Accounting is the process of identifying, measuring and communicating financial information in order to evaluate the information and make informed decisions about the business. A basic knowledge of accounting is essential to understand the functioning of the business. Accountancy comprises the methods used to keep systematic and orderly records of all financial transactions of the business and is expressed in terms of money. It enables a person to determine what the financial condition of the business is at any given time.

Understanding business finances includes understanding general financial concepts, understanding the type of ownership, knowing how to interpret the financial information in the business, knowing how to improve systems and processes in the business.

For the purposes of this article, general financial concepts will be discussed.

Transactions are the building blocks of a financial activity or accounting data and directly influence the financial position of the business.

When transactions take place, the transaction data is recorded on a source document. Source documents, e.g. tax invoice and cash slip are records of transactions and must be kept for 7 years as per the Companies Act (No. 71 of 2008).

Credit sales means that goods are sold, or a service rendered to the client, but it will only be paid at a later stage.

Someone who owes the business money is called a debtor and because it is expected that the money will be repaid within a reasonable short period of time it constitutes a current asset for the business.

A credit purchase means that the business purchases goods or inventories from a supplier and doesn’t pay for it immediately but only at a later stage.

The person to whom the amount is owed is known as a creditor and because it is expected that the business will settle the debt within a relative short period of time, it constitutes a current liability for the business.

An account is an individual record in which all the transactions that are classified together are recorded, e.g. soap, disinfectant, paper hand towels, broom and dustpan are grouped and classified under the account named “cleaning materials”.

A group of accounts is known as a ledger.

Each transaction influences at least two ledger accounts. One account will be debited, and the other account will be credited. This is known as the principle of double entry.

A debit is an entry on the left-hand side of an account.

A credit is an entry on the right-hand side of an account.

The balances of all the accounts in the general ledger are summarised in a trial balance.

If the debit side of the trial balance agree to the credit side, then it indicates that the double-entry principle was applied correctly.

The annual financial statements are compiled from the trial balance as at the end of the financial year.

The financial statements report whether the business was profitable over the past period, shown in the Statement of Comprehensive Income (income statement) and whether the financial position of the business is still sound at the end of the financial year, shown in the Statement of Financial Position (balance sheet).

An asset is defined as a resource controlled by the company as a result of events from the past, from which future economic benefits are expected.

Assets are divided into non-current assets and current assets.

Examples of non-current assets are land and buildings, furniture, equipment and vehicles.

Examples of current assets are inventories, debtors and cash.

A liability is defined as a current obligation of a business resulting from an event in the past.

Liabilities are divided into non-current liabilities and current liabilities.

Examples of non-current liabilities are loans paid back over a long term, and provisions.

Examples of current liabilities are creditors and a bank overdraft, payable over a shorter term.

Equity refers to the owner’s interest in the assets of the business. The equity is influenced by the income and expenditure of the business.

Equity can be further divided into capital, income and expense:

Equity = Capital + Income - Expenses.