so now that we've looked at all your different type of an accounts within a sole trader we're going to now quickly look at why a sole trader why are we going to look at a business that is owned by an individual one person why will one person want to own a business won't he need help will he have enough cash and then i want to look at your two broad categories of businesses in south africa your form formal businesses and then also your informal businesses so let's quickly look at the breakdown so remember we have two broad categories we have formal businesses and informal businesses so i want to quickly look at informal businesses we can have a sole trader remember that is one owner or we can have a partnership under these informal businesses where we have two to maybe a maximum of 20 owners within a business now what makes it informal business or let's quickly rephrase that question what is an informal business an informal business will be a business that's not registered for maybe that or registered at sars and these businesses normally operate on a cash only way so they only receive cash and they only pay cash there's no credit transactions within these businesses unless the vendor or the walker knows who they're selling to so i already gave you a few examples let's look at a few examples of your informal businesses we'll have hawkers street vendors people that sell at flea markets we can have a lady or a person that bakes cakes and sells it at schools at what workplaces so those are all informal businesses even your tutor at home when someone helps you with your extra accounting at home that will be a tutor and that will also be regarded as an informal business maybe they're not recording all the transactions now these businesses don't need a lot of cash okay so capital is limited we don't need a lot of capital the transactions are not always recorded in a formal manner a formal accounting manner they don't have a lot of equipment maybe just a table and a chair maybe a cash stove so as you can see they're very primitive but how do we know that they are making money and at the end of every day these business owners will see do i have enough cash left over to go home do i have stock left over and with that they can easily tell if they made a profit for the day but now let's go back to your sole trader in a formal way the formal businesses let's look at them firstly in grade 10 we're going to look at the sole trader now remember soul trader again one owner then we'll have partnerships within our curriculum now partnerships great tens will be covered in grade 11. we're going to look at that in grade 11 in full but know that we are starting off with the sole trader and next we will look at partnerships and then in grade 12 we will look at companies now companies again grade 12 work not very important now but no there's more or less a format that we're going to cover we're going to cover most of the stuff in grade 10 we're going to build on the stuff that we're going to do in grade 10 in grade 11 and then again build on the grade 10 and 11 work in grade 12. so very very important we need a strong foundation the stronger your foundation on the sole trader work the easier you'll find find the work in grade 11 and 12. but let's quickly continue with your type of businesses now firstly we can have trading businesses now what is a trading business guys trading what happens when i buy and sell and as you can see formal businesses and informal businesses can buy and sell so very important to know when i sell something i will have a cost of sale and we will look at the formulas to work out costs of sales and your profits all those things in lessons that we'll do in future let's look at a net another one your service businesses now what is a service business that's when you go to someone and you don't always take something back home so you go to a spa or beauty salon or you go to the dentist and a tutor and a teacher those are all service service renderers so we render services but you are gaining something but it's you can't really touch it let's look at the last one manufacturing businesses so that's number three and we are going to look at manufacturing in grade 10 11 and 12. so in grade 10 we'll look at what is manufacturing remember that's making a product you easily walk into a shop and just take it for granted but where did that product come from and then your your informal business and formal business can use this remember someone carving nice ornaments out of wood will be maybe an informal trader selling at a flea market but then you have these massive production facilities manufacturing cars and mass clothing that will all be manufacturing businesses now i have a good question for you why do we need accounting or slash bookkeeping i'm going to quickly give you a minute to explain that to your friend next door good so let's see if you got it right why do we need accounting or why do we need to keep your records safe why do we need to do the bookkeeping of a business now think of this every day in just a small shop how many transactions take place so how will you know if this business is doing well making good profit how will you be able to tell how many assets we have and how many assets we've accumulated over the existence of this business so accounting is a very very important thing within any business if we record every single transaction will be easily we'll easily see this business is a success making a profit or should we change our spending habits are we spending too much on expenses so it's also a way to keep track of where we're heading and what we want of our goals so how do informal businesses keep records and that's not in a formal way maybe they do keep records in a formal way but remember when you're sitting on the street the wind is blowing a bit you receive money you need to sell you need to package the things how do those street vendors record the transactions they might record it just on a piece of paper to say i received two rand and 10 round and 20 rand and then at the end of the day they see did they make a profit or loss hopefully they sold all their items and they don't need to carry anything home with him except the table tablecloth maybe their chair but if they didn't make enough money to buy new stock for the next day what then and that's the reason most businesses especially the formal businesses keep accounting records now i want to leave this question with you for a minute what is ethical in our business okay guys so ethical what does the word ethical mean let's write it down firstly it's to be truthful or to be honest or to do the right thing now to explain it in the business context remember we need to record all these transactions we are working with stock we are sometimes working with cash and what do we want our staff and our customers to do we want them to be truthful honest and do the right thing so whenever something happens we want them to record it in an honest matter to be transparent and transparent what is transparent mean not to hide anything and to be 100 truthful so i'll give you example say you go to your tuck shop and you're buying a pie and the lady at the tuck shop promises you that this is a nice meat pie but in two months you found that this is not real meat this is sawyer will you be happy definitely not so therefore what will happen to a customer base will you still go to that business and buy from that business if they weren't honest do you understand so it's a two-way thing it's a two-way direction so if you record your stuff within a business you need to be ethical you need to do the right thing do it honestly but also when you sell to your customers you need to be truthful you need to tell them exactly what in what's what's in that product what does it consist of and with that hopefully the client will return if they are happy with what they've bought so how does one controlling keep the assets safe within a business and that's quite easy i'm going to start you off slowly this is internal control we need to control our assets within the business why do we need to control our assets in the business it's very important to keep our equipment safe our vehicles safe and our trading stock safe now those are all three tangible so we can have maybe a store room to lock away all our trading stock we can have a log book for our drivers to fill in or maybe a tracking device to see how they are driving with our vehicles but then as well cash remember cash is the easy one that can disappear within a business now how do i keep my cash safe i need to put systems and procedures in place so that not only one single person work with all the finances within a business but that is that it is shared between two or three and we call that dod what does dod mean i will call it division of duties now guys i'm leaving you now i'll see you in a bit okay guys let's look at a question i'm going to give you three minutes to answer these questions define the following terms informal businesses trading businesses and service enterprises and please include an example in each okay guys i know you got all three of them correct so let's take the first one your informal business now remember your informal business will be a business it's normally small they have few assets they are not registered and then normally a soul trader now let's look at an example can be a hawker or a street vendor hope you got that one right let's look at the next one your trading business now that's quite easy that is a business that buys goods and then sells them but very important they sell it at a higher price now an example can be a supermarket now what is a service enterprise a service enterprise will be a delivery of services for an example a salon or a spa now guys remember even a restaurant can be seen as a service enterprise because you go to the restaurant yes you are eating food maybe you live with a doggy bag but mostly hopefully you eat up all your food so you leave for the full tummy and therefore you've received something but you couldn't take it home and they rendered that service of preparing the food for you to make your life nice and easy so let's go on to the god principles again name the six god principles and i want you to now name all six within a minute let's see if you can do it okay great hands let's see i'm going to quickly name them for you but then we are going to explain each one in detail now let's start at the top we'll have the historical cost then we'll have the prudence principle then we have the two m's we have the materiality we'll have the matching we'll have the going concern and then lastly the business entity so let's go and look at the first one the very first one historical cost so let's read it quickly assets like land and buildings can appreciate in value over time the historical cost concept states that when assets are bought they should be recorded at the historical cost which is the price originally paid for them if they increase in value in later years we can then make a provision for this change but this won't happen in grade 10 guys so again historical cost let's look at all three assets connected to the historical cost firstly landon buildings remember we did read that they will appreciate but now i want to go in a bit more detail remember when you drive that new car off the showroom floor will it still be worth the same amount of money that you've paid for it in two years and definitely not so they will lose value but in accounting we need to remember that we need to record this vehicle at the historical so the past tense the historical cost price so say we have paid 250 000 grand for this vehicle we need to keep this vehicle in our books under the lecture account vehicles at 250 000 that is the historical cost price although it's not worth 250 000 grand in two years we still need to include it in our books and keep it at that price another example you're buying a brand new laptop that laptop is costing five thousand rand today now i'm asking you what did you pay you've paid five thousand rand for it right so will this laptop be worth five thousand rand in three years and hopefully your answer will be no it won't so did this the laptop lose value over the three years and yes it did lose value but this principle shows us that we need to record the laptop at the historical cost price which is 5 000. so even if it lost value we still need to keep it at the historical cost very very important i trust you understand the historical cost price god principle now let's continue to the second one let's go and read it the prudence principle sometimes accountants are aware of events or circumstances that could affect the business but because these events have not yet occurred and are not def definite they are uncertain of the exact outcome the prudence states that in these circumstances an accountant must report in the most and that's the very important word there conservative manner if the financial statement showed a more favorable position of the business than was actually the case and this we don't want people that invest or buy could lose out financially so hopefully you understand what we read now to put it in plain words you need to be very pessimistic when you record transactions especially at the financial year end so prudence states that you need to be conservative you can't say oh i think i'm going to make 20 million rounds worth of sales but you did not to put it in a better way you received a nice check worth ten thousand rand you recorded in your books but now the check is missing you lost the check now what i want to ask is does the business still have the money can you keep this 10 000 trend in the sole traders books and the answer is no we've lost it we don't have it anymore so we can't say hopefully we'll find this check no we need to take it out of the book so we need to include a transaction to cancel this receipt so therefore you're being conservative or you're being pessimistic now let's say within two months this check appears out of the blue can you record it again yes you can record this check again if it's still valid but remember especially at the financial year end all the things need to be taken into consideration on worst case let's look at the next one the matching principle now guys according to the basis transactions are recorded in the income statement and balance sheets in the financial year when they happened and not when the cash that's the important one for the transaction is received or paid in the same way if an income amount has been received or an expense item has been paid but it is not an income or an expense for the current financial year needs to be excluded it must not be included in the income statement for the current year so easily i don't care about when i receive or when i pay why do i care about i care about when should this income or expense been taking place should it should it be taking place this year if it should have happened this year i need to put it in for the show if it is not for this year i need to take it out and especially in the third term great things we're going to use this principle all the time but know it no that all incoming expenses needs to be matched for certain yeah let's go and look at god principle four that will be your materiality so materiality let's quickly just get up a bit because people use accounting information to make decisions the accountant must draw the business owners attention to information that will be important to him or her the materiality concept states that information that is important or material must be shown separately in the financial statements so that they are highlighted information that is not important or material can be added together and put into sundry income or expenses now what do we exp understand under this concept materiality is it material to show each and every single stationary item we have account for pencils we have account for pins we have an account for paper we have account for receipt books we have an account for ink for the printer we have 10 000 accounts just showing in stationary or can i maybe put all of the stationary force all trader under stationary oh even better you're a very small business you don't use a lot of stationery you don't use a lot of packing material you don't use a lot of consumables like your cleaning material your coffees and teas can i include all of those under sundry expenses or consumable stores and that's what materiality means should i show certain things separate is it material for the owner or not let's move on our fifth car principle today will be your going concern so let's mark it as number five the going concern assumption is that a person reading your statements of a business assumes that the business is intending to continue to operate in the foreseeable future and that the owner of the business is not intending to sell or close down so his business sometimes in the future if the opposite is true the account should note it in the statement so the last but not too important but the beginning let's quickly look at it again going concern is the business continuing going on in the next year or will the business be sold or closed down so remember whenever we state or drop statements especially in term three this will be again asked what do you understand about going concern will the business go on will they continue or the business goes down now let's look at the very last one we have the business entity this concept says that accounting records of a business must be kept separate from the accounting records of the owner so all owners of the business this is so that it is possible to accurately work out the profit and loss of the business without confusing it with the owner's personal income or expenses now guys remember the business entity we'll have an account called drawings i don't care if the owner takes cash if he pays his insurance to the business he pays his get school fees in the business if he buys petrol even if he takes 20 rand out of petty cash all of those items will be regarded as drawings so therefore what do i say all drawings everything that the owner takes throughout the year even if it takes a packet of chips from the shelf it will be regarded as drawings even if it takes stationary home for his kids will be regarded as drawings it's for his personal use so guys remember everything the owner takes will go to drawings and whatever it takes will be decreased on the credit side of the account we'll look at that in detail next week so i trust that you'll be able to name all six car principles know all the types of businesses and especially know what the sole trade is and know how to use the sole trader and how we're going to go about it to record all transactions connected to the sole trader in a formal accounting manner thanks for joining [Music] you