Record-Keeping and Financial Management
Domain 8: Record-Keeping and Financial Management. Tests why records are kept, which records and source documents are needed, double-entry basics, and how owners read simple statements and ratios.
Why and what
Legal: NamRA requires income tax records and, above the VAT registration threshold (currently N$1 million taxable turnover), VAT records; the Labour Act requires payroll records; lenders require statements. Records include the cash book, petty cash book, receipts and invoices, bank statements, stock records, payroll, asset register, debtors and creditors ledgers and the trial balance. The accounting equation: Assets = Owner's equity + Liabilities.
Reading the numbers
Income statement: sales minus cost of sales = gross profit; minus operating expenses = net profit. Ratios: gross profit % = GP / sales; net profit % = NP / sales; current ratio = current assets / current liabilities; stock turnover = cost of sales / average stock. Controls: separate duties, authorise payments, reconcile the bank monthly, count stock physically.
Worked example
Sales N$40 000, cost of sales N$24 000, expenses N$9 000. Reasoning: gross profit is N$16 000, which is 16 000 / 40 000 = 40%; net profit is N$7 000, which is 7 000 / 40 000 = 17.5%. If N$10 000 of the sales were on credit and unpaid, the bank balance is N$10 000 below what profit suggests, so the business can be profitable and still unable to pay wages. That link between profit and cash carries the marks.
Traps
- Mixing personal and business money, which destroys the meaning of profit.
- Recording a sale only when cash arrives, so debtors disappear from the records.
- No source documents, so figures cannot be audited or defended at NamRA.
- Treating a shoebox of receipts as record-keeping, with no cash book or trial balance.