Part 2 – IDENTIFY AND APPLY ACCOUNTING PRACTICES AND PROCEDURES

INTRODUCTION
In all activities (whether business activities or non-business activities) and in all organisations (whether business
organisations like a manufacturing entity or trading entity or non-business organisations like schools, colleges,
hospitals, libraries, clubs, churches, political parties) which require money and other economic resources, accounting
is required to account for these resources. In other words, wherever money is involved, accounting is required to
account for it. Accounting is often called the language of business. The basic function of any language is to serve as a
means of communication. Accounting also serves this function.

DEFINITION OF ACCOUNTING

OBJECTIVE OF ACCOUNTING
Objective of accounting may differ from business to business depending upon their specific requirements. However,
the following are the general objectives of accounting.
To keep systematic record: It is very difficult to remember all the business transactions that take place. Accounting
serves this purpose of record keeping by promptly recording all the business transactions in the books of account.
To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit earned or loss suffered in
business during a particular period. For this purpose, a business entity prepares either a Trading and Profit and Loss
account or an Income and Expenditure account which shows the profit or loss of the business by matching the items
of revenue and expenditure of the same period.

To ascertain the financial position of the business: In addition to profit, a businessman must know his financial
position i.e., availability of cash, position of assets and liabilities etc. This helps the businessman to know his financial
strength. Financial statements are barometers of health of a business entity.
To portray the liquidity position: Financial reporting should provide information about how an enterprise obtains and
spends cash, about its borrowing and repayment of borrowing, about its capital transactions, cash dividends and
other distributions of resources by the enterprise to owners and about other factors that may affect an enterprise’s
liquidity and solvency.
To protect business properties: Accounting provides up to date information about the various assets that the firm
possesses and the liabilities the firm owes, so that nobody can claim a payment which is not due to him.
To facilitate rational decision-making: Accounting records and financial statements provide financial information
which help the business in making rational decisions about the steps to be taken in respect of various aspects of
business.
To satisfy the requirements of law: Entities such as companies, societies, public trusts are compulsorily required to
maintain accounts as per the law governing their operations such as the Companies Act etc. Maintenance of
accounts is also compulsory under the Income Tax Act.

USERS OF ACCOUNTING INFORMATION
Accounting information is important to the following person (s)

•  Owners/ Shareholders
•  Management
•  Creditors
•  Employees
•  Investors
•  Government
•  Consumers
•  Researchers

OWNERS: The owners provide funds or capital for the organisation. They possess curiosity in knowing whether the
business is being conducted on sound lines or not and whether the capital is being employed properly or not.
Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of
various years helps in getting good pieces of information.
MANAGEMENT: The management of the business is greatly interested in knowing the position of the firm. The
accounts are the basis; the management can study the merits and demerits of the business activity. Thus, the
management is interested in Financial Accounting to find whether the business carried on is profitable or not. The
financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further
expansion etc.”
CREDITORS: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that
these groups are interested to know the financial soundness before granting credit. The progress and prosperity of
the firm, two which credits are extended, are largely watched by creditors from the point of view of security and
further credit. Profit and Loss Account and Balance Sheet are nerve centres to know the soundness of the firm.
EMPLOYEES: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that
the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc.

depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is
interested in accounting.
INVESTORS: The prospective investors, who want to invest their money in a firm, of course wish to see the progress
and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This
is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to
know the safety of investment.
GOVERNMENT: Government keeps a close watch on the firms which yield good amount of profits. The state and
central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To
compile national accounting is essential.
CONSUMERS: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the
establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be
paid by the consumers. Researchers are also interested in accounting for interpretation.
RESEARCH SCHOLARS: Accounting information, being a mirror of the financial performance of a business
organisation, is of immense value to the research scholar who wants to make a study into the financial operations of
a particular firm. To make a study into the financial operations of a particular firm, the research scholar needs
detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets,
current liabilities, fixed assets, long-term liabilities and shareholders’ funds which is available in the accounting
record maintained by the firm.

OUTWARD INVOICE: This is a document sent by the firm to the customers, showing the details of goods supplied,
their price and value, discounts etc., it is the basis for writing sales book.
DEBIT NOTE: It is a simple statement sent by a person to another person showing the amount debited to the account
of the latter along with a brief explanation. A debit note is separate from an invoice and informs a buyer of current
debt obligations. A debit note is also a document created by a buyer when returning goods received on credit. In the
case of returned items, the note will show the credit amount, the inventory of the returned items, and the reason
for the return.
CREDIT NOTE: It is nothing but a statement sent by one person to another person showing the amount credited to
the account of the latter along with a brief explanation. A credit note (also known as credit memo) is issued to
indicate a return of funds in the event of an invoice error, incorrect or damaged products, purchase cancellation or
otherwise specified circumstance
CASH RECEIPTS AND VOUCHERS: These are the vouchers and receipts for cash received and paid. Entries in cash
book are made on the strength of the vouchers and receipts. They are also useful for auditing purpose.

BOOKS OF ORIGINAL ENTRY

When the business transactions take place, the first step is to record the same in the books of original entry or
subsidiary books or books of prime or journal. Thus journal is a simple book of accounts in which all the business
transactions are originally recorded in chronological order and from which they are posted to the ledger accounts at
any convenient time. Journalising refers to the act of recording each transaction in the journal and the form in which
it is recorded, is known as a journal entry.

TYPES OF JOURNALS
The original entry becomes inadequate. Thus, the number and the number and type of journals required are
determined by the nature of operations and the volume of transactions in a particular business. There are many
types of journals and the following are the important ones:

•  Sales Day Book (Sales Journal) – to record all credit sales.
•  Purchases Day Book (Purchases Journal) – to record all credit purchases.
•  Cash Book- to record all cash transactions of receipts as well as payments.
•  General Journal-to record transactions on credit that do not enter into the sales and purchases ledger e.g.
• purchases of a motor vehicle on credit
•  Once transactions have been entered into the subsidiary book of accounts, they must be posted to the
• ledger accounts using the double-entry accounting system.

BELOW IS AN EXAMPLE OF A JOURNAL
SALES JOURNAL 2002

LEDGER ACCOUNTS
A ledger contains summarized financial information that is classified by assignment to a specific account number
using a Chart of Accounts. A ledger can be a physical book or software or spreadsheets where the financial
information is recorded.
A General Ledger for instance contains a summary of all the information recorded in subsidiary ledgers, which are
ledgers that break down and show more information according to classifications. Financial information for ledgers is
taken from the company’s journal. Below are examples of ledgers;

LEDGER
SALES A/C

F ACCOUNT

TAXATION REQUIREMENTS
SARS is obligated by law to determine and collect from each taxpayer only the correct amount of tax that is due to
the Government. The SARS offices are the representatives of the Commissioner and in that capacity must ensure
that the tax laws are administered correctly and fairly so that no one is favoured or prejudiced above the rest.
REGISTRATION
As soon as you commence your business (whether as a sole proprietor, partner or any other form), you are required
to register with your local SARS office in order to obtain an income tax reference number.
FILING
A company/close corporation on the other hand is permitted to have a tax year ending on a date that coincides with
its financial year. If the financial year-end is 30 June, its tax year or year of assessment will run from 1 July to 30 June.
Income tax returns must be submitted manually or electronically by a specific date each year.
FORMS OF TAXES
The following are the main forms of taxation.
EMPLOYEES’ TAX (PAYE)
Employees’ tax is a system in terms of which an employer, as an agent of government, deducts income tax from the
earnings of employees and pays it over to SARS on a monthly basis. Once registered, the employer will receive a
monthly return (EMP 201) that must be completed and submitted together with the deducted employees’ tax within
seven days of the month following the month for which the tax was withheld.
INCOME TAX
A sole proprietor or each partner is subject to income tax on his/her taxable income. Income tax is levied at
progressive rates ranging from 18% to 40%. For the 2009 tax year, the maximum marginal rate of 40% applies where
the taxable income exceeds R490 000. Unlike individuals, a company or Pty (Ltd) pays income tax at a flat rate of
28% on its taxable income for the tax year and 25% secondary tax on companies (STC) on the net amount of
dividends declared.
VALUE-ADDED TAX (VAT)
Value-Added Tax (VAT) is an indirect tax based on consumption of goods and services in the economy. Revenue is
raised for the government by requiring certain traders or vendors to register and to charge VAT on taxable supplies
of goods or services.
The most important document in such a system is the tax invoice. Without a proper tax invoice, you cannot deduct
input tax on purchases for your enterprise, and if you have clients who are vendors or if you sell goods to foreign
tourists, they cannot claim back the VAT that you have charged them, or claim a refund of the VAT when taking the
goods out of the country.
The following information must be reflected on a tax invoice for it to be considered valid:

THE FOLLOWING IMPORTANT POINTS SHOULD ALSO BE NOTED WITH REGARD TO TAX INVOICES:
 A vendor is required to issue a tax invoice to the recipient within 21 days of the supply having been made
where the consideration for the supply exceeds R50 (whether the recipient has requested this or not)
 If the consideration in money for the supply is R50 or less, a tax invoice is not required (however, a
document such as a till slip or sales docket will still be required to verify the input tax claimed)
 Where the consideration for a taxable supply exceeds R50 but does not exceed R3 000, an abridged tax
invoice may be issued (see example above)
 A tax invoice must be in South African currency, except for a zero-rated supply (e.g. goods exported). In such
cases, a full tax invoice must be issued, even if the consideration is less than R3 000
 A tax invoice is not issued by a debtor (vendor) under an instalment credit agreement if the goods are
repossessed. This will be done by the person exercising their right of repossession (i.e. the bank or other
financier)
 It is a requirement to reflect the VAT registration number of the recipient of the supply on the tax invoice
with effect from 1 March 2005 (if that person is a vendor) and the consideration for the supply exceeds R3
000
 If a vendor fails to deduct input tax in respect of a particular tax period, it may be deducted in a later tax
period, but limited to a period of 5 years from the date that the supply concerned was made
RECORD KEEPING FOR INCOME TAX OR CAPITAL GAINS TAX PURPOSES
As a taxpayer, you are required to keep records such as ledgers, cash books, data in electronic form, all supporting
documents and any records relating to capital gains or capital losses for a period of five years from the date on which
the tax assessment for that year was received by SARS.
However, if objections and appeals have been lodged against assessments, you should keep all relevant records and
information until the objection or appeal has been finalised, even if it takes longer than five years to sort out.
PAYMENT TERMS AND PROCEDURES
Building and maintaining a strong earnings stream takes as muck work as providing fee based services. Sole
proprietors or individuals that provide contracted services should plan to spend an equivalent amount of time and
resources to invoice clients and track receivables as they do performing work for their clients. The following are
some procedures for small business billing that will help ensure that invoices are paid within an appropriate
collection period.

Agree on terms. Prior to contracting with a client determine how they will pay you and how long it will take them to
pay. Barring any unforeseen circumstances, most companies should be able to make payment within 30 days of
receiving an invoice. However, since an unpaid invoice constitutes an interest free loan, be specific about what the
payment terms will be and make sure they appear on the client’s bills. If a company agrees to pay “Net 30” which
means within 30 days of receipt, you should be entitled to some interest or penalty if they fail to pay within the
agreed upon grace period. Make sure that your client agrees to the payment penalties and make sure that they
appear on the invoices as well. Since the terms are agreed upon and appear on the bill there should be no guessing
or argument when you contact them for payment. Most companies will try to pay within agreed terms but will also
try to defer payment as long as possible if terms are not agreed upon in advance.
Agree on price. The greatest impediment to collecting on invoices is that here is some discrepancy in the client’s
mind about what the cost of services should be. To ensure that there is no arguments about the amount of the bills;
make sure that contract prices are agreed upon as part of your procedures for small business billing. In addition to
an agreement on price, the procedures on how contract amounts can be amended should be spelled out and agreed
upon in advance. Disagreements over invoice amounts usually come result due to changes in the scope of work that
are not approved before services are rendered. Having a detailed approval process will significantly reduce the risk
of increasing receivables and overdue bills.
Collect advances if possible. Many clients will agree to advance payments to help pay the cost of materials and other
upfront costs. Spell out those costs that are necessary to initiate the work and have your client approve the advance
payment. Advances and deposits will help ensure adequate working capital and reduce the amount of money that
will need to be collected after the project is completed.
Maintain billing discipline. If a company does not pay a bill within agreed upon payment terms, then you will have
grounds for penalties. However, many owners penalize themselves by not billing for services immediately after the
work has been completed. It is easy to procrastinate and forgo billing when one is busy performing work for
clients. The greatest risk to working capital and company cash flow is deferred billing. Ensure that bills are sent out
without mistakes. Don’t give your clients an excuse not to pay you or send back invoices, when you deserve to be
paid.
Track your invoices. It is difficult to get clients to pay the appropriate amount when you don’t know what it
is. Make sure to track your invoices and receivables. Build a good relationship with the person who is in charge of
paying your client invoices. Keep in touch with the payables representative and let them know about which invoices
have been sent and which invoices are late. You will be surprised about how many invoices can get lost in the
bureaucracy of a large firm. Send additional invoices marked “copy” to let your client know that invoices are due
when the grace period has expired. Follow up with regular collection calls to discuss invoices that are 10 – 15 behind
agreed payment terms. Once again, don’t give your clients an excuse to delay payment because they didn’t know
that certain invoices remain unpaid.
ACCOUNTING SUPPORT STRUCTURES
Accounting work can become cumbersome for the entrepreneur. To this end, the entrepreneur can appoint an
accounting officer, bookkeeper and coach/mentor to assist or advice in accounting matters.
A) ACCOUNTING OFFICER
Every company is obligated to appoint an Accounting Officer who is a recognized accounting professional. The
Accounting Officer has a number of important duties such as submitting financial statements to the members of the
company as well as reporting on the financial statements. The Accounting Officer will also help to meet
the A

The Close Corporation Act requires an Accounting Officer to:
 Determine whether the annual financial statements are in agreement with the accounting records
 Report to the members regarding the financial statements
 Determine whether the appropriateness of the accounting policies are applied in the preparation of the
financial statements and, if necessary, to revise the statements
B) BOOKKEEPER
A Book-keeper is the person who provides the financial support role to other professionals. In small to medium sized
enterprises book-keepers may be the sole financial member of staff. Bookkeepers tasks are most difficult to define
because duties are many and varied across differing businesses. The following are some of the popular roles of the
bookkeeper.
KEEPING FINANCIAL RECORDS
The key roles of a professional bookkeeper is to ensure financial records are current and up to date and there is a
regular reporting system in place.
CHASING UNPAID INVOICES
A proficient bookkeeper will not only keep records of incoming and outgoing invoices but in addition to this role,
they will also chase up any invoices that you should have been issued and also chase up purchase orders which have
not been paid.
KEEPING ABREAST OF CHANGES IN REGULATION
One of the key duties of a skilled bookkeeping service is keeping abreast of changes in regulation so you don’t have
to. This is important in reducing your tax liabilities and making sure you are compliant with current tax legislation.
C) COACH/MENTORS
Coaches and mentors can also be resourceful when an entrepreneur is dealing with accounting work. Coaches and
mentors play different but closely linked responsibility. Their main objective is to ensure that the new venture takesoff the ground and is successful.
Let’s look at the difference between the two:

1. A mentor serves a very important role for you; they do indeed open doors and tell you where the landmines
   are. They check in with you from time to time, and you should check in with them. Seeking out a coach,
   however, is more important.
2. Your coach watches your progress and makes course corrections. The types of coaches you need may vary
   based on the particular challenges that you are facing. If you are managing your first major implementation,
   seek coaches who have been there, done that successfully. A coach needs to be tough, and you need to
   listen. A coach might be internal, external or someone you hire. Your coach may be a family member, a
   colleague from a professional organization or even your boss.