Chapter 5

 Definition of income? increase in equity  A: The increase in economic benefits during the reporting period, in the form of an inflow of cash or increase in assets that result in an increase in equity excluding contributions made by owners.  Income generated is the result of an entities operating activities.  What does “sales of an entity” mean?  GROSS  GROSS inflow of economic benefits resulting from the sale of trade inventory of an entity.  The entity can sell for cash or credit

 Recognise a sale when?  When the definition and recognition criteria of an income is satisfied and ito the accrual principal increase in equity  Income definition: “… an inflow of cash or increase in assets that result in an increase in equity …”  “Increase in asset”:  Cash sale:  Increase in Bank, why? There was an inflow of cash  Credit sale:  Increase in Trade Receivable increase in equity”  “result in an increase in equity”  Increase Retained earnings due to sale provided meets the definition of income.

 Inventory sold to the customer in exchange for cash.  Cash can take various forms, such as?  Notes and coins;  EFT  COD (cash on delivery)  Debit card  Etc…

 When would you recognise a Cash sale?  A: on the day that the increase in the asset item bank meets the definition and recognition criteria of an Asset and the income item (sales) meets the definition and recognition criteria of income.  When would you recognise a Credit sale?  A: on the day that the asset item – trade receivables meets the definition and recognition criteria of an Asset and the income item (sales) meets the definition and recognition criteria of income.

Sales100%/ Gross amount - Cost of sales(xxx) = Gross Profitxxx Cost of inventory + mark up

 Expenditure is incurred by an entity with the intention of generating an income.  Matching principal:  For every sale recognised, we need to recognise the cost attached to such sale. i.e Cost of sales  The cost of a sale = historic cost of the inventory sold

 Cost of sales must be recognised on the day that the definition and recognition criteria of an expense is satisfied and the definition and recognition of an asset is no longer satisfied.  Definition of expense:  “Decrease in economic benefits during the reporting period in the form of an outflow of cash or a decrease in assets or incurrence of liabilities that result in a decrease in equity…”  “…a Decrease in assets…”:?  Trade inventory decreases as it no longer satisfies the definition of an asset, risk and rewards have passed to the customer. (credit leg)  “…Decrease in equity…”:?  Cost of sales meets the definition of an expense, decreases retained earnings (debit leg)

Sales100%/ Gross amount - Cost of sales(xxx) = Gross Profitxxx Cost of inventory + mark up Cost of inventory sold

Cash sales of trading inventories 10 Transaction: Inventories are sold for cash to a customer. On 10 January 20.7 Entity A sells trading inventories for R cash. Cost price of the goods sold is R6 720.

Identification & classification:  Source documents? Cash invoice  Items:?  2 transactions sales (increase) and bank (increase) cost of sales (increase) and inventories (decrease)  Elements:?  asset(bank)and equity (sales) Expense (CoS) and asset (inventories) 11

Cash sales of trading inventories 12 - Recognition 3.Journalise no.1 (cash and sales) 20.7 NrDrCr 10 Jan Bank Sales Recognise sale of inventory Assets=Liabilities+EquityClassification =0+ Asset (bank),Equity (sales)

Cash sales of trading inventories 13 - Recognition Journalise no. 2 (Cost of Sales and inventories) 20.7 NrDrCr 10 Jan Cost of Sales Inventories Recognise cost of inventories sold Assets=Liabilities+EquityClassification =0+ Asset (inventories),Equity (Cost of Sales)

Credit sales of trading inventories 14 Transaction: Inventories are sold on credit to a customer. On 10 January 20.7 Entity A sells trading inventories for R on credit to pre-approved customer. Perpetual inventory system is used. Cost price of the goods sold is R6 720.

 Identification & Classification  Source documents?  order, sales invoice, delivery note, goods received note (GRN)  Items?  2 Transactions sales (increase) and receivables (increase) cost of sales (increase) and inventories (decrease)  Elements:? Asset(receivables)and Equity/income (sales) Equity/Expense (CoS) and Asset (inventories)

Credit sales of trading inventories 16 - Recognition 3.Journalise no.1 (receivables and sales) 20.7 NrDrCr 10 Jan ReceivablesU SalesA Recognise sale of inventory Assets=Liabilities+EquityClassification =0+ asset (receivables),Equity (sales)

Credit sales of trading inventories 17 - Recognition Journalise no. 2 (Cost of Sales and inventories) (perpetual system) NrDrCr 10 Jan Cost of sales U InventoriesA Recognise cost of inventories sold Assets=Liabilities+EquityClassification =0+ Asset (inventories),Equity (Cost of Sales)

 Rent out a tangible non-current asset to a third party in exchange for rental payments.  Rental payments received = rental income  Definition of income:  “… in the form of inflow of cash or increase of an asset…that result in an increase in equity…”  “…of inflow of cash or increase of an asset…”  Rental income received in cash, cash is deposited in our bank account. Bank is an asset  “…increase in equity…”  Rental income received increases retained earnings (equity) Income (rent received) (credit leg) and Asset (increase in bank) (debit leg)  Therefore the elements impacted: Income (rent received) (credit leg) and Asset (increase in bank) (debit leg)

 What is a fixed term deposit?  A: the entity has extra cash available and nothing worth spending it on. Therefore invests the extra cash in a fixed term deposit- known as a financial asset.  Financial means?  Money; Cash etc

 Definition of an Asset:  An Asset is a resource: A fixed term deposit gives the entity access to FEB as interest income is earned on the amount invested  Controlled by the entity as a result of a past event: The fixed term deposit is in the name of the entity, third party access to the fixed term deposit is restricted. The interest income (reward) is accrued to the entity. Past event- investing the amount in the fixed term deposit, concluding/signing agreements  FEB expected to flow: Interest income earned on the amount invested. Therefore a fixed term deposit is an Asset

 Definition of income:  “… in the form of inflow of cash or increase of an asset…that result in an increase in equity…”  “in the form of inflow of cash or increase of an asset…”  Interest income is earned on the fixed deposit (asset) therefore increases the value of the fixed term deposit (asset)  Remember fixed term deposit is an investment.  “…that result in an increase in equity…”  Accrual principal.  Interest on fixed term deposit has accrued to the entity, meets the definition and recognition criteria of income & asset therefore increases retained earnings

Interest income 22 Transaction: Interest is earned on a term deposit On 1 July 20.7, AC Entity invested R for one year. The interest rate is 6% per year and interest is calculated on a simple basis. Interest income still has to be recognised for the reporting period ended 31 December 20.7

Interest income 23 - Recognition 3.Journalise 20.7 NrDrCr 31 Dec Term deposit(SFP) Interest Income(P/L) Recognise interest on on term deposit for 6 months Assets=Liabilities+EquityClassification =+ Retained earnings- income(interest income),asset (term deposit) Only 6 months

 Identification&Classification:  Source documents??  Bank statement  items?  Interest income & fixed term deposit  Elements?  Income (interest income earned) & Asset (fixed term deposit)

 Hamutenya CH – 79%  Boois SE – 79%  Attu AH – 79%  Nashima PUM – 81%  Fanuel BK – 83%  Tjitjo SMU – 84%  Ernesto M – 85%  Nyanguridza MP – 87%  Peter AN – 88%  Erastus JB – 92%