Financial statements: most important methods of communication clear and understandable financial reporting obtain relevant information to make economic decisions the Accounting Standards Board (IASB) is committed to the development of high quality contain extensive presentation and disclosure requirements An entity’s annual financial statements are one of its most important methods of communicating with its stakeholders.   Clear and understandable financial reporting ensures that the users of the financial statements obtain relevant information to make economic decisions. The International Accounting Standards Board (IASB), the standard setter of International Financial Reporting Standards (IFRSs), is committed to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. As a result, IFRSs contain extensive presentation and disclosure requirements, which are due to increase as a result of the move to a single set of high quality global accounting standards. They make the rules and that is why the format of every statement is very, very important. It is like soccer, the rules make it possible for the players or accountants to play against any other team or make decisions between two entity’s and the spectators can follow it easily like the users of financial statements.

Why Financial statements? Robert Kiyosaki is the author of Rich Dad Poor Dad and he claim that there is a big secret in it: What the rich teach their kids about money that the poor and middle class do not!

This is a very simple way to show you the effect of cash flowing through the financial statements of people who pay themselves first against someone who pays everyone else first, often find there is nothing left.   Study the diagrams and notice if you can pick up some distinctions. Again, it has to do with understanding cash flow, which tells the story. Most people look at the numbers and miss the story. If you can truly begin to understand the power of cash flow, you will soon realize what is wrong with the picture on the second page, or why 90 percent of most people work hard all their lives and need government support when they are no longer able to work. This is the everyday value of financial statements, use it.

Financial statements of a sole proprietor A sole proprietorship = the simplest form of business ownership there is no legislation prescribing how cash and/or vehicle is necessary to start equity simply consists of capital invest plus profit less money and/or goods withdrawn A sole proprietorship (also known as a sole trader) is the simplest form of business ownership and is often managed by the owner himself.   There is no legislation prescribing how a sole proprietorship should be established. Cash and/or any other type of asset, for example a motor vehicle, is necessary to start the business entity. The equity simply consists of the capital invested in the business entity plus the profit made (or less a loss suffered) and less any money and/or goods withdrawn by the owner for personal use.

Financial statements of a sole proprietor Owner invests cash in a business: R100 000 Debit Bank account (in Cash Receipts Journal) Credit Capital account (in General Ledger) Cash Receipts Journal of XXX Traders for January 2009 Cr Dr Sundry accounts Doc Day Fol Bank Amount Details 001 1 C Cross 100 000 Capital A sole proprieter usually contributes capital in the form of cash, and/or non-current assets in the form of property, plant and equipment towards the starting of the business. Dr Capital Cr Jan 1 Bank CRJ 100 000 Dr Bank Cr Capital

Financial Statements: Statement of changes in equity … (Capital account = changes from opening balance to final balance) Dr Capital Cr Feb 28 Drawings Balance c/d 8 000 41 000 Mar 1 Mar 2 Balance b/d Bank Profit or loss 25 000 15 000 9 000 49 000 Mar 1 The original investment of the owner and any further contributions specified as capital contributions are referred to as capital.   When profit is added and drawings subtracted from the capital investment this is known as equity. The equity shows the interest of the owner in the entity. In other words the balance of R41 000 represents equity and not capital. Equity is the claim that the owner has against the assets of the entity. In a sole proprietorship the capital account is used to show the changes in equity. The changes in equity are disclosed in a statement called the “Statement of changes in equity”. Statement of changes in equity for the year ended 28 Feb 20.2 Balance as at 1 March 20.1 Plus Additional investment Plus Profit for the year Less Drawings R25 000 15 000 9 000 (8 000) Balance as at 28 Feb 20.2 R41 000

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 What is required: Prepare the following financial statements: the statement of comprehensive income of Jeff’s Maintenance Services for the year ended 31 December 20.1 the statement of changes in equity of Jeff’s Maintenance Services for the year ended 31 December 20.1 the statement of financial position of Jeff’s Maintenance Services as at 31 December 20.1 show the notes for the year ended 31 December 20.1

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Bank is an asset

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents 580 Total assets EQUITY AND LIABILITIES Total equity Capital Current liabilities Trade and other payables Total equity and liabilities Disclose it in the statement of financial position as an current asset under cash and cash equivalents

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Debtors are an asset

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents 5 515 580 Total assets EQUITY AND LIABILITIES Total equity Capital Current liabilities Trade and other payables Total equity and liabilities Disclose it in the statement of financial position as a current asset under trade receivables

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Inventory is an asset

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R Property, plant and equipment Current assets 6 735 Inventories Trade and other receivables Cash and cash equivalents 640 5 515 580 Total assets EQUITY AND LIABILITIES Total equity Capital Current liabilities Trade and other payables Total equity and liabilities Disclose it in the statement of financial position as an current asset under inventories

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Equipment is an asset

Financial Statements: Notes for the year ended 31 December 20.1 Dr Equipment Cr Balance b/d 13 000 Dr Accumulated depreciation on Equipment Cr Jan 1 Dec 31 Balance b/d Depreciation NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year Cost Acc depreciation 13 000 Depreciation for the year Carrying value: End of year Disclose it in the property, plant and equipment note under carrying amount, at the beginning of the year as well as at the end of the year, at cost price because there was no additions or deductions during the year

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Vehicles are an asset

Financial Statements: Notes for the year ended 31 December 20.1 Dr Vehicles Cr Balance b/d 17 000 Dr Accumulated depreciation on Vehicles Cr Jan 1 Dec 31 Balance b/d Depreciation NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year Cost Acc depreciation 17 000 Depreciation for the year Carrying value: End of year Disclose it in the property, plant and equipment note as equipment

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Accumulated depreciation on equipment is an contra asset

Financial Statements: Notes for the year ended 31 December 20.1 Dr Equipment Cr Balance b/d 13 000 Dr Accumulated depreciation on Equipment Cr Dec 31 Balance c/d 2 600 Jan 1 Dec 31 Balance b/d Depreciation NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year Cost Acc depreciation 17 000 13 000 Depreciation for the year Carrying value: End of year 13000 2 600 Disclose it in the property, plant and equipment note under accumulated depreciation at the end of the year

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Accumulated depreciation on vehicles are an contra asset

Financial Statements: Notes for the year ended 31 December 20.1 Dr Vehicles Cr Balance b/d 17 000 Dr Accumulated depreciation on Vehicles Cr Dec 31 Balance c/d 6 800 Jan 1 Dec 31 Balance b/d Depreciation NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year Cost Acc depreciation 17 000 13 000 Depreciation for the year Carrying value: End of year 10 200 10 400 20 600 (6 800) (2 600) 30 000 (9 400) Disclose it in the property, plant and equipment note under accumulated depreciation at the end of the year. The difference between the debit balance on the asset and the credit balance on the accumulated depreciation account is the net carrying amount of the asset

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R 20 600 Property, plant and equipment Current assets 6 735 Inventories Trade and other receivables Cash and cash equivalents 640 5 515 580 Total assets EQUITY AND LIABILITIES Total equity Capital Current liabilities Trade and other payables Total equity and liabilities The total of the net carrying amount will be disclose in the statement of financial position as an asset under property, plant and equipment

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Insurance is an expense

Financial Statements: Statement of profit or loss and other comprehensive income … JEFF’S MAINTENANCE SERVICES Statement of profit or loss and other comprehensive income for the year ended 31 December 20.1 Revenue: Distribution, administrative and other expenses Insurance Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation Profit for the year Other comprehensive income for the year Total comprehensive income for the year R 720 ----- Disclose it in the statement of profit or loss and other comprehensive income under expenses

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Creditors are a liability

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R 20 600 Property, plant and equipment Current assets 6 735 Inventories Trade and other receivables Cash and cash equivalents 640 5 515 580 Total assets EQUITY AND LIABILITIES Total equity Capital Current liabilities Trade and other payables 165 Total equity and liabilities Disclose it in the statement of financial position as current liabilities under trade and other payables

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Fees earned are income

Financial Statements: Statement of profit or loss and other comprehensive income … JEFF’S MAINTENANCE SERVICES Statement of profit or loss and other comprehensive income for the year ended 31 December 20.1 Revenue: Distribution, administrative and other expenses Insurance Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation Profit for the year Other comprehensive income for the year Total comprehensive income for the year R 65 895 720 ----- Disclose it in the statement of profit or loss and other comprehensive income under revenue

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Capital is equity

Financial Statements: Statement of changes in equity … Statement of changes in equity for the year ended 31 December 20.1 Balance as at 1 January 20.1 Total comprehensive income for the year Drawings Capital R 20 200 Balance at 31 December 20.1 Disclose it in the statement of changes in equity as opening balance

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Depreciation (equipment R1 300, vehicles R3 400) Rent expense Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 4 700 9 000 R Cr 2 600 6 800 165 65 895 20 200 95 660 Drawings are equity

Financial Statements: Statement of changes in equity … Statement of changes in equity for the year ended 31 December 20.1 Balance as at 1 January 20.1 Total comprehensive income for the year Drawings Capital R 20 200 (12 000) Balance at 31 December 20.1 Disclose it in the statement of changes in equity as drawings

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation (equipment R1 300, vehicles R3 400) Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 9 000 4 700 R Cr 2 600 6 800 165 65 895 20 200 95 660 Wages, administrative expenses, advertisements, fuel and rent are expenses

Financial Statements: Statement of profit or loss and other comprehensive income … JEFF’S MAINTENANCE SERVICES Statement of profit or loss and other comprehensive income for the year ended 31 December 20.1 Revenue: Distribution, administrative and other expenses Insurance Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation Profit for the year Other comprehensive income for the year Total comprehensive income for the year R 65 895 (46 925) 720 18 650 12 410 335 1 110 9 000 ----- Disclose it in the statement of profit or loss and other comprehensive income under expenses

Financial Statements: Exercise The following information relates to Jeff’s Maintenance Services: POST-ADJUSTMENT TRAIL BALANCE AS AT 31 DECEMBER 20.1 Bank Debtors Inventory: cleaning materials Equipment at cost Vehicles at cost Accumulated depreciation on equipment Accumulated depreciation on vehicles Insurance Creditors Fees earned Capital: J Jefferson – 1 January 20.1 Drawings Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation (equipment R1 300, vehicles R3 400) Dr R 580 5 515 640 13 000 17 000 720 12 000 18 650 12 410 335 1 110 9 000 4 700 R Cr 2 600 6 800 165 65 895 20 200 95 660 Depreciation is an expense

Financial Statements: Statement of profit or loss and other comprehensive income … JEFF’S MAINTENANCE SERVICES Statement of profit or loss and other comprehensive income for the year ended 31 December 20.1 Revenue: Distribution, administrative and other expenses Insurance Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation R(1 300 + 3 400) Profit for the year Other comprehensive income for the year Total comprehensive income for the year R 65 895 (46 925) 720 18 650 12 410 335 1 110 9 000 4 700 ----- Disclose it in the statement of profit or loss and other comprehensive income under expenses

Financial Statements: Notes for the year ended 31 December 20.1 Dr Vehicles Cr Balance b/d 17 000 Dr Accumulated depreciation on Vehicles Cr Dec 31 Balance c/d 6 800 Jan 1 Dec 31 Balance b/d Depreciation 3 400 NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year 13 600 11 700 25 300 Cost Acc depreciation 17 000 (3 400) 13 000 (1 300) 30 000 (4 700) Depreciation for the year Carrying value: End of year 10 200 10 400 20 600 (6 800) (2 600) (9 400) Disclose depreciation also in the property, plant and equipment note under depreciation for the year

Financial Statements: Statement of profit or loss and other comprehensive income … JEFF’S MAINTENANCE SERVICES Statement of profit or loss and other comprehensive income for the year ended 31 December 20.1 Revenue: Distribution, administrative and other expenses Insurance Wages Administrative expenses Advertisements Fuel and maintenance Rent expense Depreciation Profit for the year Other comprehensive income for the year Total comprehensive income for the year R 65 895 (46 925) 720 18 650 12 410 335 1 110 9 000 4 700 18 970 ----- Total comprehensive income for the year of R18 970

Financial Statements: Statement of changes in equity … Statement of changes in equity for the year ended 31 December 20.1 Balance as at 1 January 20.1 Total comprehensive income for the year Drawings Capital R 20 200 18 970 (12 000) Balance at 31 December 20.1 27 170 Disclose it in the statement of changes in equity under total comprehensive income for the year. The balance at 31 December 20.1 of R27 170

Financial Statements: Statement of Financial Position … Statement of financial position as at 31 December 20.1 ASSETS Non-current assets R Property, plant and equipment 20 600 Current assets 6 735 Inventories Trade and other receivables Cash and cash equivalents 640 5 515 580 Total assets 27 335 EQUITY AND LIABILITIES Total equity 27 170 Capital Current liabilities 165 Trade and other payables Total equity and liabilities Disclose it in the statement of financial position under total equity as capital. Now it balance with R27 335

Financial Statements: Notes for the year ended 31 December 20.1 NOTE: Property, Plant and Equipment Vehicles Equipment Total Carrying amount: Beginning of year 13 600 11 700 25 300 Cost Acc depreciation 17 000 (3 400) 13 000 (1 300) 30 000 (4 700) Depreciation for the year Carrying value: End of year 10 200 10 400 20 600 (6 800) (2 600) (9 400) This is the complete property, plant and equipment note