www.e-classroom.co.za © e-classroom

GRADE 7 EMSFINANCIAL LITERACY - MEMORANDUMTOPIC 1: ACCOUNTING CONCEPTS

Accounting and businessesTo ‘account’, means to keep a record or description of an event. Accounting is the language of business which measures and records the financial transactions of a business so that they can make smart decisions over a period.

Book keeping This is the activity or occupation of keeping the financial records of a business, by recording money flowing in and money flowing out of the business. This is done daily.

AccountantAn accountant is the person who takes the information compiled by the book keeper, analyses it and helps the owner make decisions regarding the future of the business. The accountant may be hired to do both the book keeping and analysing the financial information.

Capital Capital is all the money and objects needed in the production of goods.We will look at four types of capital within a business:a) Fixed capital These are the items that are needed to produce goods. They are durable and are replaced over a long period of time. For e.g. buildings, delivery vehicles, machinery, equipment, tools, furniture, etc.b) Working capital This is the capital needed to run the business daily for e.g. stock, cash, etc.

c) Borrowed capital Sometimes businesses need to borrow money or need capital for e.g. buildings, equipment, furniture, etc. Businesses borrow capital when they don’t have the cash available. Loans can be borrowed from banks, but banks charge interest. Interest is usually paid monthly. When businesses buy items with their credit card or on account, they are also borrowing capital.d) Share capital This is the money invested by the owners of a business to start the business.

Teachers notes – see Addendum for learner’s handouts

Discuss with the learners. Take note of vocabulary that may need to be researched or explained.

www.e-classroom.co.za © e-classroom 2

Activity 11. Look at the Capital items of ‘Jack’s Shoe Shop’ and indicate if it is fixed capital or working capital on the table below:

Item Fixed capital Working capitalBuilding xDelivery trucks xFurniture for customers xCash in the cash register xShelves xCash register xBank account xPeople who buy shoes on account x

2. Jack’s Shoe Shop has an account with a furniture store, a mortgage loan with a bank for the building and an account at a shoe warehouse. a) What do we call this type of capital? Borrowed capital

b) Instead of having all these accounts and loans, what could Jack have done instead of owing all these businesses money?

Save his money before he started the business. Wait for cash to come in from selling shoes and then buying new stock or furniture.

Assets Activity 2

1. What things do you own that you could possibly sell?

__________________________________________________ _____________

These items are called Assets.Assets are possessions or things that a business owns that are worth something if they are sold. Assets are usually categorised according to vehicles (used for deliveries), equipment (machinery, tools, cash register, etc), cash (bank deposits, cash in the till), land, buildings, stock or inventory (products in storage), accounts receivable (people or debtors who owe you money), office supplies, investments, furniture, etc.

Assets increase the wealth of a business.

There are two types of assets:a) Current assets Assets that are expected to be converted into cash within one year. For e.g. cash, accounts receivable (debtors who owe you money), stock, etc.

b) Non-current assets Assets that are expected to provide value in the long term (more than 1 year). For e.g. land, buildings, vehicles, equipment, furniture, etc.

www.e-classroom.co.za © e-classroom 3

LiabilitiesActivity 3

1. Have you ever borrowed money or lent money to anybody?

Liability:A Liability is money that the business owes to others (debts) e.g. accounts payable, rent, mortgage payments, loans owed, etc. Borrowed capital is a liability.

There are two types of liabilities:a) Current liability Debts to be settled within a year. For e.g. accounts payable, short term loans, interest on loans, etc.

b) Non-current liability Debts that will be settled in more than a year (in the long term), for e.g. mortgage loan (a loan from the bank for property bought) vehicle or rent owed, long term loans (known as notes payable), etc.

Activity 4 – Amanda’s Tuck shop 1. Study the question below and answer the questions that follow: Amanda owns a tuck shop. She bought a wendy house for R10 000 and converted it into a shop. Amanda still owes her uncle R6000 for the money he lent her for the wendy house. She pays him R500 per month. She also owes the furniture shop R3500, which she pays R400 per month. She has stock to the value of R4400.

a) What assets does Amanda own?

The wendy house and stock.

b) Are they current assets or non-current assets?

Wendy house: non-current asset Stock: current asset c) What are Amanda’s liabilities?

The loan owed to her uncle and the furniture shop.

d) Are they current liabilities or non-current liabilities?

Loan: non-current liability account: current liability.

Income

This is the amount that a business receives for goods or services rendered. It is also called revenue.

ExpensesThis is the amount that the business needs to pay to run the business. For e.g. telephone, supplies, advertising, rent, electricity, etc. It is also called cost.

www.e-classroom.co.za © e-classroom 4

DrawingsThe owner of a business can withdraw money from the business to use personally, is called ‘drawings’. Most owners don’t pay themselves a salary and use the money from the business when they need it.

Activity 51. Study the income and expenses for “Jacks shoe shop” for the year. Indicate with an ‘x’ whether it is an income or expense.

Item Income ExpenseMortgage loan on building xElectricity xDelivery trucks xFurniture for customers xSalaries xShelves bought xEmployees uniforms xTelephone and internet bill xDrawings xStock sold (Sales) xOffice supplies (stationery) xCash register xCleaning supplies xWater account xShelves sold xShoe stock bought (Cost of sales) x

ProfitA business will earn a profit when the business income is more than its expenditure.Profit = Income – expenses.

LossA business will suffer a loss when the businesses income is less than its expenditure.If the answer you get when working out the profit is a negative number (- in front), then the business made a loss.

Activity 6Use a calculator.1. Calculate the profit of a business if it receives R80 000 in income and spends R66 700 in expenses. Profit = Income – expenses

= R80 000 – R66 700

= R13 300 profit

2. Calculate the loss a business suffers if it receives R60 000 in income and spends R96 000 in expenses.

Profit = Income – expenses

= R60 000 – R96 000

= R36 000 Loss 0r – R36 000,00

www.e-classroom.co.za © e-classroom 5

3. A business receives R530 000 in income and spends R600 000 in expenses. Does the business make a profit or loss?

The business makes a loss of R70 000

4. What advice could you give to a business that experiences a loss?

Cut down on expenses and by stock only when it is needed.

Budgets Activity 7

1. Watch the video about budgets and answer the questions that follow: a) Why should budgets be drawn?

So that business owners can keep control of the business income and expenditure.

b) What is a budget?

An estimate or summary of income and expenses.

c) How did Michael solve his problem of over- spending?

He cut down on his wants like going to movies, eating out and things that he couldn’t afford all the time.

d) What did Michael do with the rest of his money?

He saved it.

e) What else did Michael do to keep within his budget?

If he spent more in one area, he spent less in another area.

f ) Do you think saving money is important? Why?

Yes, it helps to put money aside for emergencies or for future needs or wants.

SavingPutting money aside for later use. For e.g. in a savings account at the bank.

Banking Activity 8

1. Watch the You tube video ‘Teaching money to kids and how they work’ - and answer the questions that follow:

www.e-classroom.co.za © e-classroom 6

a) What is a bank?

A place where people keep and borrow money.

b) What is interest?

Money that the bank pays a person for keeping their money.

c) How is the interest amount determined?

It is determined by calculating a small percentage of how much money is in your account.

d) Complete: The more money you have in the bank, the more interest you will earn.

e) Why do banks pay interest?

They pay interest because they use your money and lend it to other people who need it.

f ) How are banks able to pay you the interest on your account?

They charge a higher interest rate to those people who borrow money, so they can pay you the interest.

Financial recordsFinancial records are documents or statements that inform the owner, consumers and other interested people or businesses of the financial

condition of a business. These financial statements are records of all the cash that flows in and out of the business. These statements help business

owners to make important decisions about the condition of their business. There are 4 main types of financial records that businesses keep: The Balance

Sheet, The Income Statement, The Statement of Changes in Equity and The Cash Flow Statement.

Accounting standardsIn South Africa, The IFRS (International Financial Reporting Standards) sets

international accounting standards that some businesses must comply with when analysing their financial records.

Activity 91. Watch the You tube video: IFRS standards – why do they matter? and answer the questions that follow: a) What do international investors need?

They need access to financial information that they can trust.

b) Name three benefits that the IFRS brings to the world economy and briefly describe each one.

Transparency - helps investors make more informed investment decisions.

Accountability - reduces the information gap between those on the inside and those on the outside of companies. Can hold company management to account.

Efficiency - companies and markets can operate more efficiently with 1 trusted global standard. Lowers cost of capital and reporting.

www.e-classroom.co.za © e-classroom 7

c) How does the IFRS contribute to the global economy?

It fosters trust, growth and long term financial stability.

d) Why do you think trust is so important to investors in companies?

Investors are putting large amounts of money into these companies and hope to get a good return from the investment. They don’t want to lose money. They also want to be assured that their money is safe and secure. They want to invest in companies that have good reputations.

TransactionsThis is the action of buying or selling something. In accounting, when something is bought or sold, the transaction is recorded. This could be buying or selling for cash or credit. A business records these transactions to understand how well the business is doing.

References:https://goo.gl/rE0JRX

https://goo.gl/Jss2fc

https://goo.gl/u1x6z7

https://goo.gl/xObGm

https://goo.gl/KdbrJr

https://goo.gl/hetS3Y

https://goo.gl/AwKBQp

https://goo.gl/oFLvvf

https://goo.gl/f49rkZ

https://goo.gl/YFbsaJ

https://goo.gl/3dYwyf

www.e-classroom.co.za © e-classroom 8

TERM 2: FINANCIAL LITERACY - TOPIC 1 EMS – GRD 7 ASSIGNMENT – ACCOUNTING CONCEPTS

NAME: 20 MARKS

* Read through the terminology above and complete the questions in the space provided.1. State if the following is true or false, if false correct the underlined part: (10)

(Give 2 marks if false: 1 for false and 1 for the reason given)

a) Fixed capital is durable.

True.

b) An asset is money that the business owes to other businesses, for goods bought on credit. For e.g. equipment.

False, they are a liability.

c) In accounting, drawings is the term used when the owner takes money from the business for personal use.

True.

d) A Loss is experienced by a business if the businesses expenses are more than its income.

True.

e) Expenses is putting money aside for something we might need later.

False, Saving.

f ) A Debt is money that is owed.

True.

g) Revenue is also called cost.

False, income.

2. What is the difference between an accountant and a book keeper? (1)

A book keeper collects and organises financial records and an accountant analyses the financial information collected by the book keeper, to make decisions about the future of the business.

3. Give two reasons why budgets are important. (2)

Budgets are important because they allow you to create a spending plan for your money and ensures that you will also keep a record of your debt or help you work your way out of debt if you are currently in debt.

4. Give one benefit of saving money at a bank. (1)

Your money earns interest.

5. Give two examples of financial records that a business can keep. (2)

A Balance sheet, an Income Statement, the Statement of Changes in Equity and the Cash Flow Statement.

6. What do current assets and current liabilities have in common? (1)

They both need to be paid or received by a business within a year.

www.e-classroom.co.za © e-classroom 9

7. Give an example of a non-current asset and a non-current liability. (2)

Non-current asset: land, buildings, vehicles, equipment, furniture, etc.

Non-current liability: mortgage on business property or rent owed, long term loans, etc.

8. Give one reason why the IFRS is important. (1)

It helps investors make more informed decisions.

It reduces the information gap between those on the inside and those on the outside of businesses.

Companies can operate more efficiently with 1 trusted global standard. It lowers the cost of capital and reporting.

It fosters trust, growth and long term financial stability in world economies.