ACC121: Financial Accounting 1B Study Guide (WSU BCom Accounting)

This study guide provides comprehensive exam-oriented notes for ACC121: Financial Accounting 1B, a core first‑year module in the BCom in Accounting at Walter Sisulu University (WSU) and comparable courses at other South African universities. It focuses on the typical South African university syllabus for Financial Accounting 1B (continuation of basic financial accounting), aligned with IFRS for SMEs and introductory IFRS concepts. Use it alongside your official WSU ACC121 tutorial letters, prescribed textbook, and past papers for maximum benefit.

1. ACC121 in Context: Module Overview and Exam Strategy

1.1 Position of ACC121 in the WSU BCom in Accounting

ACC121: Financial Accounting 1B normally follows ACC111: Financial Accounting 1A in the first year of the WSU BCom in Accounting. It assumes that you already understand:

The accounting equation (Assets = Equity + Liabilities)
Double‑entry system (debits and credits)
Recording transactions in journals and posting to the general ledger
Preparing a trial balance
Preparing a basic income statement and statement of financial position for a sole trader

ACC121 deepens and extends this foundation by focusing on:

Partnership accounting
Companies (limited liability) – basic share capital and reserves
Introduction to IFRS and IFRS for SMEs
Non‑current assets (property, plant and equipment; intangible assets; impairment)
Inventory accounting (FIFO, weighted average, periodic vs perpetual)
Cash and internal control, including basic bank reconciliation
Elements of adjustments and closing entries in more complex contexts

This content is standard across many South African universities (e.g., similar to FAC1502 at UNISA and ACC16A1 at CUT), but this guide keeps the emphasis on WSU’s ACC121 outcomes and common exam angles.

1.2 Learning Outcomes and Key Competencies

By the end of ACC121, you should be able to:

Record and process more complex business transactions:
- For partnerships and companies
- Involving non‑current assets, depreciation and impairment
- Involving inventory using different cost formulas
Prepare financial statements:
- For sole traders with year‑end adjustments
- For partnerships (including appropriation account and partners’ current accounts)
- For companies – basic Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, and Statement of Financial Position
Apply IFRS principles at an introductory level:
- Understand concepts such as recognition, measurement, presentation and disclosure
- Work with IFRS for SMEs terminology and formats commonly adopted in undergraduate courses
Analyse and reconcile:
- Perform and explain a bank reconciliation
- Identify basic internal control weaknesses relating to cash and inventory
Interpret accounting information:
- Perform simple ratio analysis or commentary (e.g., liquidity, profitability), if included in your specific ACC121 syllabus
- Explain the impact of transactions and adjustments on profit, equity and financial position

1.3 ACC121 Assessment Structure and Weightings (Typical)

Assessment formats vary by year and campus, so always confirm with the current ACC121 module guide. A typical pattern at WSU and similar universities is:

Class tests / semester tests: 30–40%
Assignments / online quizzes: 10–20%
Practical exercises / tutorials: 0–10%
Final examination: 40–60%

The final exam typically includes:

One or two long questions (25–40 marks each) involving full financial statements or full ledger and adjustment cycles.
Several medium‑length questions (10–20 marks) on specific topics such as:
- Partnerships
- Non‑current assets and depreciation
- Inventory valuation
- Bank reconciliation and internal control
A few theory / conceptual questions (5–15 marks) testing IFRS definitions, principles and interpretations.

1.4 Question Types and Mark Allocation

Expect the following question types:

Preparation of financial statements (high marks, often 20–40% of the exam):
- Complete income statement and statement of financial position from a trial balance and adjustments.
- Partnership statements including appropriation account.
Ledger / journal‑based questions:
- Prepare general journal entries for non‑current asset transactions (purchase, depreciation, disposal).
- Record partner capital transactions (admission, retirement, withdrawal, drawings).
Reconciliation and analysis:
- Prepare a bank reconciliation.
- Adjust the cash book.
- Spot errors or omissions and correct them.
Short‑answer theory:
- Define assets, liabilities, equity, revenue, expenses.
- Explain the difference between capital and revenue expenditure.
- Interpret the accrual basis and going concern assumptions.
- Distinguish between a partnership and a company.

Marks are awarded for:

Layout and headings (especially in financial statement questions)
Correct use of debits and credits
Accurate calculations (with proper working notes)
Logical presentation and clearly labelled workings
Method marks – even with a wrong final figure, you can earn partial marks for correct approach.

1.5 Exam Strategy and Time Management

Scan the paper first:
- Identify the biggest questions (often 30–40 marks).
- Start with the sections you are strongest in; this builds momentum and bank marks early.
Allocate time by marks:
- If the exam is 3 hours and 100 marks, allow about 1.8 minutes per mark.
- A 30‑mark question should take about 54 minutes.
- Keep a small buffer for checking (e.g., last 10–15 minutes).
Plan before you write:
- For financial statements, sketch a template first: headings, major line items (revenue, cost of sales, gross profit, other income, expenses, profit). Then fill in systematically.
- For journals, write the date, account names, and narration where required.
Show all workings:
- Use numbered working notes and cross‑reference them (e.g., “Depreciation – Note 1”).
- This helps markers trace your logic and award partial credit.
Common pitfalls to avoid:
- Forgetting adjustments (e.g., accrued expenses, prepayments, depreciation).
- Confusing debits and credits, especially for equity accounts.
- Mixing up current and non‑current asset/liability classifications.
- Failing to clearly label partners’ capitals, current accounts, and drawings.
Study technique suggestions:
- Work through WSU ACC121 tutorial questions and past examination papers under timed conditions.
- Create summary sheets for each topic with key definitions and formats.
- Practise journal entries repeatedly; writing them out helps memorisation.

2. Conceptual Framework, Double‑Entry Review, and Adjustments

ACC121 assumes you know the basics from ACC111, but exams often include integrated questions where foundational concepts matter. This section refreshes core ideas that underpin everything else.

2.1 Conceptual Framework Basics (IFRS and IFRS for SMEs)

Modern accounting in South Africa follows International Financial Reporting Standards (IFRS) and, for many SMEs, IFRS for SMEs. At first‑year level, focus on:

2.1.1 Objective of Financial Statements

The objective is to provide useful financial information about the reporting entity to existing and potential investors, lenders and other creditors to help them make decisions about:

Providing resources (e.g., buying shares, offering loans)
Assessing management’s stewardship / accountability
Evaluating profitability, liquidity, and solvency

Useful information has qualitative characteristics:

Relevance – information is capable of influencing decisions (e.g., significant pending lawsuit is relevant).
Faithful representation – complete, neutral, free from error (in process, not always perfectly accurate).
Enhancing characteristics: comparability, verifiability, timeliness, understandability.

2.1.2 Elements of Financial Statements

Know the basic elements clearly:

Asset: A present economic resource controlled by the entity as a result of past events, from which future economic benefits are expected.
Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
Equity: The residual interest in the assets after deducting liabilities.
Income: Increases in assets or decreases in liabilities that result in increases in equity (other than contributions from owners).
- Includes revenue (sales, service income), gains.
Expenses: Decreases in assets or increases in liabilities that result in decreases in equity (other than distributions to owners).

2.1.3 Recognition and Measurement

Recognition: Including an item in the financial statements (e.g., recognising revenue when earned).
Measurement: Determining the monetary amount at which an item is recognised. Common bases:
- Historical cost
- Fair value (used more in advanced modules)
- Amortised cost, etc.

In ACC121, most items are measured at historical cost minus accumulated depreciation / impairment.

2.2 Review of the Double‑Entry System

The double‑entry system ensures that every transaction affects at least two accounts and the accounting equation remains balanced.

2.2.1 The Accounting Equation

Fundamental equation:

Assets = Equity + Liabilities

For a sole trader:

Assets = Capital + Liabilities

For a company:

Assets = Share Capital + Retained Earnings + Reserves + Liabilities

For a partnership:

Assets = Partners’ Capital + Partners’ Current Accounts + Liabilities

Any transaction must keep this equation in balance.

2.2.2 Debit and Credit Rules (Quick Reference)

Use this framework:

Category	Normal Balance	Increase	Decrease
Asset	Debit	Debit	Credit
Expense	Debit	Debit	Credit
Drawings / Dividends	Debit	Debit	Credit
Liability	Credit	Credit	Debit
Equity / Capital	Credit	Credit	Debit
Income / Revenue	Credit	Credit	Debit

So when recording:

Buy equipment for cash:
- Debit Equipment (asset ↑)
- Credit Bank (asset ↓)
Receive cash from customer for previous credit sale:
- Debit Bank (asset ↑)
- Credit Trade Receivables (asset ↓)

Total debits for every transaction must equal total credits.

2.3 Journals, Ledgers and Trial Balance Refresher

Although ACC121 focuses more on financial statements and special topics, you may still be required to:

Prepare general journal entries
Post to ledger accounts
Extract or adjust a trial balance

2.3.1 Steps from Transaction to Trial Balance

Analyse the transaction: Identify which accounts are affected and how.
Record in the general journal:
- Date
- Debit account(s) and amount
- Credit account(s) and amount
- Narration (brief description)
Post to ledger accounts:
- Ledger T‑accounts for each general ledger account.
Balance each ledger account:
- Sum debits and credits.
- Insert balance carried down (c/d), then brought down (b/d) for the next period.
Prepare trial balance:
- List each ledger account with its closing debit or credit balance.
- Totals of debits and credits must agree.

2.3.2 Common Journal Types in ACC121

General journal – for most entries including:
- Opening balances for partnerships
- Capital injections, drawings
- Disposal of non‑current assets
- Adjustments (accruals, prepayments, depreciation)
Sales and purchases journals – may be given; detail entries often summarised in the general ledger.

2.4 Year‑End Adjustments (Crucial for Exam Questions)

Integrated questions in ACC121 often give a trial balance and a list of adjustments. You must:

Record adjusting journal entries
Reflect them appropriately in the financial statements

Common adjustments and typical entries:

2.4.1 Accrued Expenses and Income

Accrued expenses (e.g., wages owing at year end):
- Dr Relevant Expense
- Cr Accrued Expenses (liability)
Accrued income (e.g., interest earned but not yet received):
- Dr Accrued Income (asset)
- Cr Relevant Income

2.4.2 Prepaid Expenses and Income Received in Advance

Prepaid expense (insurance paid in advance):
- Dr Prepaid Expense (asset)
- Cr Insurance Expense
Income received in advance (rent received for next period):
- Dr Rent Income
- Cr Income Received in Advance (liability)

2.4.3 Depreciation

Depreciation on equipment (straight line example):
- Dr Depreciation Expense – Equipment
- Cr Accumulated Depreciation – Equipment

2.4.4 Provision for Doubtful Debts (Allowance for Credit Losses)

Increase in provision:
- Dr Bad Debts Expense or Credit Loss Expense
- Cr Allowance for Doubtful Debts
Decrease in provision:
- Dr Allowance for Doubtful Debts
- Cr Bad Debts Expense (or Credit Loss Income)

2.5 Capital vs Revenue Expenditure (Frequent Theory Topic)

Understanding the difference between capital and revenue expenditure influences:

Whether expenditure is capitalised as an asset or expensed in the income statement.
Impact on profit and on non‑current assets.

2.5.1 Capital Expenditure

Capital expenditure:

Benefits the business for more than one financial period.
Is used to acquire or improve non‑current assets.

Examples:

Purchase price of machinery.
Cost of installing a new production line.
Major overhaul of an asset that extends its useful life.

Accounting treatment:

Recognised as an asset (e.g., Property, Plant and Equipment).
Depreciated over its useful life.

2.5.2 Revenue Expenditure

Revenue expenditure:

Benefits the business in the current period only.
Is incurred to maintain the asset in working condition or for day‑to‑day operations.

Examples:

Repairs and maintenance.
Ordinary servicing of a vehicle.
Rent, wages, telephone, electricity.

Accounting treatment:

Recognised as an expense in the income statement.
Reduces profit in the period.

In exams, case scenarios may ask you to classify given expenditures as capital or revenue and explain the effect on profit and assets if misclassified.

3. Partnerships and Companies: Equity, Profit Distribution and Basic Financial Statements

ACC121 moves beyond the sole trader to partnerships and companies, which are central in South African business practice and heavily examined.

3.1 Partnerships: Characteristics and Basic Accounting

3.1.1 Key Characteristics of a Partnership

A partnership is an association of two or more persons who carry on a business with the aim of making a profit, sharing risks and rewards. Features:

Mutual agency – each partner can bind the partnership in contracts.
Unlimited liability – partners are personally liable for partnership debts.
No separate legal personality in most contexts (in South African common law, unlike companies).
Partnership agreement – sets out capital contributions, profit‑sharing ratios, salaries, interest on capital, drawings, etc.

3.1.2 Equity Structure in Partnership Accounting

Common equity accounts:

Partners’ Capital Accounts:
- Record initial and subsequent capital contributions and permanent withdrawals.
- Often fixed (especially when current accounts are used).
Partners’ Current Accounts:
- Record each partner’s:
  - Share of profit/loss
  - Salary allowances (if any)
  - Interest on capital
  - Interest on drawings
  - Drawings during the year
- Balances are either debit (overdrawn) or credit (owing to partner).

3.2 Partnership Profit Distribution: Appropriation Account

The partnership appropriation account starts with net profit (or loss) from the income statement and distributes it to the partners.

3.2.1 Standard Format

Example format for ABC Partnership:

Start with Net Profit (from income statement)
Add / subtract:
- Plus: Interest on drawings (credited to profit for allocation later)
- Less: Partners’ salaries
- Less: Interest on capital
- Plus/Minus: Any other adjustments from agreement
Remaining balance is share of residual profit (or loss) allocated in the profit‑sharing ratio.

3.2.2 Example Profit Appropriation

Assume the following:

Net profit: R120 000
Partner A salary: R30 000
Partner B salary: R20 000
Interest on capital: A: R10 000; B: R6 000
Interest on drawings: A: R2 000; B: R1 000
Profit‑sharing ratio for remaining profit: A:B = 3:2

Appropriation account:

Net profit: R120 000
Add: Interest on drawings (A 2 000 + B 1 000) = R3 000
Adjusted profit for appropriation: R123 000
Less: Salaries (A 30 000 + B 20 000) = R50 000
Remaining: R73 000
Less: Interest on capital (A 10 000 + B 6 000) = R16 000
Remaining residual profit: R57 000
Share residual profit:
- A: 3/5 × 57 000 = R34 200
- B: 2/5 × 57 000 = R22 800

Total appropriations:

A: Salary 30 000 + Interest on capital 10 000 + Share residual profit 34 200 – Interest on drawings 2 000 = Net credit to A’s current account of R72 200.
B: Salary 20 000 + Interest on capital 6 000 + Share residual profit 22 800 – Interest on drawings 1 000 = Net credit to B’s current account of R47 800.

These net amounts are transferred from appropriation account to each partner’s current account.

3.3 Partners’ Current Accounts and Capital Accounts

You may be asked to:

Prepare partners’ current accounts (T‑accounts or vertical format).
Show how the appropriation affects each partner.

3.3.1 Typical Current Account Structure (Vertical Format)

Partner A – Current Account (credit balance = amount owed by partnership to A)

Details	Debit (R)	Credit (R)
Drawings	xx
Interest on drawings		xx
Salary		xx
Interest on capital		xx
Share of profit		xx
Balance c/d (closing)		xx (if credit) or on debit side if overdrawn

Everything on the credit increases what the partnership owes the partner; debits (like drawings) reduce it.

3.3.2 Admission and Retirement (Introductory)

ACC121 usually covers basic admission or retirement of a partner:

Admission:
- New partner brings in capital; new profit‑sharing ratio agreed.
- Sometimes goodwill is recognised (through goodwill account or premium for goodwill).
Retirement:
- Retiring partner’s current and capital balances are settled or converted into a loan.

At first‑year level, questions might:

Give you old ratio and new ratio.
Ask you to calculate the new capital balances based on a given total capital.

3.4 Partnership Financial Statements

Core statements for partnerships:

Statement of Profit or Loss and Other Comprehensive Income (income statement)
Statement of Changes in Equity (showing movements in partners’ capital and current accounts)
Statement of Financial Position (balance sheet)

You must:

Distinguish clearly between current accounts and capital accounts in equity section.
Show appropriation as either a separate note or within statement of changes in equity.

Example equity section (simplified):

Equity
Partner A – Capital
Partner B – Capital
Partner A – Current Account (credit balance)
Partner B – Current Account (debit balance: shown as deduction)
Total Equity

3.5 Companies: Key Features and Share Capital

ACC121 introduces basic company accounting, particularly share capital and distribution of profits.

3.5.1 Characteristics of a Company

Separate legal entity from its shareholders.
Limited liability of shareholders.
Shares can be ordinary and preference.
Governing bodies:
- Shareholders (owners) – elect directors.
- Directors / Board – manage company affairs.
Subject to Companies Act and typically follows IFRS or IFRS for SMEs.

3.5.2 Share Capital Basics

Key equity accounts:

Share Capital:
- Ordinary share capital: long‑term ownership interest.
- Preference share capital: may have fixed dividend rate, priority for dividends and capital.
Share Premium (if any):
- Amount received above par/nominal value.
- In many modern courses, shares are often assumed to be no‑par value, and all contributions go into “Share Capital”.
Retained Earnings:
- Accumulated profits not distributed as dividends.

3.5.3 Example Share Issue Journal Entries

Issue 10 000 ordinary shares at R5 each (no par value):

Dr Bank R50 000
Cr Share Capital R50 000

Issue 5 000 ordinary shares at R6 each (par value R5, premium R1):

Dr Bank R30 000
Cr Share Capital (at par) R25 000
Cr Share Premium R5 000

ACC121 exams often include straightforward share issue entries and basic equity section presentations.

3.6 Basic Company Financial Statements

For companies, ACC121 will usually focus on:

Statement of Profit or Loss and Other Comprehensive Income (Profit or Loss section only at introductory level)
Statement of Changes in Equity
Statement of Financial Position

3.6.1 Statement of Profit or Loss (Simplified Format)

Typical headings:

Revenue (Sales)
Cost of Sales
Gross Profit
Other Income
Distribution Costs
Administrative Expenses
Other Expenses
Finance Costs
Profit Before Tax
Income Tax Expense
Profit for the Year

You must know:

Which items fall where (e.g., salaries under administrative expenses; advertising under distribution).
How to calculate cost of sales if using periodic inventory system:
- Opening inventory + purchases – closing inventory = cost of sales.

3.6.2 Statement of Changes in Equity (Basic)

Structure:

Component	Share Capital	Retained Earnings	Total Equity
Opening balance	xx	xx	xx
Issue of shares	xx	–	xx
Profit for year	–	xx	xx
Dividends	–	(xx)	(xx)
Closing balance	xx	xx	xx

You must:

Understand how profit increases retained earnings.
Show dividends declared as a reduction of retained earnings.
Add share capital issued during the year.

3.6.3 Statement of Financial Position (Balance Sheet)

Key sections:

Assets
- Non‑current assets
- Current assets
Equity and Liabilities
- Equity:
  - Share Capital
  - Retained Earnings
- Non‑current liabilities (e.g., long‑term loans)
- Current liabilities (e.g., trade payables, bank overdraft, current portion of loans)

Equity is shown above liabilities, consistent with IFRS format.

4. Non‑Current Assets, Depreciation, Impairment and Disposal

Non‑current assets (property, plant and equipment, and intangible assets) are a major mark‑rich area in ACC121, often integrated into bigger questions.

4.1 Property, Plant and Equipment (PPE)

4.1.1 Definition and Initial Recognition

Under IFRS / IFRS for SMEs, property, plant and equipment (PPE) are:

Tangible items
Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
Expected to be used over more than one period

An item of PPE is recognised as an asset when:

Future economic benefits are probable.
Cost can be measured reliably.

4.1.2 Initial Measurement

Initially measured at cost:

Purchase price (including import duties and non‑refundable taxes)
Directly attributable costs to bring the asset to working condition (e.g., installation, delivery)
Less: Trade discounts and rebates

Example:

Purchase price: R200 000
Import duty: R10 000
Delivery and installation: R8 000
Training of staff: typically expensed, not capitalised
Total capitalised cost: R218 000

Journal entry:

Dr Machinery (PPE) R218 000
Cr Bank / Trade Payables R218 000

4.2 Depreciation: Concepts and Methods

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It reflects the consumption of economic benefits.

Depreciable amount = Cost – Residual value
Useful life: Period of expected use or number of units produced.

ACC121 generally emphasises:

Straight‑line method
Diminishing balance (reducing balance) method
Possibly units‑of‑production in some syllabi

4.2.1 Straight‑Line Method

Formula:

Annual Depreciation = (Cost – Residual Value) ÷ Useful Life (in years)

Example:

Cost: R100 000
Residual value: R10 000
Useful life: 5 years
Annual depreciation = (100 000 – 10 000) ÷ 5 = R18 000

Journal entry per year:

Dr Depreciation Expense R18 000
Cr Accumulated Depreciation – Asset R18 000

4.2.2 Reducing Balance Method

Depreciation is calculated as a fixed percentage on the carrying amount (cost – accumulated depreciation) at the beginning of each year.

Example:

Cost: R100 000
Rate: 20% reducing balance
Year 1 depreciation: 20% × 100 000 = R20 000
Carrying amount at end of Year 1: 100 000 – 20 000 = R80 000
Year 2 depreciation: 20% × 80 000 = R16 000
Carrying amount at end of Year 2: 80 000 – 16 000 = R64 000

Journal each year:

Dr Depreciation Expense
Cr Accumulated Depreciation

4.2.3 Partial Year Depreciation

If an asset is acquired or disposed of during the year, depreciation is often calculated pro rata for the period of use.

Example:

Asset purchased on 1 April.
Financial year end: 31 December.
9 months of use in the year:
- Annual depreciation = R18 000
- Depreciation for 9 months: 18 000 × 9/12 = R13 500

ACC121 exam questions often require you to calculate such partial depreciation and adjust accumulated depreciation accordingly.

4.3 Impairment (Introductory Level)

Impairment is when the recoverable amount of an asset falls below its carrying amount.

Carrying amount: Cost – Accumulated depreciation – Accumulated impairment losses
Recoverable amount: Higher of:
- Fair value less costs to sell
- Value in use (present value of future cash flows)

At introductory ACC121 level, you may only need to:

Recognise and journal an impairment loss when given carrying and recoverable amounts.
Adjust depreciation for future periods after impairment.

4.3.1 Impairment Journal Entry

Example:

Carrying amount: R80 000
Recoverable amount: R70 000
Impairment loss: R10 000

Journal:

Dr Impairment Loss (expense) R10 000
Cr Accumulated Impairment Loss – Asset R10 000

4.4 Disposal of Non‑Current Assets

A frequent ACC121 exam topic: record the disposal of an asset and calculate any profit or loss on disposal.

4.4.1 Steps in Disposal

Update depreciation to date of disposal.
Remove cost and accumulated depreciation from the books.
Record proceeds from disposal (cash or trade‑in).
Determine profit or loss on disposal:
- Proceeds – Carrying amount at disposal date.
Record profit (income) or loss (expense).

4.4.2 Example Disposal Calculation

Assume:

Equipment cost: R120 000
Accumulated depreciation at start of year 3: R50 000
Depreciation method: Straight‑line, 10‑year life, no residual value → annual depreciation = R12 000.
Sold on 30 June Year 3 for R65 000.
Year end: 31 December.

Steps:

Depreciation for 6 months (Jan–June Year 3):
- R12 000 × 6/12 = R6 000
- Accumulated depreciation before disposal = 50 000 + 6 000 = R56 000
Carrying amount at disposal date:
- 120 000 – 56 000 = R64 000
Proceeds: R65 000 → profit on disposal = 65 000 – 64 000 = R1 000.
Journal entries:

a) Record 6 months’ depreciation:

Dr Depreciation Expense – Equipment R6 000
Cr Accumulated Depreciation – Equipment R6 000

b) Remove asset and accumulated depreciation, record proceeds:

Dr Bank R65 000
Dr Accumulated Depreciation – Equipment R56 000
Cr Equipment R120 000
Cr Profit on Disposal of Equipment R1 000

If the carrying amount had been higher than proceeds, you would record a Loss on Disposal.

4.5 Intangible Assets (Basic Overview)

Intangible assets are non‑monetary assets without physical substance (e.g., patents, trademarks, software, goodwill). ACC121 usually focuses on:

Basic definition
Distinction between internally generated and acquired intangibles
Simple amortisation

4.5.1 Recognition and Amortisation

Internally generated goodwill is not recognised as an asset.
Acquired intangible assets (e.g., purchased patent) recognised at cost and amortised over their useful life.

Example:

Patent purchased for R60 000.
Useful life: 5 years.
Annual amortisation: 60 000 ÷ 5 = R12 000.

Journal each year:

Dr Amortisation Expense – Patent R12 000
Cr Accumulated Amortisation – Patent R12 000

The financial statements display:

Non‑current assets: Intangible assets (cost less accumulated amortisation).

5. Inventory, Cash, Bank Reconciliation and Internal Control

ACC121 introduces important working‑capital topics: inventory accounting and cash management (including bank recon and internal control).

5.1 Inventory Accounting: Systems and Cost Formulas

Inventory is a major current asset for trading and manufacturing entities.

5.1.1 Definitions

Inventory: Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies.
Cost of sales: Cost of inventory sold during a period.

5.1.2 Inventory Systems: Periodic vs Perpetual

Periodic Inventory System:
- Purchases are recorded in a Purchases account.
- Inventory on hand is determined by physical stock count at period end.
- Cost of sales is calculated using:
  - Opening inventory + Purchases – Closing inventory.
Perpetual Inventory System:
- Inventory account is updated continuously.
- Each sale entry reduces inventory and records cost of sales.
- At year end, physical count is still needed to confirm quantities but system records are always up‑to‑date.

ACC121 often uses the periodic system in exam questions, though you may be required to show simple perpetual entries as well.

5.2 Inventory Costing Methods

Two common methods:

FIFO (First In, First Out)
Weighted Average Cost

LIFO is generally not allowed under IFRS.

5.2.1 FIFO Method

Under FIFO:

Earliest (first) purchased items are assumed sold first.
Closing inventory consists of the most recent purchases.

Example:

Opening inventory: 100 units @ R10
Purchases:
- 200 units @ R12
- 100 units @ R13
Total available: 400 units.
Sales: 250 units during the period.
Under FIFO, cost of sales:
- 100 units from opening @ R10 = R1 000
- 150 units from first purchase @ R12 = R1 800
- Total cost of sales = R2 800
Closing inventory:
- Remaining 50 units from first purchase @ R12 = R600
- All 100 units from second purchase @ R13 = R1 300
- Closing inventory = R1 900

5.2.2 Weighted Average Method (Periodic)

Weighted average cost per unit =
(Total cost of units available for sale) ÷ (Total units available)

Using the same data:

Total cost:
- Opening: 100 × 10 = 1 000
- Purchase 1: 200 × 12 = 2 400
- Purchase 2: 100 × 13 = 1 300
- Total = R4 700
Total units = 400
Weighted average cost per unit = 4 700 ÷ 400 = R11.75

Cost of sales:

Sold 250 units × R11.75 = R2 937.50

Closing inventory:

Remaining 150 units × R11.75 = R1 762.50

In ACC121, you are expected to:

Apply both methods correctly.
Explain differences in cost of sales and closing inventory under each method.

5.2.3 Net Realisable Value (NRV)

Inventory is measured at the lower of cost and net realisable value.

Net realisable value (NRV): Estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to sell.

If NRV < cost, inventory is written down:

Dr Cost of Sales (or Inventory Write‑Down Expense)
Cr Inventory

Example:

Cost = R100 per unit, NRV = R90.
50 units unsold.
Write‑down = (100 – 90) × 50 = R500.

5.3 Cash, Petty Cash and Bank

5.3.1 Cash and Cash Equivalents

Cash and cash equivalents include:

Bank balances (cheque/current accounts)
Cash on hand
Short‑term, highly liquid investments (depending on syllabus depth)

In ACC121, focus is mainly on cash on hand, petty cash, and bank balances.

5.3.2 Petty Cash Imprest System

Petty cash is used for small day‑to‑day expenses (e.g., taxi fares, small stationery purchases).

Under the imprest system:

A fixed amount (e.g., R1 000) is kept as petty cash float.
At replenishment, petty cash is restored to the fixed amount.

Example:

Establish petty cash:

Dr Petty Cash R1 000
Cr Bank R1 000

During the month, petty cashier pays out:
- Stationery: R200
- Taxi fares: R150
- Tea and coffee: R100
- Total: R450
At month‑end, reimburse petty cash with R450:

Dr Stationery Expense R200
Dr Transport Expense R150
Dr Staff Refreshments Expense R100
Cr Bank R450

Petty cash account remains at R1 000; vouchers represent expenses incurred.

5.4 Bank Reconciliation Statements

A bank reconciliation compares:

The bank statement balance from the bank’s records, and
The bank account balance in the entity’s general ledger.

Differences arise because of timing differences and errors. ACC121 commonly tests your ability to:

Adjust the cash book balance.
Prepare a bank reconciliation statement.

5.4.1 Common Reconciling Items

Outstanding cheques: Cheques issued by the business but not yet presented at the bank.
Deposits not yet credited (outstanding deposits): Cash/cheque deposits recorded in the cash book but not yet reflected on bank statement.
Bank charges and interest recorded only in bank statement, not yet in cash book.
Direct debits / stop orders / debit orders:
- E.g., insurance premiums automatically deducted.
Direct deposits from customers:
- E.g., EFTs received directly into bank account.
Errors:
- Bank errors or bookkeeper errors.

5.4.2 Steps for Bank Reconciliation

Update the cash book:
- Enter items from bank statement not yet in cash book:
  - Bank charges, interest, direct debits, direct deposits, dishonoured cheques, etc.
- Calculate new updated cash book balance.
Prepare bank reconciliation statement:
- Start with updated cash book balance.
- Add deposits not yet credited.
- Deduct outstanding cheques.
- Adjust for any bank errors.
- The final figure should equal the bank statement balance.

5.4.3 Example Bank Reconciliation

Suppose:

Cash book (before adjustments): Debit balance R10 500
Bank statement: Debit balance R9 200
Bank statement shows:
- Bank charges R300 (not recorded in cash book)
- Direct deposit by customer R1 000 (not recorded in cash book)
Company knows:
- Outstanding cheque: R2 000
- Deposit of R500 made on 30th not yet reflected on bank statement

Update cash book:

Starting balance: R10 500

Deduct bank charges R300
Add direct deposit R1 000

Updated cash book balance:

10 500 – 300 + 1 000 = R11 200 (debit)

Prepare bank reconciliation:

Start with updated cash book balance: R11 200 (debit)

Add: Outstanding cheque? No, outstanding cheque is subtracted (it’s in cash book but not in bank).
Add: Deposits not yet credited R500 (in cash book but not in bank statement).

Adjusted balance (for bank side) before cheques: 11 200 + 500 = 11 700

Less: Outstanding cheque R2 000

Bank statement balance should be:

11 700 – 2 000 = R9 700

But bank statement shows R9 200, difference R500 suggests either:

Another outstanding item or error; or
The example can be adjusted: Suppose outstanding cheque is R2 500 (instead of R2 000).

Revised:

Adjusted bank: 11 700 – 2 500 = R9 200 → matches bank statement.

Exam tasks require similar logic, and you should show:

Updated cash book with entries and new balance
Reconciliation statement linking cash book balance and bank statement balance

5.5 Internal Control over Cash and Inventory

ACC121 often includes short theory questions on internal control, vital in South African contexts where organisations must combat fraud and error.

5.5.1 Objectives of Internal Control

Internal control aims to:

Safeguard assets
Ensure reliable financial reporting
Promote efficiency and adherence to policies
Prevent and detect fraud and error

5.5.2 Internal Control over Cash

Key control measures:

Segregation of duties:
- Separate custody of cash, recording of cash, and reconciliation.
Pre‑numbered receipts and payment vouchers.
Regular bank reconciliations.
Limiting cash payments; use electronic transfers or cheques.
Safe custody of cash (safes, locked tills).
Surprise cash counts.

Exam questions may ask you to identify weaknesses in a scenario and recommend improvements.

5.5.3 Internal Control over Inventory

Controls include:

Restricted access to stores; storekeeper responsible.
Pre‑numbered goods received notes and delivery notes.
Regular stock counts and reconciliation with inventory records.
Use of perpetual inventory system with continuous records.
Proper authorisation of issues (requisitions).
Separation of duties between ordering, receiving, recording, and paying suppliers.

When given a narrative (e.g., one person handles orders, receives goods and records them), you must identify that this violates segregation of duties and propose solutions.

6. Integrative Exam Practice: From Trial Balance to Financial Statements

An ACC121 exam often includes a comprehensive question where you receive a trial balance and adjustments and must prepare:

Adjusted trial balance (sometimes),
Statement of Profit or Loss and Other Comprehensive Income,
Statement of Changes in Equity, and
Statement of Financial Position.

This section outlines a robust, repeatable approach.

6.1 Systematic Approach to Adjustment‑Based Questions

Read the requirement first:
- Know whether you must prepare:
  - Full statements; or
  - Selected notes; or
  - Adjusted trial balance only.
Scan the trial balance:
- Highlight key items:
  - Non‑current assets
  - Equity accounts (capital, current accounts, share capital)
  - Revenue and expenses
  - Provisions (e.g., allowance for doubtful debts)
List adjustments clearly:
- Number each adjustment.
- Leave space beside each for notes or workings.
Process each adjustment one by one:
- Identify accounts affected.
- Decide if they affect income statement, balance sheet, or both.
- Prepare working notes:
  - Depreciation (by asset class)
  - Inventory and cost of sales
  - Accruals and prepayments
  - Bad debts and provision adjustments
Update figures in a “skeleton” financial statement layout:
- Start with an income statement layout:
  - Revenue
  - Cost of sales
  - Gross profit
  - Other income
  - Expenses (group appropriately)
- Build up each line item from trial balance plus/minus adjustments.
Check total equity reconciliation:
- Opening equity + profit – drawings/dividends + capital contributions = closing equity.
- This should match the equity section in the statement of financial position.

6.2 Common Examination Traps

Forgetting to adjust inventory:
- Opening and closing inventory must be correctly used in cost of sales calculation under periodic system.
Mis‑classifying expenses:
- E.g., wages used in manufacturing vs. administration.
Omitting accumulated depreciation:
- Always present assets at carrying amount (cost – accumulated depreciation – impairment).
Wrong treatment of drawings:
- Drawings are not expenses; they reduce equity (or partners’ current accounts), not profit.
Ignoring additional information that overrides trial balance:
- For example, interest on a loan may need to be accrued even if not shown in trial balance.

6.3 Example Structure for Financial Statements (Sole Trader)

Statement of Profit or Loss for the year ended 31 December 20X1

Revenue
Less: Cost of sales
Gross profit
Other income
Less: Operating expenses:
- Distribution costs
- Administrative expenses
Profit for the year

Statement of Changes in Equity

Opening capital
Plus: Additional capital introduced
Plus: Profit for the year
Less: Drawings
Closing capital

Statement of Financial Position as at 31 December 20X1

Assets:
- Non‑current assets (at carrying amount)
- Current assets (inventory, trade receivables, bank, etc.)
Equity and Liabilities:
- Equity:
  - Capital
- Non‑current liabilities
- Current liabilities (trade payables, accruals, bank overdraft)

6.4 Example Structure for Financial Statements (Partnership)

Modify the above to include:

Partnership appropriation account (can be a separate statement or integrated note).
Partners’ current accounts in the statement of changes in equity section.

Statement of Changes in Equity (Extract):

	Partner A Capital	Partner B Capital	A Current	B Current	Total
Opening balances	xx	xx	xx	xx	xx
Additional capital	xx	xx			xx
Profit appropriation			xx	xx	xx
Drawings			(xx)	(xx)	(xx)
Closing balances	xx	xx	xx	xx	xx

6.5 Ratio Interpretation (If Included in ACC121 Syllabus)

Some ACC121 papers may introduce basic ratios:

Profitability:
- Gross profit percentage = Gross profit ÷ Revenue × 100
- Net profit margin = Profit for the year ÷ Revenue × 100
Liquidity:
- Current ratio = Current assets ÷ Current liabilities
- Quick ratio (acid test) = (Current assets – Inventory) ÷ Current liabilities

Questions may ask:

Calculate ratios from given financial statements.
Comment briefly on performance compared with a previous year.

Example:

Year 1 gross profit: R200 000 on revenue R500 000 → 40%
Year 2 gross profit: R210 000 on revenue R600 000 → 35%

You should observe:

Revenue increased but gross profit margin declined, possibly due to higher cost of sales, discounts, or lower selling prices.

This study guide consolidates the key concepts, formats and techniques vital for ACC121: Financial Accounting 1B in the WSU BCom in Accounting and similar South African university modules. Combine this with your prescribed textbook, WSU tutorial letters, and substantial practice of past ACC121 papers, and focus particularly on partnerships, basic company accounting, non‑current assets, inventory, and bank reconciliation, as these consistently dominate first‑year Financial Accounting 1B examinations.