Formative Assessment Module 5 Risk Managemen.docx

Formative Assessment
Module 5
Risk Management
Assignment No. MAN61FMod5-1

RISK MANAGEMENT
Learner Full Names:
Surname:
Only fill in your answers in the provided columns on the right
hand side of the page.
Question 1: Multiple Choice - Only write the BEST CORRECT
corresponding answer in
the space provided for “Your Answers”. (i.e. either a, b, c, or d
)
Nr: Statement or question:
Ma
rk
Your
Answers
1.1 In risk management, uncertainties may include: 2 D

a Events which may or may not happen
b Uncertainties caused by a lack of information
c Uncertainties caused by ambiguity
d All of the above
1.2 The unexpected variability or volatility of returns is known
as: 2 B
a Information security risk
b Financial risk
c Human relationship risks
d Marketing risk

1.3 The characteristics of a Level 3 uncertainty (total
uncertainty) are: 2 D
a Outcomes are not fully identified and probabilities are
unknown
b Outcomes can be predicted with precision
c Outcomes are identified and probabilities are known
d Outcomes are identified but probabilities are unknown
1.4
Having appropriate risk management processes in place is a
function of: 2 A
a The Board
b Employees

c Management
d Directors
corresponding answer in the
space provided for “Your Answers”. (i.e. either a, b, c, or d)
CONTINUED:
Nr: Statement or question: Mark Your Answers
1.5 An example of a risk management plan is: 2 A
a House insurance

b SWOT analysis
c Project failures
d None of the above
1.6 A benefit of risk management is: 2 D
a Effective use of resources
b Ability to quickly grasp new opportunities
c Contingency planning
d All of the above
1.7 One of the key activities in the Risk Management Process
is: 2 A
a Resource controls
b Staff meetings
c Cost allocation
d Budgeting
1.8 The practice of taking measures to minimize loss is called: 2
C

a Risk avoidance
b Risk assumption
c Risk prevention
d Risk transfer
1.9
The capture of information about the organization and its
operations,
2
including the company’s aims and objectives, involves: B
a Compliance risk
b Strategic risk
c Operational risk

d Security risk
1.10 A Risk Assessment form is used to: 2 D
a Show the severity of a risk
b Indicate risk probabilities
c Estimate the frequency of occurrence of a risk
d Show the organisation’s vulnerabilities and the estimated cost
of recovery in the event of damage.

Question 2: Choose the CORRECT answer by selecting a or b.
Nr: Statement or question: Nr: Your Answers
A Work Breakdown Structure breaks larger tasks down into …
2.1 a. smaller tasks (activities) or 2.1 A
b. milestones
Each item in the WBS is generally assigned a unique identifier;
these identifiers
2.2
can provide a structure for a hierarchical summation of costs
and …
2.2
a. time B

b. resources
The following are examples of possible Threats and
Opportunities in a business: B
2.3 a. Quality; Staff; Management; Price
b. Technology; Public expectations; Competitors and
competitive actions
The following are examples of possible Strengths and
Weaknesses in a business: B
2.4 a. Economic conditions; Expectations of stakeholders or 2.4
b.
Resources ( financial, intellectual, location); Customer service;
Efficiency
FMEA is a method for analysing potential …. early in the
development cycle.
2.5 a. reliability problems or 2.5 A

b. risk problems
Risk can be defined in terms of frequency and severity:
2.6
… is how serious it will be if something happens.
2.6
a. Frequency or B
b. Severity
A Hazard and Operability study that systematically analyses
each part of a
2.7 system or activity is called ... 2.7 A a. HAZOP or
b. HAZOS
Failure Modes and Effects Analysis is a method used
2.8 a. early in the development cycle or 2.8 A
b. at the end of the development cycle

The following aspects should be covered in the risk review
process:
2.9 a. Opinions of key external and internal stakeholders; Risk
disclosure 2.9 A
exercise; or
b. Resource controls; Planned reaction; Report and monitor
performance
Which of the following are risks associated with workplace
skills:
2.10 a. Financial risk; Compliance; Reputation 2.10 A b.
Changing labour market conditions; changes in existing
strategic
partnerships
Total question 2 /10

Question 3:
Carefully read each of the following statements and state
whether they are true (T) or false (F):
No Statement T/F
3.1 Two of the factors that make up risk are levels of risk and
uncertainty. -True
3.2 Risk management is defined as a set of principles and
processes that help minimise the negative impacts of
risks and maximise the positive impacts. - True
3.3 One of the risks faced when developing new products is
problems with employee acceptance. - False
3.4 A reactive project manager tries to resolve issues when they
occur. _ True
3.5 Risk spreading is when money is put aside to cover losses
that might occur. - False
3.6 One method to reduce inter-group conflict is through
arbitration. - True
3.7 Reputation is a risk associated with workplace skills. - True

3.8 In financial risk management, market risk is the investor’s
risk of loss arising from a borrower who does not
make payments as promised. - False
3.9 Injury or harm to customers due to negligence of the
company may result in a public liability claim against the com-
pany. - True
3.10 Compliance risk is the risk of direct or indirect losses
arising from failed internal processes or systems. - False
3.11 An event that result in development of new infrastructure
and demand management systems that cannot be
man-aged after the event, is called environmental risk. - False
3.12 According to the 3x3 risk matrix, the severity of a risk
with a high probability and medium impact is medium. - False
3.13 One of the problems that could be experienced with a risk
matrix is that higher qualitative ratings can be
assigned to quantitatively smaller risks by mistake. - True
3.14 One of the elements of the external environment that the
SWOT analysis examines, is the human resource skills. - False
3.15 The HAZOP process is a means of solving problems rather
than an identifying technique. - False
3.16 In PEST analysis, PEST is an acronym for Political,
Economic, Sociological and Training factors. - True

3.17 To run an effective risk management program, one needs to
be able to predict failure risk levels throughout the
life of the asset. - True
3.18 Four ways to respond to risk include tolerate, treat,
transfer and terminate. - True
3.19 One of the controls that can be put in place to mitigate
risk, is additional information. – True
3.20 In an insurance context, pure risk refers to the uncertainty
as to whether a voluntary undertaken activity will result
in a gain or loss. - False
Student Number: 2 0 1 3 0 1 5
-
0 5 1 4 1
Module 5

Risk Management

Copyright © Business Management Training College (Pty)
Ltd
FD Roodt
1 3 0 1 5- 0 5 1 4
55 5 55
RISK MANAGEMENT
Learner Full Names:
Surname:
Only fill in your answers in the provided columns on the right
hand side of the page.

space provided for “Your Answers”. (i.e. either a, b, c, or d )
Nr: Statement or question: Mark
Your
Answers
1.1 In risk management, uncertainties may include: 2 d
a Events which may or may not happen
b Uncertainties caused by a lack of information
c Uncertainties caused by ambiguity
d All of the above

1.2 The unexpected variability or volatility of returns is known
as: 2 b
a Information security risk
b Financial risk
c Human relationship risks
d Marketing risk
1.3 The characteristics of a Level 3 uncertainty (total
uncertainty) are: 2 d
a Outcomes are not fully identified and probabilities are
unknown
b Outcomes can be predicted with precision

c Outcomes are identified and probabilities are known
d Outcomes are identified but probabilities are unknown
1.4 Having appropriate risk management processes in place is a
function of: 2 a
a The Board
b Employees
c Management
d Directors
Copyright © Business Management Training College (Pty) Ltd

Initial:
FD Roodt
Student Number: 2 0 1 3 0 1
-
5 0 5 1 4 3
space provided for “Your Answers”. (i.e. either a, b, c, or d)
CONTINUED:
Nr: Statement or question: Mark Your Answers
1.5 An example of a risk management plan is: 2 a
a House insurance

b SWOT analysis
c Project failures
d None of the above
1.6 A benefit of risk management is: 2 d
a Effective use of resources
b Ability to quickly grasp new opportunities
c Contingency planning
d All of the above
1.7 One of the key activities in the Risk Management Process
is: 2 a
a Resource controls
b Staff meetings
c Cost allocation
d Budgeting
1.8 The practice of taking measures to minimize loss is called: 2
c

a Risk avoidance
b Risk assumption
c Risk prevention
d Risk transfer
1.9 The capture of information about the organization and its
operations, 2 b including the company’s aims and objectives,
involves:
a Compliance risk
b Strategic risk
c Operational risk
d Security risk
1.10 A Risk Assessment form is used to: 2 d
a Show the severity of a risk
b Indicate risk probabilities

c Estimate the frequency of occurrence of a risk
d Show the organisation’s vulnerabilities and the estimated cost
of recovery in the event of damage.
Initial: FD Roodt
Student Number: 2 0 1 3 0 1 - 5 0 5 1 4 4
Question 2: Choose the CORRECT answer by selecting a or b.
Nr: Statement or question: Nr: Your Answers
A Work Breakdown Structure breaks larger tasks down into …
2.1 a. smaller tasks (activities) or 2.1 a

b. milestones
Each item in the WBS is generally assigned a unique identifier;
these identifiers
2.2
can provide a structure for a hierarchical summation of costs
and …
2.2
b
a. time
b. resources
The following are examples of possible Threats and
Opportunities in a business: b
2.3 a. Quality; Staff; Management; Price

b. Technology; Public expectations; Competitors and
competitive actions
The following are examples of possible Strengths and
Weaknesses in a business: b
2.4 a. Economic conditions; Expectations of stakeholders or 2.4
b. Resources ( financial, intellectual, location); Customer
service; Efficiency
FMEA is a method for analysing potential …. early in the
development cycle.
2.5 a. reliability problems or 2.5 a
b. risk problems
Risk can be defined in terms of frequency and severity:
2.6
… is how serious it will be if something happens.
2.6
b

a. Frequency or
b. Severity
A Hazard and Operability study that systematically analyses
each part of a
2.7
system or activity is called ...
2.7
a
a. HAZOP or
b. HAZOS
Failure Modes and Effects Analysis is a method used
2.8 a. early in the development cycle or 2.8 a

b. at the end of the development cycle
The following aspects should be covered in the risk review
process:
2.9 a. Opinions of key external and internal stakeholders; Risk
disclosure 2.9 a
exercise; or
b. Resource controls; Planned reaction; Report and monitor
performance
Which of the following are risks associated with workplace
skills:
2.10
a. Financial risk; Compliance; Reputation
2.10
b. Changing labour market conditions; changes in existing
strategic a
partnerships

FD Roodt
Initial:
Student Number: 2 0 1
3 0 1 - 5 0
5 1 4 5

Question 3:
No Statement T/F
3.1 Two of the factors that make up risk are levels of risk and
uncertainty.
T
3.2 Risk management is defined as a set of principles and
processes that help minimise the negative impacts of
risks and maximise the positive impacts.
3.3 One of the risks faced when developing new products is
problems with employee acceptance.
3.4 A reactive project manager tries to resolve issues when they
occur.
3.5 Risk spreading is when money is put aside to cover losses
that might occur.
3.6 One method to reduce inter-group conflict is through
arbitration.
3.7 Reputation is a risk associated with workplace skills.
3.8 In financial risk management, market risk is the investor’s
risk of loss arising from a borrower who does not
make payments as promised.

3.9 Injury or harm to customers due to negligence of the
company may result in a public liability claim against the com-
pany.
3.10 Compliance risk is the risk of direct or indirect losses
arising from failed internal processes or systems.
3.11 An event that result in development of new infrastructure
and demand management systems that cannot be
man-aged after the event, is called environmental risk.
3.12 According to the 3x3 risk matrix, the severity of a risk
with a high probability and medium impact is medium.
3.13 One of the problems that could be experienced with a risk
matrix is that higher qualitative ratings can be
assigned to quantitatively smaller risks by mistake.
3.14 One of the elements of the external environment that the
SWOT analysis examines, is the human resource skills.
3.15 The HAZOP process is a means of solving problems rather
than an identifying technique.
3.16 In PEST analysis, PEST is an acronym for Political,
Economic, Sociological and Training factors.
3.17 To run an effective risk management program, one needs to
be able to predict failure risk levels throughout the
life of the asset.

3.18 Four ways to respond to risk include tolerate, treat,
transfer and terminate.
3.19 One of the controls that can be put in place to mitigate
risk, is additional information.
3.20 In an insurance context, pure risk refers to the uncertainty
as to whether a voluntary undertaken activity will result
in a gain or loss.
TOTAL: FORMATIVE 5 /50
Initial:
T
F
T
F
T

T
F
T
F
F
F
T
F
F
T
T
T
T
F
FD Roodt

Student Number:
-
SECTION A
/70
SECTION B
/80
SECTION C
/50
SECTION D
/50
TOTAL
/250
1
Student Number:
-
SECTION A: SHORT QUESTIONS

Nr: Question
Mark:
1
1.1 Name three external role-players that need information
from an organisation.
1.2 Also name the type of information needed by each.
6
2
Why is a workload chart very useful when developing new
systems?
4
3
Name three different types of information systems and the
organisational level that it is
used at.
6
4
How is the flow of information influenced by structure and
culture in an organisation?
5
5
Name three factors that must be taken into account when
organising a meeting by way of
video conferencing.
3
6
Give examples of how legal requirements, regulations or the
organisation’s constitution
can have an effect on organising events such as a conference,
banquet congress, or seminar.
5
7

Why is determining your audience an important step in the
communication process?
5
8
Name three devices that make use of wireless transmission.
3
9
9.1 Explain the difference between a star network and a ring
network.
9.2 Point out the advantages and disadvantages of each type of
network.
8
10
Why is it important to compile an agenda for a meeting?
5
/50
Multiple Choice - Only write the MOST CORRECT
Nr:
Statement or question:
Mark Your
Answer
11.1 When can a chairperson adjourn a meeting without a
majority decision?
2
a
When the rules and regulations of the organisation are not
observed by the members.
b
When some members talk too much and do not allow quieter
members to have their say.
c

When disorderliness makes it impossible to continue.
d
When someone attending the meeting does not obey him.
11.2 When does a motion become a decision?
2
a
When it is submitted in writing.
b
When it is seconded.
c
After it has been discussed and adopted by the meeting.
d
In the next meeting after it was adopted.
11.3 A ‘bring forward’ planning system is also known as ...
2
a To-do-list
b Tickler
file
c
Time-log
d Gantt
chart
2
Student Number:
-
Multiple Choice - Only write the ACCURATE corresponding

answer in the space
provided for
“Your Answers”. (i.e. either a, b, c, or d )
Nr:
Mark
Your
answer
11.4 What is the ‘scalar principle’ more commonly known as?
2
a Delegation.
b Accountability
c
Span of control.
d
Chain of command
11.5 The rights inherent to a managerial position
2
a Delegation.
b
Span of control.
c
Authority
d
Responsibility
11.6 Identify the disadvantage of centralisation
2
a
Work processes are not always the best.
b

Offices do not always have the specialised workers and
equipment to implement savings
c
The co-operation of administrative activities can eventually
become cumbersome.
d
Owing to a variety of work of smaller scope, the work is done
more slowly.
11.7 In a functional organisational structure, the
administrative manager ...
2
a
Has the authority to give instructions to people in staff
positions.
b
Has authority to give enforceable instructions regarding the
administrative function to all
other functions.
c
Has authority to give instructions to line functionaries and
their subordinates.
d
Has only line authority.
11.8 When you take action to prevent an anticipated problem,
you are practising …
2
a Concurrent
control
b Feedback
control
c
Feed-forward control
d
Quality control

3
Student Number:
-
Multiple Choice - Only write the MOST CORRECT
Nr:
Mark
Your
Answer
11.9
A deviation from the quality standard can be caused by ... 2
a
Sick or unhappy employees and labour unrest.
b
Out-dated and inadequate machinery.
c
Poor working conditions and lack of support from management
d
All the above
11.10 When using the Delphi technique as a problem-solving
aid, the business will ... 2
a
Involve a group of people to generate as many as possible
ideas and solutions.

b
Ask each individual in the group taking part to write his/her
ideas about the problem
down in silence.
c
Do their best to create an environment for creative thinking.
d
Collect anonymous opinions from a group of experts.
Total question 11: /20
TOTAL SECTION A: 70
4
Student Number:
-
SECTION B: CASE STUDIES
Mark
Planet Bike is a manufacturer of bicycles. It has retail outlets
in Kwa-Zulu Natal,
Gauteng, Limpopo, the Free State and Cape Town. All functions
are centralised in their Head

Office in Gauteng, apart from sales representatives and
consultants who introduce and market
new products to various outlets. Steve Taylor is the
administrative manager. He is a very
competent manager who understands that the primary purpose of
his section is to process and
communicate information.
12.1 List four key objectives that you think Steve will be
responsible for as
administrative manager. (4)
12.2 The functional managers at Planet Bike need information
to enable them to assist
top management in the planning, development and
implementation of policies and to manage
their individual functions effectively.
What type of internal information would the managers of the
following areas require
from Steve and his team?
(12)
Purchasing
25
Operations
Human Resources
Public Relations
12.3 Give an example of an external role player, and the type
of information this role
player would need from Steve’s department. (4)
12.4 Discuss the following statement:
‘An administrative manager should have special people skills’
(5) Cඉඛඍඛගඝඌඡ2

You are leading the payments and accounts team in a small
retail business. The function
of the team is to process payments and administer accounts.
This office takes 10 days to process
a payment. One person works on a document, and then files it
away in a cabinet. It is taken out
later again for further work by another person. After each stage
the documents are carefully filed
away in a cabinet.
Bongani is an expert in office layout and design. You have
asked Bongani for advice with
the current office layout (figure A). She inspected the current
office layout , (figure A) and
changed it to figure B.
Figure A: Figure B: 13.1 Do you think the change in office
lay-out was an
improvement? Motivate your answer by referring to the possible
effect on quality delivery, cost
and time. (5) 13.2 Bongani has advised you that you need new
office furniture in some of your
other sections.
13 Write a letter to an office furniture supplier requesting a
catalogue and a price list to
assist you in making your decision on what to buy. (Use the
Business letter—standard block
form). (10) 25
13.3 The photocopier is not suitable for your team any more.
Investigate various
photocopier options and write an informal (short) report to
senior management where you
request the photocopier most suitable for your office needs. (10)
5

Student Number:
-
SECTION B: CASE STUDIES
Nr:
Question:
Mark:
Top-cover is a short-term insurance company. The claims
department consists of 30
claims adjustors, examiners and investigators that analyse and
investigate claims before the
insurance company makes a payment to the customer.
Their functions include:
obtain
missing information.
records, using computers
to enter, access, search and retrieve data.
Preparing and reviewing insurance-claim forms and
related documents for
completeness.
instructions on how to proceed
with claims or providing referrals to auto repair facilities or
local contractors.

They have experienced a sharp increase in workload over the
past couple of months
without any new appointments being made. They find it difficult
to deal with the increased
workload and feel unmotivated. Lots of time is wasted on
unnecessary things like duplicate
queries on outstanding claims, paperwork, unnecessary phone
calls, junk e-mail, clients now
knowing the right procedure to claim, etc.
To make things worse, they are constantly running out of stock
and have to waste
valuable time waiting for paper and other stationary. The
department uses an average of 800
pages of A4 paper each day, and new stock takes 3 days to
deliver.
The manager of the department, Vusi, decided to have a
meeting with his team to discuss
problems and possible solutions.
14.1 Use a planning aid to demonstrate how Vusi can help his
sub-ordinates use their
time more effectively.(10)
14.2 Discuss the importance of stock control in an
organisation. (5) 14
14.3 Decide on the level of A4 stock that must always be
available for the claims
department 30
in the case study. Calculate the re-order level of A4 paper for
the department. What does
the figure that you calculated mean? (5)
14.5 Write a memorandum to the claims department employees
in which you give them

information on the forthcoming meeting. (10)
TOTAL SECTION B:
80
6
Student Number:
-
SECTION C: ESSAY QUESTIONS
Nr: Question:
Mark:
As a result of the technological revolution, electronic
communication today is one of the
most frequently used modes of communication. Communications
media technology is vitally
important in a network.
15
15.1 Which factors should be considered to determine the most
appropriate
communications 15
medium? (10)
15.2 What is groupware and why is it so important in an
organisation? (5) The
relationships within an organisation cannot be restricted to
those enforced by management, and
are therefore not always formal.
16
10
Explain why it is important for the administrative manager to

know about the informal
organisational structure.
Problem-solving is a skill that is required of an administrative
manager. Discuss the
following statement critically:
17
10
‘All problems that occur in the workplace have something to
do with people at some
stage.’
You have been asked to develop a forms management policy
for ABC Stores, a closed
corporation business that belongs to two brothers.
18.1 Motivate the necessity of a forms management system.
(5) 18
15
18.2 What should be addressed in a forms management policy?
(5) 18.3 Describe how
you would go about establishing a forms management policy.
(5) TOTAL SECTION C
50
7
Student Number:
-

SECTION D: FINANCIAL MANAGEMENT QUESTIONS
Nr: Question:
Mark:
19
Explain at least 5 steps that a company can take to ensure that
it will maintain a positive
cash flow.
10
20
Discuss the two main reasons why businesses normally loose
money.
10
21
21.1 Briefly explain the 8 stages in a typical budgeting process
(8)
21.2 Explain how Zero-based budgeting is done (2)
10
Compile a pre-adjustment trail balance for Daniela’s Sweets.
The following balances appear in her general ledger of 31
October:
Bank (positive) R15 000
Capital
R27 000
22
Salaries

R 8 000
Vehicles R35
000
10
Creditors R34
000
Debtors
R10 000
Equipment R12
000
Sales
R21 000
Rental
R 2 000
Compile an income statement for Fruity Tooty Juice for
October.
The following information is available:
During the month they received R55 000 for the sale of fruit
juice.
23
At the beginning of the month they had R5 000 worth of fruit
juice.
During the month they bought another R18 000 of fruit juice.
10
At the end of the month they have R6 000 stock left.
Rental for the shop amounts to R4 000 per month.
They pay the sales person R3 000 per month.
The cost of paper cups used during the month is R2 500.
TOTAL SECTION D
50

Total of section A : 70
Total of section B : 80
Total of section C : 50
Total of section D : 50
Total of summative assessment: 250
8
Student Number: -

Module 6
Introduction to Financial
Management

Initial:
Student Number: -
Question 1: Answer the following short questions regarding
financial management
1.1 The primary financial objective of any business is to:
___________________________

_____________________________________________________
______________(1)
1.2 Name 5 secondary objectives of financial management.
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
_____________(5)
1.3. Explain 5 steps that can be taken to ensure that a business
maintains a positive cash flow.

_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
______________(5)
1.4 Name 4 reasons why budgets are drawn up.
_____________________________________________________

________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
________________
_____________________________________________________
_____________ (4)
Total question1: /15
Initial:
Student Number: -

Question 2: Basic financial concepts:
Match the following terms (a-j) to the most accurate description
(2.1 – 2.10)
a) Solvency
b) Fixed assets
c) Liquidity
d) Working capital
e) Assets
f) Profitability
g) Fixed overhead expenses
h) Capital
i) Variable expenses
j) Current assets
2.1
Stock of raw materials, stock of finished goods, work in
progress, prepaid expenses
and deposits, cash on hand and at bank and outstanding debtors.
2.2
Items that are purchased to facilitate the running of the business
(they are not pur-
chased for resale)
2.3
The ability of a business to pay off its debt at any given time,
even if all its activities

should stop.
2.4
The relationship between the net income earned over a certain
period, and the capital
used in that period to generate income.
2.5
The money available to the business for the purchase of goods
and services with a
view to generating an income for the business.
2.6 The economic resources that an enterprise owns
2.7 Expenses that must be paid whether the business is trading
or not.
2.8 The company’s ability to keep making all its required
payments regularly and on time.
2.9 Money used to acquire current assets such as stock or

financing debtors.
2.10 Expenditure directly related to the manufacturing or sales
processes of a company
Question 3:
No Statement
3.1 The amount of an expense account is decreased by entries
on the debit side.
3.2 The amount of an income account is increased by entries on
the debit side.
3.3 An enforceable claim against others, such as account
receivable is classified as an asset.
3.4 The acid test measures the ability of an organisation to meet
its current liabilities without the
most non-liquid item of current assets.
3.5 Solvency ratios investigate the effectiveness of employment
of assets to realise sales

Total question 3 /5
Initial:
Student Number: -
Question 4: Classify (√) the following accounts as asset,
liability, income or expense
accounts:
ACCOUNT ASSET LIABILITY INCOME EXPENSE
Sales
Loan from bank
Telephone
Rental paid
Discounts given
Stationary in store

Postage
Equipment
Total question 4 /4
Question 5: Choose the concept (a-f) that match the statements
(5.1-5.6):
a. Fixed asset register
b. Journals
c. Income statements
d. Cash flow statements
e. Ledgers
f. Balance sheets
5.1 Diaries of the day-to-day transactions of the business.
5.2 Summarise and categorise the information entered into
journals.
5.3 Reflect the profit/loss made by company for a specific
period.
5.4 Examples of ledgers.

5.5 Project the flow of money in a business for specified future
period.
5.6 Snapshots of businesses at close of business on a specified
day.
Total question 5 /6
Initial:
Student Number: -
Question 6: Compile a pre-adjustment trail balance for
Catherine’s Cake Emporium.
The following balances appear in her general ledger on 31 July:
Bank (favourable) R13 000
Capital R20 000
Salaries R 8 000
Vehicles R35 000
Creditors R32 000

Debtors R 3 000
Sales R 7 000
Account Debit Credit
Total question 6: /10
Total Formative 6: /50

Initial:
EAR
MODULE 661
BUSINESS ADMINISTRATION I:
FINANCIAL MANAGEMENT
READ THIS BEFORE YOU DO ANYTHING ELSE!
1.
TUTORIAL INTRODUCTION
Welcome to studying with Business Management Training
College! We trust that you
will find your studies towards this qualification rewarding.
It is very important that you work through the study material

in each guide and in the
prescribed text books, as this will prepare you for the
assignments at the end of each Module. In
order to complete the Qualification you need to be found
competent against all the Assessment
Criteria of the Topics in this Module.
2.
HOW DOES THIS MODULE WORK?
Chapters start with a title followed by the lessons for that
chapter. At the beginning of
every chapter is a list of the outcomes for the particular chapter.
YOU ARE NOT REQUIRED TO ANSWER THESE
STATEMENTS. We are only
informing you of WHAT you will learn and be assessed on in
this module.
The study guide fulfils the purpose of a tutor, and will
effortlessly guide you through the
training material. Each lesson teaches you about a specific
topic.
Make sure you understand the topic of the lesson before you
proceed to the next lesson.
If at any time you require assistance, please contact one of the
study advisors at BMT
College who will promptly assist you with any queries.

REMEMBER: IT IS IMPORTANT TO STUDY AND WORK
THROUGH
ALL THE LESSONS IN THIS GUIDE BEFORE
ATTEMPTING THE
ASSIGNMENT. IF YOU UNDERSTAND THE WORK IN
THIS GUIDE,
THE ASSIGNMENT WILL BE EASY.
2
STUDY INSTRUCTIONS
3. ICONS USED IN THIS MANUAL
LESSON 1
Indicates the start of a new lesson
Indicates the start of a Chapter (also top left of STUDY
chapters) Usually an explanation
or definition of a specific word or concept
Examples of a specific topic or concept

Important information.
Take a break from your studies!
Making notes while you study is very important. Spaces have
been allocated throughout this manual for this purpose
Indicates self assessment and self assessment answer section
THESE SHOULD NOT BE SUBMITTED FOR ASSESSMENT
Outcomes for this Module (What you will learn)
Steps to be followed in order to complete/execute/do a specific
action or task.
No prescribed textbook for this module
3
READ THIS BEFORE YOU DO ANYTHING ELSE!
HOW TO COMPLETE YOUR ASSIGNMENT
4.
COMPLETING THE QUESTIONS:
Answers to review questions must preferably be typed as this
eliminates the possibility
of an assessor marking the answers incorrect due to the
illegibility (unclearness) of the
handwriting.

You need to complete ALL the formative questions. Unless the
College granted you
RPL exemption from that topic or subject, you need to do all the
questions. If you do not
understand a question, phone or e-mail your assessor to get
assistance. ALL
questions need to be completed in order to be found
competent.
Each question must be marked clearly. The question numbers
must not be placed in the
left margin but at the top of the answer.
Question 1.1
An example of a breakfast cereal is Kellogg’s.
Only attempt the summative assignment after you successfully
worked through the
module and completed all the formative questions for the
particular module/s.
Diploma learners are required to complete a Summative
assignment on completion of a
subject (provided in the yellow assignment covers).
Use single sheets, front side only. (Double pages must be cut
loose on the sides)
Learners who received exemption from certain topics or
subjects through RPL
(recognition of prior learning) must attach the official letter
from the College stating the
exempted topics or subjects.

5. SUBMITTING YOUR FORMATIVE AND SUMMATIVE
ASSIGNMENTS:
Make sure your name, surname and student number is on every
page.
Place the answers to your formative assessment inside the
BLUE Formative Assignment
cover provided.
Place the answers to your summative assignment inside the
YELLOW
Summative Assignment cover provided.
Use a file binder and bind the cover around your answer sheet.
Always keep a copy of your assignment (should your
assignment be lost in the post) as
the BMTC can take no responsibility for assignments lost in the
post.
Only summative assignments must be certified under oath (at
any police station or post
office) to be the original work of the candidate.
Only the original certified answers will be accepted for
assessment.
4
STUDY INSTRUCTIONS

No photocopied, faxed, e-mailed or any other than the original
certified answers will be
accepted for assessment.
PLEASE NOTE: You can only submit the Formative
Assignment once! That
means, you only have one attempt for the formative
assessment. If you fail
the formative you need to make up the marks in the
summative. You have
three attempts to pass the summative assignment successfully.
6.
RESULTS OF YOUR FORMATIVE AND SUMMATIVE
ASSIGNMENT:
Your formative and summative assignment results will be
outlined in a results letter at the
end of each module.
Your formative assessment will count 25% toward your final
result for the module and
your summative assessment will count 75% of your final result
for the module.
To pass and to be advanced to the next module, you need a
final result of 50%.
If you do not obtain a pass mark of 50%, you will be required
to re-do sections of the
summative assignment where you did not obtain a successful
result.
Even though your progress will be followed by a study

advisor, it will not be possible for
the assessor to comment on each answer you submitted. This
preventative measure is taken to
eliminate irregularities of sharing memorandum answers with
fellow students.
7.
The Assessment Appeals Form need to be submitted to the
College.
Assignment (tests) structure for the 1st year of the Diploma
qualification Study
Formative
Summative
Next Action from the college?
Process
STUDY COMPONENT 1
Management Principles (a)
College will mark module 1
NO SUMMATIVE DUE
Step 1
Complete and submit
formative assignment and posts
after module 1
Module 1 questions
module 2.
Management Principles (b)

NO SUMMATIVE DUE
Step 2
Complete and submit
after module 2
Module 2 questions
module 3.
Management Principles (c)
Complete and submit the
formative and summative of
Complete and submit
Step 3
summative assignment on
component 1. Learner receives
Module 3
Module 1, 2 and 3.
results of component 1. The College
formative questions
posts module 4.
STUDY COMPONENT 2
Business Admin (a)
NO SUMMATIVE DUE
Step 4
Complete and submit
after module 4
Module 4 questions
module 5.
Business Admin (b)
NO SUMMATIVE DUE

Step 5
Complete and submit
after module 5
Module 5 questions
module 6.
Business Admin (c)
Complete and submit
Step 6
Module 6
Module 4, 5 and 6.
results of component 2. The College
formative questions
posts module 7.
STUDY COMPONENT 3
Entrepreneurship (a)
NO SUMMATIVE DUE
Step 7
Complete and submit
formative assignment and post
after module 7
Module 7 questions
module 8.
Entrepreneurship (b)
College will assess module 8
Complete and submit

Step 8
Module 8
Module 7 and 8
formative questions
results of component 3.
END OF 1ST YEAR
STUDY PLANNER
Expected
Suggested
time of
Type
REF
Heading/Description
Duration
completion
(in hours)
(learner to
complete)
CHAPTER 1 - INTRODUCTION TO FINANCIAL
MANAGEMENT

Lesson
1.1
Financial Management Defined
4
Lesson
1.2
Basic Financial Concepts
3
CHAPTER 2 - BASIC FINANCIAL ACCOUNTING AND
STATEMENTS
Lesson 2.1
Recording
Transactions
2
The Effect of Transactions on the Financial
Lesson 2.2
3
Position of the Enterprise
Lesson
2.3
Balancing the Accounts of the General Ledger
3
Lesson
2.4
Preparing and Controlling Budgets
2
Lesson
2.5
The Income Statement
3
Lesson
2.6
The Balance Sheet
3
CHAPTER 3 - BASIC BUSINESS CALCULATIONS

Lesson 3.1
Recording
Transactions
4
Lesson 3.2
Calculating
Interest
2
Lesson 3.3
Financial
Ratios
3
Formative
Complete formative answer sheet (Blue Cover)
2
Summative
2
Summative assignment about module 4-6
4
TEAM SUPERVISOR

CHAPTER 1
INTRODUCTION TO FINANCIAL
MANAGEMENT
IN THIS CHAPTER:
LESSON 1.1 : FINANCIAL MANAGEMENT DEFINED
LESSON 1.2 : BASIC FINANCIAL CONCEPTS
AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:
1. Define and explain financial management as a concept
2. Explain the general objectives of financial management
3. Explain the main tasks of financial management
4. Explain the meaning of a number of important financial
management concepts (capital,
profitability, liquidity, solvency, assets, liabilities, income,
expenditure and transactions)
LESSON
1.1
LESSON 1.1
FINANCIAL MANAGEMENT DEFINED
In this Lesson:
Financial Management is concerned with acquiring the

necessary resources to ensure the
most advantageous financial result to the business over the short
and long term. It has to ensure
that the business makes best use of its financial resources.
The primary financial objective of any business is to gain
maximum return on the capital
invested in the business. Financial managers want to achieve the
highest possible profitability or
net income on the capital available. The secondary objectives of
financial management all
contribute in the end to the primary objective of maximising
profitability.
CONCEPTS AND VOCABULARY TERMS YOU NEED TO
UNDERSTAND:
monitoring, organising, and
controlling of the monetary resources of an organisation.
necessary payments
regularly and on time.
9
1. FINANCIAL MANAGEMENT DEFINED
1.1
DEFINITION OF FINANCIAL MANAGEMENT
Financial management can be defined as the responsibility to:

essary resources to ensure the most
advantageous result to the
business over the short and long term
resources Financial
Management is about the analysis of financial variables to
ensure the maximum utilisation of
capital and the maximum attraction of capital to finance the
utilisation.
1.2
THE GENERAL OBJECTIVES OF FINANCIAL
MANAGEMENT
PRIMARY
OBJECTIVE
The primary financial objective of any business is to gain
maximum return on the capital
invested in the business. Financial managers want to achieve the
highest possible profitability or
net income on the capital available.
SECONDARY
OBJECTIVES
The secondary objectives all contribute in the end to the
primary objective of maximising
profitability. They are:

Use limited resources as well as possible
Available capital must be used as effectively and profitably as
possible.
Maintain a healthy position of liquidity
A healthy position of liquidity often means the difference
between growth and success on
one hand, or failure on the other hand. If a business is in a
situation where it can no longer make
compulsory payments in the short term, the business will fail if
the problems cannot be
overcome.
10
LESSON
1.1
An effective working capital cycle tries to free capital that is
tied up in working capital
(such as stock and debtors) as quickly as possible to allow this
capital to be used for other needs
like paying creditors.
Maintain a positive cash flow

To ensure that the business always has enough money to pay
what it needs to pay at any
given time, it needs to:
Collect debt as soon as possible.
Eliminate unnecessary stock and do not overstock.
Eliminate products that are not profitable.
Lease fixed assets such as buildings, delivery vehicles and
computer equipment instead
of buying them.
Use discounts offered by suppliers (e.g. bulk discounts).
Keep operating costs as low as possible.
Regularly (at least once a month) draw up a cash budget. It
allows you to make suitable
provision for possible shortages of cash and to know when cash
will be available.
Negotiate the best loan conditions and interest rates from
financial institutions.
Lower interest rates mean lower cost of capital and therefore
more profit. A business
must be able to make interest payments on borrowed capital
regularly and on time. It must be
able to keep to the terms and conditions of the loan.

Implement an effective budgeting system.
1.3
THE TASKS OF FINANCIAL MANAGEMENT
1.3.1 DRAW UP AND MAINTAIN A FINANCIAL POLICY
Formulate guidelines according to which financial activities
must be conducted.
This will also assist in decision-making, e.g. guidelines
according to which you will grant
credit, determine product prices, value stock and calculate
depreciation.
Keep to the guidelines that have been formulated.
1.3.2 DRAW UP FINANCIAL STATEMENTS
A proper record-keeping system that will provide the
accountant / bookkeeper with all
the necessary source documents to draw up financial statements
must be maintained.
11
1.3.3 DO FINANCIAL ANALYSES (FOR PLANNING AND
CONTROL)

With a financial analysis you investigate the financial position
of your business. This
information allows you to apply financial control and to
determine to what extent the actual
performance of your business meets the objectives you have set
for it. Problem areas can be
identified and corrective action can be taken when necessary.
For example businesses normally
loose money for one of two reasons:
A) Poor profits
High expenses; high administrative costs, advertising costs,
staff costs and fixed
expenses. Poor gross profit; incorrect purchasing and receiving,
incorrect storage and control
and inefficient production. Overcoming the problems of poor
profits:
High expenses
High admin costs: Keep good record of costs and eliminate
unnecessary costs.
High advertising costs: Only advertise if benefits from
advertising will outweigh the
costs.
High staff costs: Cut down unnecessary wages. Regulate staff
meals and privileges.
Clean and mend uniforms regularly. Avoid overtime.
High fixed expenses: Avoid purchases on lease terms.
Renegotiate terms regularly.
Poor gross profit
Incorrect purchasing and receiving: Check quantity and
quality of goods before paying
for them. Choose suppliers carefully to ensure good quality at
reasonable price.
Incorrect storage and control procedures: Keep cold-rooms

and equipment well
maintained. Do not over-order.
Inefficient production: Keep portion sizes at a reasonable
level and monitor complaints
from guests. Correct any problems as soon as possible.
B) Low turnover
This is normally caused by Ineffective management and/or
external factors. Overcoming
the problems of low turnover:
Ineffective management: More training for managers. Obtain
more feedback from
guests.
External factors: Keep up with changes and events in your
micro (internal), macro
(PEESTL) and market environments and adapt as soon and
effectively as possible.
1.3.4 MAKE CREDIT EVALUATIONS AND COLLECT
DEBTS
Judge the creditworthiness of customers who want to buy on
credit.
Decide on what terms credit will be granted.
Credit sales mean additional administration and costs.
Debts must be collected effectively and on time because delays
can have a negative effect
on your cash flow and liquidity.
1.3.5 DEAL WITH TAXES AND INSURANCE OF THE

BUSINESS
Make provision for paying VAT and Income tax to the SA
Revenue services (SARS).
12
LESSON
1.2
LESSON 1.2
BASIC FINANCIAL CONCEPTS
In this Lesson:
As a manager you should be familiar with the basic financial
concepts to be able to know
exactly what is referred to when, for instance the financial
manager refers to the liquidity of the
business or the income statement or balance sheet. It is
important that we understand the key
aspects and terms of finance.
1. BASIC FINANCIAL CONCEPTS
1.1 FINANCE
Finance is the art of raising, managing, and making money. It
is a process that involves
three essential steps:
Assessing the financial health of the company

Using the information to plan for future performance
Executing the plan
1.2 CAPITAL
Capital structure
The capital structure represents the long-term financing of the
firm, represented by long-
term debt, preferred stock and common equity (consists of
capital and retained earnings). Capital
structure is distinguished from financial structure, which
includes short-term debt plus all other
accounts.
Capital refers to the money available to the business for the
purchase of goods and
services with a view to generating an income for the business.
13
Fixed capital
The capital used to obtain assets such as land, buildings,
machinery and equipment.

Operating or working capital
Money used to acquire current assets such as stock or
financing debtors.
Short-, medium- and long- term capital
Short-term capital: Capital that is usually available for a
period of between one and
three years; in most cases less than one year
Medium-term capital: Capital usually available for a period
between one and five years.
Long-term capital: Capital usually available for a period
longer than five years (10, 15
and even 20 years).
Owners’ capital or equity
The capital made available by the owner/s of the business.
Outside (borrowed, loaned or foreign capital)
The part of the capital lent or provided to the business by
external institutions (investors,
suppliers, commercial banks and other financial institutions) at
a certain price (interest).
1.3 PROFITABILITY

Profitability refers to the relationship between the net income
earned over a certain
period, and the capital used in that period to generate income.
Profitability is calculated as a
percentage:
Net
income
earned
X
100%
Total
Capital
employed
1.4 LIQUIDITY
A business will incur certain expenditure in the process of
making an income.
Payments must be made to suppliers, interest must be paid to
financial institutions and
salaries/wages, rental, water and electricity must be paid.
Liquidity refers to the company’s
ability to keep making all these payments regularly and on time.

14
LESSON
1.2
1.5 SOLVENCY
The ability of a business to pay off its debt at any given time,
even if all its activities
should stop, is known as the solvency of the business. Total
assets must cover total liabilities of
the business (liabilities are what the business owes to its
creditors and suppliers and suppliers of
capital).
This means in fact that the business’s total assets must at least
equal or exceed its total
liabilities. When the business’s total liabilities exceed its total
assets, the business is technically
insolvent.
1.6 ASSETS
Assets refer to all the economic resources that an enterprise
owns. In an accounting
environment, an asset is something that an entity has acquired
or purchased, and that has money
value (its cost, book value, market value, or residual value).
An asset can be:
(1)
something physical, such as cash, machinery, inventory, land

and building, (2)
an enforceable claim against others, such as accounts
receivable,
(3)
right, such as copyright, patent, trademark, or
(4)
an assumption, such as goodwill.
Assets shown on their owner's balance sheet are usually
classified according to the ease
with which they can be converted into cash. See also intangible
assets and tangible assets
FOUR TYPES OF ASSETS TO BE FAMILIAR WITH:
1.6.1 Fixed assets (intangible)
These are assets that confer rights, ex. goodwill, franchise
fees, patents, special licences,
brands, copyrights, etc.
1.6.2 Fixed assets (tangible)
These are items that are purchased to facilitate the running of
the business. They are not
purchased for resale, ex. land, buildings, plants and machinery,
fixtures and fittings, office
machines, furniture, vehicles, etc.

15
1.6.3 Investments
When a business has spare cash that the owners do not want to
put into their trading
operations, they may decide to invest that money into other
trading profit earning investments or
ventures; investments in other businesses, long-term deposits,
shares in listed companies, etc. If
the investment is of a long-term nature it will be shown
separately on the balance sheet under
fixed assets. Short-term investments for quick profits will be
shown as a current asset.
1.6.4 Current assets
These are the trading assets of the business. They are part of
the working capital.
Typical current assets are: stock of raw materials, stock of
finished goods, work in
progress, prepaid expenses and deposits, cash on hand and at
bank and outstanding debtors.
1.7 LIABILITIES
Liabilities refer to all money owed by the enterprise to other
people or businesses.
A liability legally binds an individual or company to settle a
debt. When one is liable for

a debt, they are responsible for paying the debt or settling a
wrongful act they may have
committed.
In the case of a company, a liability is recorded on the balance
sheet and can include
accounts payable, taxes, wages, accrued expenses, and deferred
revenues. Current liabilities are
debts payable within one year, while long-term liabilities are
debts payable over a longer period.
THREE TYPES OF LIABILITIES:
1.7.1 Owner’s equity
Amounts invested in the business by owners: share capital and
loan accounts.
Accumulated profits. In the case of a Company or CC, these
profits may be
distributable (dividends) or non-distributable (reserves).
Equity is a stock or any other security representing an
ownership interest. On a
company's balance sheet, the amount of the funds contributed
by the owners (the stockholders)
plus the retained earnings (or losses).
1.7.2 Long term liabilities

Amounts the business borrowed from financial institutions and
other businesses or
individuals. The loans are repayable over long periods of time.
16
LESSON
1.2
1.7.3 Current liabilities
The trading liabilities of the company that form part of the
working capital; creditors,
bank overdrafts, taxes, etc.
1.8 INCOME
The amount of money or its equivalent received during a
period of time in exchange for
labour or services, from the sale of goods or property, or as
profit from financial investments.
Income is simply the event that results in money flowing into
the business.
EXAMPLES OF INCOME:
Sales
Services rendered (such as an accountant’s services, doctor’s

services, a plumber’s
services, etc.)
Interest received
Rent received
Each one of these things above represent some sort of event
that occurs (like a sale being
made), which results in money flowing into a business.
Two basic types of income:
From trading or service operations: Sales, commissions, etc.
From other sources: Interest received, dividends, profit on sale
of fixed assets, etc.
1.9 EXPENSES
Payment of cash or cash-equivalent for goods or services, or a
charge against available
funds in settlement of an obligation as evidenced by an invoice,
receipt, voucher, or other such
document.
TWO BASIC TYPES OF EXPENSES:
1.9.1 Fixed overhead expenses.
These are expenses that must be paid whether the business is
trading or not. They are not
directly related to sales or manufacturing, ex. rental of

administrative offices, receptionist’s and
accountant’s salaries, telephone and electricity expenditure.
17
1.9.2 Variable expenses
Expenditure directly related to the manufacturing or sales
processes of a company, ex.
materials used, labour, depreciation on machines, etc.
1.10 TRANSACTIONS
A transaction is classified as an agreed upon transfer of value
from one party to another,
ex. sale or purchasing of goods. In an enterprise, all
transactions must be recorded, classified and
summarised to provide information on which owners, managers
and investors can base their
decisions and actions.
In
accounting, any event or condition recorded in the book of
accounts is a transaction.
This information is normally communicated by means of
financial reports such as the balance
sheet (financial position) and the income statement (financial

result).
We obtain essential information from accounting records,
such as:
Sales
Total sales figures by day, week, month and year should be
available and these sales
should also be broken down into departments, products or type
of merchandise, if applicable.
These divisions of sales are necessary to determine the
profitability of each department or line
and to make decisions about it.
Operating expenses
Information is needed for all types of expenses. Retailers may
classify their expenses as
selling expenses and general expenses. Factory’s expenses may
be classified as manufacturing,
selling and general expenses.
Accounts receivable
Records of total cash sales and total sales on account must
always be available.
Accounts payable
Records of every debt incurred must be available and the total

debts outstanding at any
time must be easily accessible.
Inventory
Regular information on the total inventory must be available.
Payroll records
Payrolls include records of weekly wages, monthly cheese to
employees, pension fund
contributions, PAYE, etc.
18
LESSON
1.2
NOTES:

19
TEAM SUPERVISOR
CHAPTER 2
BASIC FINANCIAL ACCOUNTING AND STATEMENTS
IN THIS CHAPTER:
LESSON 2.1 : RECORDING TRANSACTIONS

LESSON 2.2 : THE EFFECT OF TRANSACTIONS ON THE
FINANCIAL POSITION OF THE ENTERPRISE
LESSON 2.3 : BALANCING THE ACCOUNTS OF THE
GENERAL
LEDGER
LESSON 2.4 : PREPARING AND CONTROLLING BUDGETS
LESSON 2.5 : THE INCOME STATEMENT
LESSON 2.6 : THE BALANCE SHEET
AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:
1.
Describe how financial transactions are recorded
2.
Explain the double-entry system in accounting
3.
Explain the accounting equation
4.
Explain the effect a transaction will have on the financial
position a business 5.
Name and explain the function of all the main documents
involved in recording and
summarising transactions (source documents, journals, ledger,
financial statements) 6.
Balance a general ledger account
7.
Classify general ledger accounts into asset, liability, income or
expenditure accounts 8.

Prepare a pre-adjustment trial balance for a small
business/department 9.
Discuss the importance of budgets
10. Explain why budgets are drawn up
11. Describe the stages that have to be completed in sequence
to prepare a proper budget
12. Explain terminology associated with budgeting
13. Identify various types of budgets and briefly explain them
14. Prepare a sales budget for a small business/department
15. Prepare a production budget for a small
business/department
16. Prepare an income statement for a small
business/department
17. Utilise information from an income statement to calculate
the breakeven point,
maximum discount, and mark
-up % for a business
18. Prepare a balance sheet for a small business/department
LESSON
2.1
LESSON 2.1
RECORDING TRANSACTIONS
In this Lesson:
Before any transaction can be transferred to the financial
statements, it has to be
summarised, organised and recorded. Every transaction has an
effect on the financial position of
the enterprise. Transactions must be classified, recorded and
summarised to show its effect on

the financial position of the business.
1. RECORDING TRANSACTIONS
1.1 TRANSACTIONS
In general, everything a company does results in a transaction,
including things that take
place between the business and:
Customers, who buy products and services sold by the business
Employees, who are paid wages and provided benefits
Vendors, who sell services, equipment, and supplies to the
business
Government agencies, who collect taxes from the business
Sources of equity capital (investors or owners who put money
in and take it out of the
business)
Sources of debt capital (banks and lending institutions)
Accounting guidelines govern how businesses record
transactions. They also dictate the
design of the recordkeeping system that a business uses and how
reports are prepared, based on
the information gathered and put into the system.
Before any transaction can be transferred to the financial

statements, it has to be
summarised, organised and recorded. Every transaction has an
effect on the financial position of
the enterprise.
21
Transactions must be classified, recorded and summarised to
show its effect on the
financial position of the business. For example:
When you sell a stock item:
There is a change in stock.
There is a change in cash or debtors.
When you buy stock to resell:
There is a change in stock
There is a change in cash or creditors
This bookkeeping or recording phase provides the information

on the financial position
and the financial result of the enterprise that can be used to
compile balance sheets and income
statements.
All transactions are recorded in two separate accounts. There
is an account for each asset,
liability and equity item. There also is an account for each
income and expense item. All these
accounts are classified and grouped together in the general
ledger.
Income and expenses affect the equity and are therefore
referred to as nominal accounts.
The nominal accounts provide the information for the income
statement while the asset, liability
and equity accounts provide information for the balance sheet
and statement of changes in
equity.
The accounts in the general ledger are basically in the form of
a “T” and are often
referred to as T-accounts. A DEBIT (Dt) and CREDIT (Ct)
system is used. The ledger page is
divided in two and debits are entered on the left hand side and
credits on the right hand side.
When we enter something on the left side of the account, this
is known as debiting the

account. A debit entry is put through or the account is debited.
When we enter something on the right side of the account, it is
known as crediting the
account. A credit entry is put through or the account is credited.
A debit amount on one ledger account must have an equal
credit on another ledger
account. For every debit entry there always must be a credit
entry of a corresponding amount.
This is known as the double-entry system or double entry
accounting.
22
LESSON
2.1
DOUBLE ENTRY ACCOUNTING
This is the method used by most businesses and preferred by
accountants. With this
method, every valid entry or transaction must involve two (or
more) accounts.
(In fact, most accounting software packages will not allow you
to post a single entry
transaction!) Both sides – the debit and the credit – of the
transaction must balance and this
ensures that all financial statements balance.

For example, let’s say that the business buys a R2, 000
computers on credit. The
company’s assets go up by R2, 000 (the debit) but the liabilities
also go up by R2, 000 (the
credit). As this is paid, assets (cash) decrease as payments are
made and the liability goes down
by the same amount
Some notes about recordkeeping:
Rand signs are typically not used in journals or ledgers, but
should be placed in financial
reports and statements (even if it is on the first line only).
Commas (to show thousands of dollars) are not required in
journals or ledgers but should
be placed in financial reports and statements for clarity.
Dashes or blank spaces can be used to indicate zeroes.
1.2
THE ACCOUNTING EQUATION
The financial position of an enterprise can be expressed as
follows:
DEBIT
BALANCES

=
CREDIT BALANCES
OR
ASSETS
=
INTERESTS (FINANCING)
OR
ASSETS
=
LIABILITIES + EQUITY
A
debit balance can only be one of two things: an asset or an
expense.
A
credit balance can only be one of two things: an income or a

liability.
23
The accounting equation can therefore also be written as
follows:
How money is applied (Dt) = Where money comes from (Ct)
Assets + Expenses (Dt) = Liabilities + Income (Ct)
Dt
ASSET (e.g. Bank) or EXPENSE Account (e.g. Rent paid) Ct
Decrease
(-)
An asset account is increased by an entry on the debit side
and decreased by an entry
on the credit side.
The amount of an expense account is also increased by entries
on the debit side and
decreased by entries on the debit side.
Dt

LIABILITY (e.g. Creditor) or INCOME (e.g. Sales)
Ct
Decrease (-)
Increase (+)
•
Liabilities and the capital account are increased by entries on
the credit side and
•
The amount of an income account is increased by entries on
the credit side and
1.3 LEDGER
ACCOUNTS
The ledger account is also known as the T-account as it has the
form of a T. The title is
being written on the horizontal line and transactions are entered
on the left side (debit side) and
right side (credit side) of the vertical line: Cash Account
Debit side
Credit side

24
LESSON
2.1
Balance: The balances of certain accounts increase when
debited, while the balances of
other accounts increase when credited. The reason for this is
found in the basic accounting
comparison:
Assets= Ownership interest + Liabilities
The balance of an account is the difference between the total
money value of the debit
and credit entries on an account.
The balance of an account normally appears on the same side
as the side on which the

element appears in the accounting comparison.
The balance of an account increases with the entry of an
amount on the same side as the
side on which the element appears in the accounting
comparison.
The balance of an account decreases with the entry of an
amount on the opposite side as
the one on which the element appears in the accounting
comparison.
Asset accounts
Asset accounts are on the left side (debit side) of the
comparison. The balance of the asset
account is usually a debit balance and increases with entries on
the debit side and decreases with
entries on the credit side.
Liability accounts
Liability accounts are on the right side (credit side) of the
comparison. The balance of the
liability account is usually a credit balance and increases with
entries on the credit side and
decreases with entries on the debit side.
Ownership interest (Owner’s equity / Capital)
Ownership interest appears on the right side (credit side) of

the comparison and therefore
the balance will increase with further entries on the credit side
and decrease with further entries
on the debit side.
Income items:
These items will increase ownership interest and therefore
income accounts will have
credit balances and will increase with entries on the credit side
and decrease with entries on the
debit side.
25
Cost items
These items will decrease ownership interest and therefore
cost accounts will usually
have debit balances that will increase with further entries on the
debit side and decrease with
further entries on the credit side.
This proposition can schematically be presented as follows:

Assets
=
Ownership interest
+
Liabilities
DT Asset
accounts
CT
DT Capital CT
DT Liability
Accounts
CT
+
-
-
+
-
+
- Increase
- Increase
on

- Increase
on
on
Debit
Credit
side
Credit
side
side
Decrease on
Decrease on
Decrease on
Credit side
Debit side
- Credit
Debit side
- Credit
- Debit
balance
balance
balance
Income accounts

-
+
- Decrease
- Increase
on Debit side
on Credit side
- Credit
balance
Cost Accounts
+
-
- Increase
Decrease on
on

Debit
Credit side
side
(because
it is a
decrease
in
ownership
interest)
- Debit
balance
26
LESSON
2.1
NOTES:

27
NOTES:

2.2
LESSON 2.2
THE EFFECT OF TRANSACTIONS ON THE FINANCIAL
POSITION OF THE ENTERPRISE
In this Lesson:
Every transaction has an effect on the financial position of the
enterprise. A transaction
always affects two accounts. The accounting equation can be
used to analyse these effects.
1. THE EFFECT OF TRANSACTIONS ON THE FINANCIAL
POSITION OF THE
ENTERPRISE
1.1
ANALYSING THE EFFECTS
Every transaction has an effect on the financial position of the
enterprise.
Transactions must be classified, recorded and summarised to
show its effect on the
financial position of the business.
A transaction always affects two accounts.
The accounting equation can be used to analyse these effects.

29
The following example will illustrate this principle:
Pamela starts a bakery. During the first month of business:
1.
She opens a bank account for her business in the name of
Pamela’s delicatessen and
Deposits R25 000 into it. This is her initial capital investment
or equity.
2.
She purchases an oven for R20 000 on credit from Hellfires
Pty Ltd.
3.
She purchases consumable inventory for R2000.
4.

She supplies snacks of R2000 on credit to Yuppie Foundation.
5.
The bakery consumes R1000 of consumable inventory.
Assets (R) + Expenses
Liabilities (R) +Equity (R)
Bank
Debtors
Equipment
Consumables =
Creditors
Equity
1
+25
000
=
+25
000
2.
+20 000

=
+20 000
3.
– 2 000
+2 000
=
4.
+2
000
=
+2
000
5.
-1 000
=
- 1 000
+23 000

+2 000
+20 000
+1 000
=
+20 000
+26 000
R46
000 = R46
000
1.
The cash in the bank is an asset for the business, but it owes
this amount to the owner.
2.
The oven is an asset for the business, but it owes this amount
to Hellfires Pty Ltd.
3.
Because the business paid cash from the bank, the bank asset
decreases, but at the same
time the consumable inventory asset increases by the same
amount.
When the Inventory is consumed, the cost of the consumption
will represent an expense
and the consumable asset as well as equity will decrease with
the same amount (see 5.)

4.
This represents an income for the business. Since the business
belongs to the owner, the
income also belongs to her. It therefore increases the equity.
30
LESSON
2.2
5.
The consumed inventory represents an expense that decreases
equity and the inventory at
hand. If the Yuppie foundation pays their debt, the net profit for
this period the difference
between the income (R2000) and the expenditure (R1000).
The profit belongs to the owner.
Examples of how accounts are influenced by transactions:
TRANSACTIONS
ACCOUNT DEBITED
ACCOUNT CREDITED
The owner deposits capital
Bank
Equity/capital
Sell goods for cash
Bank
Goods/stock

Sell goods on credit
Debtors
Goods/stock
Debtor makes payment
Bank
Debtors
Buys goods for cash
Goods/stock
Bank
Purchas goods on credit
Goods/stock
Creditors
Pay creditor
Creditors
Bank
1.2
BASIC ACCOUNTING BOOKS AND STATEMENTS
1.2.1 SOURCE DOCUMENTS
Receipts
Sales invoices

Delivery notes
Invoices from creditors
Delivery notes from creditors
Cash register slips
Petrol and tollgate slips
Stock received notes
Stock requisition notes
Bank statements and vouchers
Other proof of expenditure or income depending on type of
business.
31
1.2.2 JOURNALS

Journals are the prime books of entry and are entered from the
source documents.
They are diaries of the day-to-day transactions of the business:
Sales journal; records all sales whether cash or credit.
Purchases journal; record of all purchases on credit.
Cash book; accurate record of bank account – payments and
receipts.
Petty cash book; minor cash expenditure.
Journal; to make adjustments in the ledger.
1.2.3 LEDGERS
Ledgers are called the secondary books of account and are
entered from the journals.
They summarise and categorise the information entered in the
journals:
General ledger or private ledger.
Debtor’s ledger; record of all customers who owe you money
and buy on credit –
separate account for each debtor.
Creditors ledger; exact information on all the suppliers who
supply you on credit basis

and who you owe money to – separate account for every
creditor.
Fixed assets register.
The number of accounts needed in the ledger will depend on
the nature and size of the
business, but the following accounts must always be opened:
Assets
Liabilities
Owner’s equity
Initial capital invested
Income accounts
Cost accounts
1.3. RECORDING TRANSACTIONS IN THE LEDGER
A separate account must be opened for each asset, liability and
ownership interest item.
The collective noun for all these accounts is the ledger. The
proportionality of the basic
accounting comparison is being maintained in the ledger and
therefore the total of the debit
balances in the ledger equals the total of the credit balances in
the ledger.

32
LESSON
2.2
The accounting system is based on the following approaches:
Every transaction influences at least two items in the
accounting comparison (or in the
accounts).
The influence of every transaction must be reproduced in
terms of money.
The accounting comparison must balance after the
reproduction of the influence of each
transaction.
Before a transaction can be put on record, it must be analysed
as follows: a)
Determine which asset or interest items are being influenced
b)
Application of the tenets of debit and credit.
Example
The following transactions of CJ Smit, an attorney, are being
used to illustrate the

recording of transactions in the ledger accounts:
2011
September
1:
CJ Smit opened a bank account for his legal practice, Smit and
Kie by investing R50 000
from his private sources in the practice.
a)
The asset “Cash” increased with R50 000 and to increase an
asset the Cash in Bank must
be debited.
Dt
Cash in Bank
Ct
2009
Sept: 1 Capital: CJ Smith R50 000
b)
Ownership interest coming into being (increased) with R5 000;

to increase an interest the
interest account must be credited.
Dt
Capital: CJ de Wet
Ct
2009
Sept: 1 Capital: CJ Smith R50 000
33
September
2:
The firm pays R8000 for rent for September for the use of the
practice’s offices.
a)
The cost item “Rent Pay” originates (increased) with R8000.
This item is a decrease of
the ownership interest. To increase a cost item the Rent Pay
must be debited.

Dt
Rent Pay
Ct
2009
Sept: 2 Cash R8 000
b)
The asset “Cash in Bank” decreased with R8000 because of the
payment. To decrease the
asset, the Cash in Bank must be credited.
Dt
Cash in Bank Ct
2009
2009
Sept: 1 Capital: CJ Smit R50 000 Sept: 2 Rent R8 000
September
3:
The firm buys office equipment with a value of R16 000 for
cash.
a)

The asset “Office Equipment” increased with R16000. To
increase the asset, the Office
Equipment must be debited.
Dt
Office Equipment
Ct
2009
Sept 3: Cash R16 000
b)
The asset “Cash in Bank” decreased with R16000. To decrease
an asset the Cash in Bank
must be credited.
Dt
Cash in Bank Ct
2009
2009
Sept 1: Capital: CJ Smith R50 000 Sept 2: Rent: R8 000
Sept 3: Equipment R16 000

34
LESSON
2.2
September
6:
Waltons Stationery provides stationery and printing for the
value of R2500 on credit.
a)
The cost item “Stationery ad Printing” decrease the Ownership
Interest with R2500.
To decrease the Ownership Interest the Stationery and Printing
must be debited.
Dt
Stationery and Printing
Ct
2009
Sept: 6 Waltons Stationery R2 500
b)
Creditors increased with R2500. To increase the creditors,
Waltons Stationery (a creditor)
must be credited.

Dt
Waltons Stationery Ct 2009
Sept: 6 Stationery & Printing R2 500
September
12:
Smit & Kie receive R5000 for legal services rendered.
a)
The asset “Cash in Bank” increased with R5000. To increase
an asset, Cash in Bank must
be debited.
Dt
Cash in Bank
Ct
2009
2009
Sept: 1 Capital CJ Smit R50 000 Sept: 2 Rent R8 000
Sept: 12 Fees R 5 000 Sept: 3 Equipment R16 000
b)
The ownership interest increased with R5000. To increase
ownership interest,
“Fees” must be credited.
Dt
Fees
Ct
2009

Sept: 12 Cash R5 000
35
September
18:
Smit & Kie completed legal work for ABC Limited and
debited their account with R10
000.
a)
The asset “ABC Limited” (a debtor) increased with R10 000.
To increase the asset, ABC
Limited must be debited.
Dt
ABC Limited Ct 2009

Sept: 18 Fees
R10 000
b)
Ownership interest increased with R10 000. To increase
Ownership Interest, fees must be
credited.
Dt
Fees Ct 2009
Sept : 12 Cash
R 5000
Sept : 18 ABC Limited R10 000
September 25:
Pay salaries of R10 000 for the month
a)
The cost item “Salary” decreased the ownership interest with
R10 000. To decrease the
ownership interest, “Salary” must be debited.

Dt
Salary Ct 2009
Sept: 25 Cash
R10 000
b)
The asset “Cash in Bank” decreased with R10 000. To
decrease an asset, “Cash in Bank”
must be credited.
Dt
Cash in Bank Ct 2009
2009
Sept: 1 Capital : CJ Smit
R50 000 Sept : 2 Rent
R 8000
Sept 12 Fees
R 500 Sept : 3 Equipment

R 16000
Sept : 25 Salary
R10 000
36
LESSON
2.2
September
28:
CJ Smit withdrew R5000 from the firm’s bank account for his
own use.
Withdrawal by the owner decreased his interest in the
enterprise with R5000. To decrease
the ownership interest “Withdrawal: CJ Smit” must be debited.
Dt
Withdrawal : CJ Smit Ct 2009
Sept: 28 Cash
R5000
b)
The asset “Cash in Bank” decreased with R5000. To decrease

the asset, cash in bank
must be credited.
Dt
2009
Sept 1: Capital : CJ de Wet R 50 000 Sept : 2 Rent
R 8 000
Sept 18 : Fees
R5 000 Sept : 3 Equipment
R16 000
Sept 25 Salary
R10 000
Sept 28 Withdrawal: CJ Smit R 5 000
September
29:

Pay R1500 on account to Waltons Stationery
a)
A liability (creditor) decreased with R1500. To decrease the
liability, Walton Stationery
must be debited.
Dt
Waltons Stationery Ct 2009
2009
Sept: 29 Cash
R1 500 Sept: 6
Stationery & Printing
R2 500
An asset “Cash in Bank” decreased with R1500, therefore
“Cash in Bank” must be
credited.
Dt
2009
Sept 1 : Capital : CJ Smit R50 000 Sept : 2 Rent

R8 000
Sept 18 : Fees
R16 000
Sept 25 Salary
R10 000
Sept 28 Withdrawal
: CJ Smit R5 000
Sept 29 Waltons stationery R1 500
Stationery
R 1500
37
September 30: Received payment of R2500 from ABC Limited
a)
An asset “Cash in Bank” increased with R2500. To increase
the asset, the account must

be debited.
Dt
2009
Sept 1 : Capital : CJ Smit R50 000 Sept : 2 Rent
R8 000
Sept 18 : Fees
R 16 000
Sept 30 : ABC Limited
R2 500 Sept 25 Salary
R10 000
Sept 28 Withdrawal
R5 000
Sept 29 Waltons Stationery
R1 500
b)
The asset, debtors decreased with R2500. To decrease the
asset, ABC Limited must be

credited.
Dt
ABC Limited Ct 2009
2009
Sept 18 : Fees
R10 000 Sept : 30 Cash
R2 500
38
LESSON
2.2
NOTES:

39
BALANCING THE ACCOUNTS OF THE GENERAL
LEDGER
LESSON 2.3
BALANCING THE ACCOUNTS OF THE
GENERAL LEDGER
In this Lesson:
During the recording process both the debit side and the credit
side of an account is used.
All amounts on the one side of the account are increases, which
must be added. All amounts on
the opposite side are decreases, which must be subtracted.
The different between the total debits and the total credits on
an account is known as the

balance on the account. When the total debits on an account
exceed the total credits, the balance
is a debit balance and when the credits exceed the debits, it is a
credit balance.
1.1
THE BALANCE ON AN ACCOUNT IS CALCULATED AS
FOLLOWS:
1)
Add the debit side on an account and write the total in, in
pencil.
2)
Add the credit side of an account and write the total in, in
pencil.
3)
Subtract the smaller total from the bigger total. The
“difference” which is calculated, is
the balance of the specific account. This balance is written on
the side of the account with the
smaller total.
4)
The totals of the account are now inserted. After the inserting
of the balance as described
in (3), the totals of the debit and credit sides must be in
harmony.
5)
The balance, which is written above the totals in (4), must now
be transferred to the
opposite side from which it was inserted in step 3 and be
written under that side’s total. This
represents the balance at the beginning of the new month’s
transactions.

40
LESSON
2.3
The balance of the Cash in Bank account will be calculated as
an example:
DT CASH IN BANK CT
2009
2009
Sept 1 Capital : CJ Smit
50 000 Sept 2 Rent
8 000
Sept 15 Fees
5 000 Sept 3 Equipment
16 000
Sept 30 ABC Limited
2 500 Sept 25 Salary
10 000

Sept 28 Withdrawal: CJ Smit
5 000
1 500
(1) total debit side in pencil
57 500 (2) Total credit side in pencil
40 500
DT CASH IN BANK CT
2009
2009
Sept 1 Capital : CJ Smit
50 000 Sept 2 Rent
8 000
Sept 15 Fees
5 000 Sept 3 Equipment
16 000
Sept 30 ABC Limited
2 500 Sept 25 Salary
10 000

Sept 28 Withdrawal: CJ Smit
5 000
1 500
(3) Insert balance
Sept 30 Balance
17 000
as calculated
57 500
57 000
4) Add totals of debit and credit side
2009
Oct 1 Balance
17 000

41
BALANCING THE ACCOUNTS OF THE GENERAL
LEDGER
1.2 CLASSIFICATION OF GENERAL LEDGER ACCOUNTS
All accounts must be classified as an asset, liability, income or
expense account.
The following are some examples of this classification. The
classification will have an
effect on whether the account will be debited or credited.
Remember that all Income and
Liability accounts will always have a Credit balance (Use the
acronym, CIL to remember: Ct =
Income and Liability accounts) and all Asset and Expense
accounts will always have a Debit
balance (Use the acronym DAE to remember : Dt = Assets and
Expense accounts).
ACCOUNT NAME

ASSET
LIABILITY
INCOME EXPENSE
Positive bank balance
Telephone expenditure
Land and buildings
Wages
Petty cash

Sales
Advertising expenditure
Stationery (in store room)
Loan from bank
Vehicle

Rental expenditure
Water and electricity
Discounts given
Deposit for municipal account
Postage

Debtors
Creditors
Bank overdraft
42
LESSON
2.3
1.3
THE PRE-ADJUSTMENT TRIAL BALANCE
After the recording of all the transactions in the ledger, the

arithmetical accuracy of the
recording must be tested, to determine whether the total debits
equal the total credits. This is
being done by determining the balances of each account as
already explained.
At the end of a specific period, all accounts in the ledger will
either have a debit balance
or a credit balance or a nil balance. A list of these balances is
called a trial balance. Because
every debit entry has an equal credit entry, the total of the debit
balances has to equal the total of
the credit balances.
If this is the case, the double-entry principle has been applied
correctly. It does however
not mean that no mistakes were made during the recording
phase. The following errors will not
be revealed by the trial balance:
Items posted to the correct side of the ledger but to the wrong
account.
Entries that are completely omitted (not recorded at all).
Errors on one side of ledger that are compensated by errors on
the other side if the ledger.
A trial balance can be compiled by taking all the balances

from the accounts in the
general ledger and transferring them to the correct columns in a
table. This is called the pre-
adjustment trial balance because no changes have been made to
it.
Example: Pre-adjustment trial balance of Hamburger Den at 30
April ….
ACCOUNT
DEBIT
CREDIT
Bank R18
000
Consumables (inventory)
R2 000
Equipment R30
000
Capital
R20
000
Sales
R8
000
Creditors
R30
000
Debtors R5
000

Consumables (used)
R2 000
Salaries
R1 000
Total
R58 000
R58 000
43
PREPARING AND CONTROLLING BUDGETS
LESSON 2.4
PREPA
REP RING AND CONTROLLING BUDGETS
In this Lesson:
A budget can be defined as a written document that expresses
management’s goals and
forecasts in financial terms for a specific future period. It is a
financial plan for a future period.
Budgeting is an important technique for all businesses.
Budgets are based on forecasts of
future events. Although forecasts are only guesses as to what
may happen in the future, they help
organisations to base their guesses on the most reliable
information available at that specific
time. In order for a budget to be drawn up effectively, certain
stages have to be completed in
sequence.
1.1 INTRODUCTION

Control is the process that enables management to see to it
that the actual activities are in
harmony with planned objectives. This requires concerted
effort.
Standards must be set, and performance must be watched. If
necessary, corrective steps
must be taken to ensure that the enterprise resources are utilised
as effectively as possible.
A budget can be defined as a written document that expresses
management’s goals and
forecasts in financial terms for a specific future period. It is a
financial plan for a future period.
1.2 REASONS WHY A BUDGET IS DRAWN UP
It creates a formal framework for an enterprise to make
forecasts and set goals.
Budgets are instruments for management and staff to evaluate
whether goals have been
achieved. They aid financial control by comparing actual results
with budgeted results.
Budgets assist in the process of financial planning. In the
budgeting process, the capital
requirements of the enterprise are determined. It allows the
enterprise to make provision for its
financial needs at an early stage.

44
LESSON
2.4
It creates cost awareness among staff. Budgets are used to
control costs in an enterprise
and limit them to a minimum.
It co-ordinates the enterprise’s goals and unifies them to
achieve goals. It contributes to
the optimum use of resources at the disposal of the enterprise.
The enterprise has the opportunity to take into account
external factors such as
competition and economic cycles that may influence financial
planning.
It is a good indication of the enterprise’s performance and is
used to assist in the
application of financial control.
Budgeting is an important technique for all businesses.
Budgets are based on forecasts of
future events. Although forecasts are only guesses as to what
may happen in the future, they help
organisations to base their guesses on the most reliable
information available at that specific
time.
In business, forecasts are generally referred to as budgets,
though the term projection may
also be used. Forecasts are made of both the income that the

business expects to earn and
different types of expenditure that the business is to undertake.
Financial accounting and cost reporting systems are important
in assessing how a
business has performed in the past. However, looking at past
results alone is not sufficient to
enable managers to run a business efficiently. The success of a
business depends on the ability of
the managers to formulate polices and strategies effectively, to
plan and control the operations of
the business, to co-ordinate the use of the resources of the
business and to make decisions. One
of the most important tools used in this process is the budget.
1.3 BUDGETING PERIODS
Budgets are drawn up a reasonable time before the end of the
financial year to be ready
for the following year to which they will apply. It takes place
by collecting and processing the
necessary information from various components.
All information in budgets must be based on challenging but
realistic goals.
Thorough research must be done on existing situations. A
budget will only work if all
interested parties in the enterprise are consulted in the process
and their inputs are also
processed. When a budget is reasonable and realistic it will

motivate staff to attempt to comply
with it. Unrealistic and unreasonable budgets will have a
negative effect on staff.
1.4 INTERNAL AND EXTERNAL FACTORS THAT IMPACT
ON A BUDGET
45
In most enterprises, one or more factors exist which limit the
activities of the enterprise
as a whole. If this were not the case, all the enterprises in the
country would theoretically
experience unlimited growth.
Examples
of
such
limiting factors are:
The supply of the product is limited; therefore purchases are
limited (external).
The demand for the product is limited; therefore sales are
limited (external).
The funds of the enterprise are limited; therefore neither too
much stock can be kept nor
can too much credit be allowed (internal).

There are many competitors in the same industry (external).
1.5 BUDGET STAGES
The budget promotes involvement, co-operation and co-
ordination between the often
isolated departments of the organisation. It forces departments
to acknowledge their mutual
dependency on one another. In order for a budget to be drawn
up effectively, certain stages have
to be completed in sequence: Stage 1
Communicating details of the budget policy
This information may be planned changes in the sales mix, the
expansion or contraction
of certain activities, important guidelines that govern the
preparation of the budget, ex. price and
wage increases, expected changes in productivity and expected
changes in industry demand and
output.
Stage 2
Determining
factors
that restrict output
As discussed above, various limitations exist. Prior to the
preparation of the budgets, it is
necessary for top management to determine the factors that
restrict performance.

Stage 3
Preparing the sales budget
If sales demand is the factor that restricts output, the sales
budget is the most important
plan in the annual budgeting process. Sales budgets are
typically based on estimated sales
demand.
Stage 4
Initial
preparation of departmental budgets
Initial budgets should be done by the managers responsible for
meeting the budgeted
performance. It should be done using the bottom up process.
This means that the lowest level of
management is the source of the budget that is passed up to
higher levels for approval.
46
LESSON
2.4
Stage 5
Negotiating
budgets
Once budgets are completed at lower management or

departmental level, it is passed up
to higher levels of management, who may adjust certain aspects.
This phase merely represents
the adjustment of budgets at higher levels of management.
Stage 6
Co-ordination and review of budgets
This phase represents the acknowledgement of any adjustments
made in the previous
phase, and how these adjustments affect the budgeting process.
Stage 7
Final acceptance of the budget
When all budgets are in harmony with each other, they are
summarised into a master
budget.
Stage 8
Budget
review
The budget should be analysed at regular interviews. This
means that comparisons
between actual results and budgeted results are made. This
process will assist in determining the
accuracy of the budgets. Any changes can be made to obtain
better results when subsequent
budgets are to be prepared.

1.6 BUDGET TERMINOLOGY
In order to understand the budgetary process, it is important to
become familiar with the
terminology associated with budgeting:
1.6.1 COST
It is necessary to examine cost not only by their nature
(material, labour, overheads) but
also by their behaviour in relation to changes in the volume of
sales. Using these criteria, four
kinds of cost may be identified:
Fixed costs; these costs remain fixed irrespective of the
volume of sales, for example
rent, rates, insurance.
Semi-fixed costs these are costs that move in correlation
with, but not in direct
proportion to the volume of sales (ex. fuel costs, telephone,
laundry). Semi-fixed costs contain a
fixed and variable cost element, ex. the charge for the telephone
47

line and a variable cost depending on the number of calls
made.
Variable costs; these are costs that vary in proportion to the
volume of sales, ex.
food and beverage costs.
Total costs; this is the sum of the fixed costs, semi-fixed
costs and variable costs.
1.6.2 PROFIT
There are two main kinds of profit:
Gross profit = total sales – cost of materials.
Net profit = total sales – total costs (material +labour +
overhead costs).
1.6.3 BREAKEVEN POINT
The term break-even point may be defined as that volume of
business where the
total costs are equal to the sales and where neither profit nor
loss is made.
1.6.4 VARIANCE ANALYSIS

Variance analysis is an activity that allows management to
compare the actual
performance during a specific period against its budgeted
expectations in the same
period. To use variance analysis effectively, determine why the
variance occurred. Identify the
causes of unfavourable variances and suggest remedies to
prevent them.
1.7 BUDGET
LIMITATIONS
Although budgets are useful and valuable, one must keep in
mind that they do have
certain limitations.
These limitations include:
The given information used to prepare budgets is obtained
from estimates.
Budgets are never perfect because they have to adapt
continuously to changing
circumstances.
The implementation of a budget and the control over the
activities are subject to the
fallibility of man.
48

LESSON
2.4
1.8 BUDGET
CONTROL
In any enterprise it is the responsibility of management to plan
the future activities of the
enterprise and to exercise control over these activities so that
the planned objectives are met.
The control process can be divided into three phases, namely:
Setting standards or measures.
Measuring reality and judging it against the given measures or
standards.
Corrective action when the reality deviates from the plan.
The budget remains one of the best planning and controlling
mechanisms the organisation
can make use of, but then it must be established and used in a
responsible and scientific manner.
A very good management information system is necessary to do
planning and controlling.
1.9 TYPES OF BUDGETS

There are many types of budgets available as financial control
tools within the business:
1.9.1 Project budgets are budgets drawn up for specific tasks
or projects to be
undertaken (ex. if a company wishes to open up another branch)
and will no longer be valid once
the project is completed.
1.9.2 Capital budgets are concerned with general office
buildings, extensions of the
factory building, installation of new machinery and equipment
as well as new vehicles.
1.9.3 Cash budgets. The enterprise always needs cash and the
amount needed will vary
from month to month, depending on the monthly cash income
and payments.
1.9.4 Departmental budgets are prepared when individual
departments may need to
make separate budgets to add to a master budget, e.g. sales,
purchases, human resources,
advertising, etc.
1.9.5 Operating budgets. These are concerned with the day-to-
day income and
expenditure of an establishment and include sales, cost of sales,
labour, maintenance, etc.
1.9.6 Zero-based budgets. In this approach to budgeting the
results of the previous 49

year’s budget are not taken into account. The budgeting
process begins afresh every year.
This enables the organisation to look at its activities and
prioritise from a fresh angle every year.
The budget figures of the past play no role in the allocation of
funds and every manager must
state his case again and give the necessary motivation for his
department’s budget request.
1.10 THE MOST IMPORTANT BUDGETS
THE SALES BUDGET
Sales forecasts determine the starting point of the sales
budget. It is regarded as the most
important budget because many other budgets are influenced by
it. The formula for determining
expected sales is: Expected sales = expected number of units
sold x unit price
Example of a sales budget:
ABC
Traders
They sell doormats and estimate that 3000 units will sell in the
first quarter.

Sales will increase by 500 units per quarter thereafter.
Their selling price for the door mats is R60 per unit.
SALES BUDGET FOR ABC TRADERS
1 2 3 4
Year
Expected sales
3 000
3 500
4 000
4 500
15 000
Unit price
X R60
X R60
X R60
X R60
X R60
Total: quarter
R180 000
R210 000
R240 000
R270 000

R900 000
PRODUCTION BUDGET
It has now been determined how many units you are expected
to sell, thus the units you
must manufacture can now be determined, bearing in mind that
you already have some stock on
hand. The calculation should be done as follows: Expected sales
figure Minus Opening stock
Plus Final stock = Expected number of units to manufacture.
50
LESSON
2.4
Complete the following production budget
PRODUCTION BUDGET FOR ABC TRADERS
1 2 3 4

Year
Expected sales
3 000
3 500
4 000
4 500
15 000
Less opening stock
(450)
(525)
(600)
(675)
(450)
Total
Plus closing stock
525
600
675
750
750
Number of units to be produced
CASH BUDGET

The cash budget is the main concern in the enterprise; it is an
important result obtained
from drawing up other budgets. Expected cash flow is
determined to assist management to make
provision for cash shortages and to consider the necessary
financing possibilities.
Example:
ABC Traders has collected the following information for you
in respect of their cash
budget:
The bank should show a positive balance of R40 000 at the
beginning of the year
An investment of R4 000 will be sold for cash in the second
period
Purchases of all current costs are spread evenly over the
quarters
Direct labour costs are settled in the period incurred
Management wants to purchase a new truck for R133 000 in
the second
quarter
The enterprise pays tax monthly in equal instalments

Loans are paid in the first quarter when there is sufficient
cash.
51
CASH BUDGET FOR ABC TRADERS
1 2 3 4
Cash balance
40 000
22 550
5 900
13 050
Debtors and cash
173 000
198 000
228 000
258 000
Sales of investment
4 000

Total receipts
213 000
224 550
233 900
271 050
Expenditure
Less: payments
Direct material
15 125
17 625
20 125
22 585
Direct labour
47 105
49 805
52 505
91 500
Rent paid
14 000
14 000
14 000
14 000
Telephone
1 400
1 400
1 400
1 400
Salaries
11 200
11 200

11 200
11 200
Repairs and maintenance
1 120
1 120
1 120
1 120
Marketing
14 000
14 000
14 000
14 000
Purchase of vehicle
133 000
Interest paid
8 750
8 750
8 750
8 750
Current costs
76 500
76 500
76 500
76 500
Tax
1 250
1 250
1 250
1 250
Total payment

190 450
328 650
200 850
242 305
Surplus/deficit
22 550
(104 100)
33 050
28 745
Financing
- loans
110 000
- payments
(20 000)
(10 000)
Closing balance
22 550
5 900
13 050
18 745
52
LESSON
2.4

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