Accounting Master Summary

ACCOUNTING The Complete Guide Grade 7 Grade 12 Everything you need — explained like your teacher is sitting right next to you. GR 7 GR 8-9 GR 10 GR 11 GR 12 From your teacher, with care. How to Use This Book Welcome! I wrote this guide as if I am sitting right next to you, explaining every concept out loud. You will notice four kinds of boxes throughout: The book follows the school curriculum from Grade 7 all the way to Grade 12. Each grade builds on what came before, so do not skip sections — they are connected! Master Summary — All Grades at a Glance The Accounting Cycle — Step by Step Every accounting process follows this cycle, year after year: Step Name What Happens 1 Source Documents Collect proofs of transactions (receipts, invoices, cheques) 2 Journals Record transactions in the appropriate subsidiary journal 3 Ledger Post (transfer) from journals to the General Ledger accounts 4 Trial Balance List all ledger balances; check debits = credits 5 Adjustments Record end-of-year adjustments (depreciation, accruals, prepayments) 6 Financial Statements Prepare Income Statement and Balance Sheet 7 Interpretation Analyse ratios; compare to previous years and benchmarks 8 Close off Transfer income and expense accounts to retained income; start new year Ratio Quick-Reference Card Ratio Formula Ideal Category Gross Profit % GP ÷ Sales × 100 As high as possible Profitability Net Profit % NP ÷ Sales × 100 As high as possible Profitability ROE NP ÷ Avg Equity × 100 Above bank rate Profitability Current Ratio Current Assets ÷ Current Liabilities 2:1 Liquidity Acid Test (CA ? Stock) ÷ CL 1:1 Liquidity Debt:Equity Total Liabilities ÷ Equity < 0.5:1 Solvency Stock Turnover COS ÷ Avg Stock High (industry varies) Efficiency Debtors Days (Avg Debtors ÷ Credit Sales)×365 30 days or less Efficiency Creditors Days (Avg Creditors ÷ Credit Purchases)×365 Longer than Debtors Efficiency Key Accounting Terms Glossary Term Definition Accrual Expense incurred but not yet paid (it is a liability) Prepayment Expense paid in advance for a future period (it is an asset) Accrued income Income earned but not yet received (it is an asset) Income received in advance Money received for work not yet done (it is a liability) Provision for bad debts An estimate of debts that may not be collected Working capital Current Assets minus Current Liabilities Going concern Assumption that the business will continue to operate for the foreseeable future Historical cost Assets are recorded at their original cost, not current market value Materiality Only significant information needs to be separately disclosed Consistency Same accounting methods used from year to year Prudence Do not overstate income or understate expenses; be cautious Entity concept The business and its owner are treated as separate entities