1. Chapter 5

2.  Transaction is an exchange of goods or services between two parties at an agreed amount  An event is known in Accounting as subsequent measurement of assets and liabilities.  What is subsequent measurement?  It is what happens after the recording of an Asset or a Liability

3. Initial measurement?  All assets are initially recognised at the historical cost price.  What is historical cost price?  It is the invoice price.  What the person/entity paid or the present value of what the entity will pay for the asset. I.e. the value today Subsequent measurement?  It is calculated and recorded on the last day of the entities financial year.

4.  Current Assets are assets that are essential to the entities day to day operating activities.  These assets will be used/consumed within a period of 12 months.  Remember an entities financial period is 12 months long. Examples??

5.  Non- current assets create the physical capacity to carry out operating activates.  They form a structure allowing the entity to perform their day to day operating activities.  These assets are not readily convertible into liquid cash  They will be used for a period of more than 12 months. Examples??

6. What is it?  The consumption of economic benefits as and when the entity uses a non current asset over its limited useful life. What does a limited useful life mean?  Non- current assets have a limited life. Exception???  Therefore depreciation is NOT a decrease in value, but rather an allotment of the cost price of the depreciable non-current asset to an expense account as and when the asset is used.  Depreciation is a subsequent event. It is recognised at the end of the financial period or month in which the asset is used provided that the definition of an expense is satisfied.

7.  Straight line method  Diminishing balance method  Units of production method Depreciation Methods:

8. Historical Cost price = Depreciation expense Useful life of asset  Non- current Assets with different useful lives must be calculated separately

9. Example: Machine is purchased for R100 000 on 1 Jan 20x7. The estimated useful life of this machine is 5 years. What is the depreciation expense in the first year? Reporting period ended 31 December 20x7. Use straight line method.

10.  NB: For every DR there’s a CR What is Accumulated depreciation? It is a valuation adjustment of an asset It is the accumulation of economic benefits of an asset that have already been used by the entity. It is NOT reflected as a separate line item on the SFP, but rather deducted from the historical cost of the asset in order to reflect the remaining benefits that the entity has available to use. This value is known as the depreciated replacement cost Expense Asset

11.  Year 0 100 000  Year 1 100 000-20 000 = 80 000  Year 2 100 000- 20 000- 20 000=60 000  Year 3 100 000- 20 000- 20 000- 20 000= 40 000  Year 4 100 000-20 000-20 000-20 000-20 000=20 000  Year 5 100 000-20 000-20 000-20 000-20 000-20 000=0  Thus less future economic benefits every year.

12. Depreciation 12 - Recognition 4.Post to accounts Dr A30 Depreciation: machinery Cr DateContra accountNrAmountDateContra accountNrAmount 20.7 Accumulated depreciation J1 Dr U15 Accumulated depreciation: machinery Cr DateContra accountNrAmountDateContra accountNrAmount 20.7 31 Dec DepreciationJ1

13. Depreciation 13 - Presentation - Textbook – examples 5.8 and 5.9 Item Accumulated DeprDepreciation Statement SFPSP/L Classification Non-Current assetsn/a Line item MachineOther admin expenses

14. An Entity Sells on Credit Creating an Asset (Receivable: Freddy the debtor)… Why? Question: Why cant a receivable pay their debt?? Question: What happens when the receipt of money no longer becomes probable??????

15.  The amount that is no longer probable no longer satisfies the definition and recognition criteria of an Asset and must now be recognised as an expense as the receivable is now irrecoverable.  NB: Make sure the definition of an expense is satisfied before writing the receivable off as irrecoverable

16. Transaction: Jan 1 20.1Entity A sold merchandise to Client C (receivable C) for R10 000 on credit. (thus not for cash but Client will pay within 30 days) 30 June 20.1 After fruitless warnings over a period of 6 months, the credit manager authorised on 30 June to write off receivable C.

17. Recognition The sale: The write off: Sold on credit, recognised receivable(create an asset) Recognise an expense, Derecognise an Asset Obtain a Source document that authorizes the write off of the receivable. This document must be signed by the owner or credit manager

18. Bad debts 18 - Recognition 4.Post to accounts Dr A30 Receivable Cr DateContra accountNrAmountDateContra accountNrAmount 1 Jan Balance b/o 20.7 30 Jun Doubtful debtsJ1 Dr U7 Bad debts Cr DateContra accountNrAmountDateContra accountNrAmount 20.7 30 Jun ReceivableJ1 31 Dec Bank

19. Bad debts: liquidation dividend 19 - Recognition – pg. 183 The liquidator of receivable B pay entity liquidation dividend of R4 000 on 31 Dec. 3.Journalise 20.7 NrDrCr 31 Dec Bank (SFP) U7 Bad debts (P/L) A3 0 Recognise liquidation-dividend Assets=Liabilities+EquityClassification ?????= +

20. Bad debts 20 Dr A30 Receivable Cr DateContra accountNrAmountDateContra accountNrAmount 1 Jan Balance b/o 20.7 30 Jun Doubtful debtsJ1 Dr U7 Doubtful debts Cr DateContra accountNrAmountDateContra accountNrAmount 20.7 30 Jun ReceivableJ1 31 Dec Bank Dr U8 Bank DateContra accountNrAmountDateContra accountNrAmount 20.7 31 Dec Doubtful debtsJ1

21. Bad debts 21 - Presentation Item ReceivablesDoubtful debts Statement SFPSP/L Classification Current assetsExpenses Line item Trade receivablesOther admin expenses

22. 1. An Asset has a limited useful life- what does this mean? 2. What Non- current asset has an unlimited life? 3. What is depreciation and why must we account for it? 4. What is Accumulated depreciation? 5. At what amount are assets shown on the SFP? 6. An Entity sells on credit to its customer, what happens when the receipt of money is no longer probable?

23. 1. The life of an asset is the period over which an entity expects to use an Asset and obtain a benefit from the use of that asset. 2. Land 3. The consumption of economic benefits as and when the entity uses a non current asset over its limited useful life. 4. It is the accumulation of all benefits consumed by the entity due to use of an asset. It is a valuation adjustment 5. Assets are shown at its carrying amount. Its Historic cost – Accumulated depreciation. This allows the entity to see the remaining benefits the asset still has to offer. 6. No longer satisfies the definition of an asset. The amount must be written of as a bad debt to P/L

24.  Liabilities are initially recognised at historical cost price.  Examples of liabilities and their historic cost price????  On each reporting date liabilities must be remeasured (subsequent measurement). Subsequent measurement: Interest bearing financial liabilities at amortised cost (Dealt with later) Trade and other payables at amount outstanding/due to the creditor

25. Interest- What?&Why?  It is stated in your written agreement and therefore you're obligated to pay it.  Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt We looking at:  Interest expense on bank loan  Interest expense on suppliers loan  Interest expense on Bank overdraft

26.  Bank loan of R500 000 (primary debt) incurred and paid to Entity 1 Jan 20.7. Interest rate is 12% and added to the loan amount at 31 Dec 20.7. Interest has not been recognised.

27. Identification and Classification  Source documents – loan agreement loan statement from bank/supplier indicating the interest  Items&Accounts: 1. Expense Item (decrease Retained Earnings)- Interest on Loan account 2. Liabilities item (Increase)- Bank Loan NB: Don’t forget about the definition and recognition criteria

28. Recognition: Recognise an item when the definition and recognition criteria has been satisfied- 31 December 20.7 Journals: Assets=Liabilities+EquityClassification ?????/=?????+???? Recognise an expense Recognise an increase in the liability

29. Interest expense on bank loan/suppliers loan/overdraft 29 Dr U4 Interest expense Cr DateContra accountNrAmountDateContra accountNrAmount 20.7 31 Dec LoanJ1 Dr Bank loan/suppliers loan Cr DateContra accountNrAmountDateContra accountNrAmount 1 Jan Bank 31Dec Intereste expenseJ1

30. Interest expense on bank loan/suppliers loan/overdraft 30 - Interest schedule for the loan: DateDetailInterest at 12% per year Amortised cost of loan 1 Jan 20.7Primary debt R500 000 31 Dec 20.7Interest60 000R560 000 31 Dec 20.8Interest67 200627 200 31 Dec 20.9Interest75 264702 464 202 464

31. Interest expense on bank loan/suppliers loan/overdraft 31 - Presentation ItemInterest expense Bank/suppliers loan StatementSP/LSFP Classificationn/a Non-current liabilities Line itemInterest expenseLong term loan, Current portion of LT loan 20.8