Accounting is a system that records the entity's financial transactions, then classifies and summarizes them, then presents them in financial statements that help users make decisions. That is why it is called "the language of business": everything that happens in the entity — a sale, a purchase, a collection, a payment — is translated into meaningful figures.
| User | What do they want to know? |
|---|---|
| Owners & management | Is the business profitable? Where does the cash go? What is owed to us and by us? |
| Banks & lenders | Can the entity repay its obligations? |
| The Tax Authority | What is the correct taxable base? |
| Investors & suppliers | Should we deal with this entity and grant it credit? |
Financial accounting records the financial events and transactions that have actually occurred in the past (such as last month's sales, or assets bought last year), and prepares statements for users outside the entity under binding accounting standards, while management accounting prepares internal reports for management in whatever form serves the decision — this booklet covers the fundamentals of financial accounting.
Every resource the entity owns (assets) came from one of only two sources: other people's money (liabilities) or the owners' money (equity). That is why the equation is always in balance after every transaction, whatever it is — and this is the foundation of the whole double-entry idea.
An owner started a business by depositing 500,000 of his own money into the company's account, the company borrowed 200,000 from the bank, and bought equipment for 150,000 in cash:
| Cash (500,000 + 200,000 − 150,000) | 550,000 |
| Equipment | 150,000 |
| Total assets | 700,000 |
| Bank loan (liabilities) | 200,000 |
| Capital (equity) | 500,000 |
| Liabilities + equity | 700,000 |
(Note that buying the equipment did not change total assets — less cash, more equipment, by the same amount)
Profits increase equity and losses decrease it — that is why retained earnings appear within equity on the balance sheet; they are not "cash in the safe" as some assume.
Every transaction has at least two sides: a debit and a credit, and total debits always equal total credits. To know which side an account falls on, memorize the nature of each type:
| Account type | Nature | Increases by | Decreases by |
|---|---|---|---|
| Assets (cash, receivables, inventory, equipment) | Debit | Debit | Credit |
| Expenses (rent, salaries, electricity) | Debit | Debit | Credit |
| Liabilities (suppliers, loans) | Credit | Credit | Debit |
| Equity (capital, retained earnings) | Credit | Credit | Debit |
| Revenue (sales, service income) | Credit | Credit | Debit |
① The owner deposited capital of 500,000 in the bank:
| Account | Debit | Credit |
|---|---|---|
| Bank (asset increases) | 500,000 | |
| Capital (equity increases) | 500,000 |
② The company paid the month's rent of 10,000 from the bank:
| Account | Debit | Credit |
|---|---|---|
| Rent Expense (expense increases) | 10,000 | |
| Bank (asset decreases) | 10,000 |
③ The company sold services on credit to a client for 30,000:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable (asset increases) | 30,000 | |
| Service Revenue (revenue increases) | 30,000 |
Do not memorize entries by heart — always ask yourself two questions: what increased and what decreased? then what is the nature of each account? The entry will come out right on its own.
The accounting cycle is the series of steps, repeated every period, that every transaction goes through inside any accounting system — manual or electronic — from the document to the financial statements and closing:
| Step | What happens in it? |
|---|---|
| 1 · The document | An invoice, a receipt, a contract — no entry without a supporting document |
| 2 · The journal entry | Recording the transaction with its debit and credit sides, on its date |
| 3 · Posting to the ledger | Accumulating the entries per account to know each account's balance |
| 4 · The trial balance | A listing of all account balances — total debits = total credits |
| 5 · Adjusting entries | Accruals, prepayments, depreciation and provisions at period end |
| 6 · The financial statements | Balance sheet, income statement, comprehensive income, cash flows, changes in equity, and the notes |
| 7 · Closing entries | Closing revenue and expenses and transferring the net profit or loss to equity |
A balanced trial balance means every entry balanced — but it does not guarantee correct classification: an entry posted to the wrong account, or with the wrong amount on both sides, passes through with the trial balance still balanced! Document review remains essential.
Modern accounting software performs steps 3 and 4 automatically the moment the entry is saved — but understanding what happens "behind the screen" is what separates an accountant from a data-entry clerk.
The document cycle is the path a document travels inside the entity from the moment it is created until it is filed: who prepares it, who approves it, how many copies are issued, and which department receives each copy. Every type of transaction (purchasing, selling, cash disbursement, store issues) has a document cycle the entity designs — and it is the cornerstone of internal control: signatures and approvals, segregation between whoever requests, receives, records and pays, and pre-printed serial numbering that exposes any missing document.
| Document | Who prepares it? | Its role |
|---|---|---|
| 1 · Purchase requisition | The department needing the item | Evidences the need, approved by the responsible manager |
| 2 · Purchase order | The purchasing department | Contracts with the supplier at the approved quantity and price |
| 3 · Goods received note | The stores, after inspection | Evidences the quantity actually received into the warehouse |
| 4 · Supplier invoice | The supplier | The claim for payment — accounting matches it against the purchase order and the goods received note (the three-way match) before recording anything |
| 5 · Payment voucher | Accounting, executed by the treasury or the bank | Settles the amount due after approval |
A common question: what is the difference between the two cycles? The document cycle is the paper's journey between departments, while the accounting cycle is the transaction's journey inside the books — the first ends roughly where the second begins: a complete, approved document is the only legitimate input to a journal entry.
When you start a new job, ask to understand the entity's document cycle before its books — who signs what, and where each copy goes. Whoever understands the paper trail catches errors and fraud before they ever reach the entries.
Under the accrual basis — the basis required by accounting standards — revenue is recognized in the period in which it is earned (the service performed or the goods delivered), and an expense is recognized in the period in which it is incurred, regardless of when cash is collected or paid. The cash basis recognizes a transaction only when cash moves — and it is not acceptable for financial statements.
The company performed a consulting service in December 2026 worth 20,000, collected in January 2027. The December entry (the year the revenue was earned):
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 20,000 | |
| Service Revenue | 20,000 |
And on collection in January (no new revenue — just one asset converting into another):
| Account | Debit | Credit |
|---|---|---|
| Bank | 20,000 | |
| Accounts Receivable | 20,000 |
The company consumed December electricity worth 3,000, with the bill issued and paid in January. The December entry:
| Account | Debit | Credit |
|---|---|---|
| Electricity Expense | 3,000 | |
| Accrued Expenses (liability) | 3,000 |
"Revenue is not collection, and an expense is not payment" — profit is one thing and cash flow is another; a company can be profitable yet unable to pay its salaries because its profits are "on paper" with its customers.
| Assumption | What it means in practice |
|---|---|
| Business entity | The entity is a person separate from its owners — the owner's personal expenses are not company expenses, and his drawings from the safe are charged to his current account, not to expenses |
| Going concern | We assume the entity will continue operating for the foreseeable future — which is why we spread an asset's cost over its useful life instead of expensing it immediately |
| Monetary unit | Only what can be measured in money is recorded — staff competence and the entity's reputation never appear in the books, whatever their value |
| Periodicity (the accounting period) | The entity's life is divided into equal periods (a year, a quarter) whose performance is measured separately — this is where adjusting entries come from |
| Principle | Meaning and a practical example |
|---|---|
| Historical cost | An asset is recorded at its actual acquisition cost — land bought for 1,000,000 stays in our books at that amount even if the market price rises (unless a revaluation model permitted by the standard is applied). The same principle applies to liabilities: initially recorded at the fair value of what was received in exchange — which normally equals the amount actually received: a loan the company received 500,000 from is recorded at 500,000, not at the total future installments and interest to be paid |
| Revenue recognition | Revenue is recognized when the performance obligation is satisfied — the goods delivered or the service performed — not at contract signing and not at collection |
| Matching | A period's expenses are matched against its revenue — cost of goods sold is recognized in the same period as the sale's revenue, and the salesman's commission in the period of the sale that caused it |
| Prudence (conservatism) | Do not record expected gains, but record probable losses as soon as they are expected — inventory costing 100,000 with a net realizable value of 90,000 is shown at 90,000 |
| Consistency | The same accounting policies from one period to the next (depreciation method, inventory costing method) so comparisons stay meaningful — any change must be justified and disclosed |
| Materiality | An item is material if omitting or misstating it would affect the decisions of a user of the statements — a 200-pound stapler is expensed immediately, not "depreciated" over 5 years |
| Full disclosure | Every piece of information that affects a user's decision must appear in the statements or their notes — such as a lawsuit against the company or a mortgage over its assets |
Prepare at least one practical example for every principle in the table above; an example proves understanding better than a definition. And make sure you truly understand all of these principles rather than memorize them — memorization evaporates at the first practical question, while understanding stays with you.
| Statement | What it presents | Its question |
|---|---|---|
| Statement of financial position (balance sheet) | Assets, liabilities and equity at a specific date | What do we own and what do we owe? |
| Income statement | Revenue − expenses = net profit for a period | Did we make a profit? |
| Statement of comprehensive income | Net profit + other comprehensive income items (such as revaluation surplus and translation differences) for a period | What is total comprehensive income, after what bypasses the income statement? |
| Statement of cash flows | Cash movements — operating, investing, financing — for a period | Where did cash come from and where did it go? |
| Statement of changes in equity | Capital, retained earnings and distributions for a period | How did the owners' equity change? |
The notes are an integral part of the financial statements — reading the statements is incomplete without them.
A company earned revenue of 300,000 with expenses of 240,000 during the year, and opening equity was 500,000 with no distributions:
| Revenue | 300,000 |
| (Expenses) | (240,000) |
| Net profit (income statement) | 60,000 |
| Opening equity | 500,000 |
| Closing equity (appears on the balance sheet) | 560,000 |
(The income statement's net profit flows into equity — and that is how the balance sheet always balances)
The balance sheet is a snapshot at a moment (a balance at a date), while the income statement is a film over a period (movement between two dates) — confusing "balance" with "movement" is one of the most common beginner mistakes.
Some gains and losses never pass through the income statement at all — they are recognized directly within equity under "other comprehensive income". The best-known examples: the revaluation surplus on fixed assets, and translation differences on foreign operations. That is why the standards give the statement its full name: the "statement of profit or loss and other comprehensive income" (presented as one statement in two sections, or as two consecutive statements), where total comprehensive income = net profit + OCI items.
| Term | Definition |
|---|---|
| Journal Entry (JE) | The first formal record of a transaction in the books: the date, the debit side, the credit side, the narration, and the supporting document number. Entries are recorded in the journal in date order |
| General Ledger (GL) | The collection of all the entity's accounts; every entry is posted to it so that each account accumulates its own movements and balance — the account's page describes every movement made on the account |
| Trial Balance (TB) | A listing of the balances of all ledger accounts at a specific date, with total debit balances equal to total credit balances — the starting point for preparing the financial statements |
Take the same three entries of section 3 (capital 500,000 into the bank, rent 10,000 from the bank, services on credit 30,000). First, each was recorded as a journal entry. Second, they are posted to the ledger — this is the bank account's page:
| Narration | Debit | Credit | Balance |
|---|---|---|---|
| Capital deposited | 500,000 | 500,000 | |
| Month's rent paid | 10,000 | 490,000 |
Third, all account balances are gathered in the trial balance:
| Account | Debit | Credit |
|---|---|---|
| Bank | 490,000 | |
| Accounts Receivable | 30,000 | |
| Rent Expense | 10,000 | |
| Capital | 500,000 | |
| Service Revenue | 30,000 | |
| Total | 530,000 | 530,000 |
The sequence is the same in every system: document → journal entry → posting to the ledger → trial balance → financial statements. Accounting software performs the posting and the trial balance automatically the moment the entry is saved — but the question "where does this figure appear and why?" is always answered by this sequence.
A ledger account gives you one total balance — but daily work needs the detail: which specific asset? which item? which customer? That detail lives in the subsidiary registers and master data files:
| Register / file | What it contains | Why it matters |
|---|---|---|
| Fixed Asset Register (FA Register) | A line per asset: code, description, purchase date, cost, depreciation rate, accumulated depreciation, net book value, location and custodian | Computing each asset's monthly depreciation, physical verification of assets, and recording disposals and sales |
| Inventory Item Card | A card per item: code, unit, every receipt and issue in quantity and cost, the balance after each movement, and the reorder level | Knowing any item's quantity and cost instantly, costing the issues (moving average or otherwise), and matching the physical count |
| Customer Master File | A card opened once per customer: code, legal name, commercial register and tax card, address, contact person, credit limit, payment terms | Every invoice and collection lands on the right card — producing correct statements and aging per customer |
| Vendor Master File | The same idea for suppliers + their bank details and their withholding-tax treatment | Correct bills and payments, and the withholding return (Form 41) comes straight out of the data |
The subsidiary record's total must always equal its control account's balance in the ledger: the sum of customer cards = the receivables account balance, the sum of item cards = the inventory balance, and the sum of the asset register = the fixed assets balance. This reconciliation is a core monthly checkpoint — any difference means an entry hit the total without the detail, or the reverse.
Master-data accuracy matters more than it looks: a duplicated customer card or a wrong tax name means rejected e-invoices and scattered statements — which is why creating and editing cards is a restricted permission for specific people in well-run systems.
Under the perpetual system the inventory account is updated with every movement: a purchase enters inventory immediately, and every sale records its cost of goods sold at the same moment — so the inventory balance and the item cards are always up to date. Under the periodic system purchases are recorded in a "Purchases" account and inventory is updated only at period end after a physical count, with cost computed by one overall formula.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 25,000 | |
| Sales | 25,000 | |
| Cost of Goods Sold | 15,000 | |
| Inventory | 15,000 | |
| Total | 40,000 | 40,000 |
(The revenue entry and the cost entry together — inventory drops the moment of sale)
| Opening inventory | 50,000 |
| + Purchases during the period | 200,000 |
| − Closing inventory (by physical count) | (60,000) |
| Cost of goods sold | 190,000 |
Even under the perpetual system a physical count remains periodically essential — it is the only thing that exposes shortages, damage and theft: the difference between book and count is recorded as a shortage expense. Modern systems have made perpetual the default; periodic remains common in small businesses.
A cheque is a payment instrument due the moment it is presented to the bank — so a currently-dated (due now) cheque received from a customer and deposited with the bank awaiting clearance is recorded in "Cheques Under Collection" (a near-cash asset within cash and cash equivalents). A post-dated cheque, however, is in substance a credit instrument — treated like notes receivable until its date arrives and it is deposited for collection. A note receivable (a post-dated cheque, a bill of exchange or a promissory note) is a credit instrument signed by the customer with a future maturity date — recorded in "Notes Receivable" within current assets until it is collected.
| Account | Debit | Credit |
|---|---|---|
| Cheques Under Collection | 40,000 | |
| Accounts Receivable | 40,000 |
And when the bank's collection advice arrives:
| Account | Debit | Credit |
|---|---|---|
| Bank | 40,000 | |
| Cheques Under Collection | 40,000 |
A post-dated cheque for 60,000 due in 90 days is recorded: DR Notes Receivable 60,000 / CR Accounts Receivable 60,000 — and on collection at maturity: DR Bank / CR Notes Receivable.
Cheques and commercial papers are valuable documents kept in the company safe under a custody register (paper details, customer, amount, maturity date), counted periodically and by surprise, with full segregation between the treasurer who holds them and whoever records them in the books.
All three are current liabilities on the same side of the balance sheet — but each means something different, and mixing them distorts the presentation:
| Item | When does it arise? | Example |
|---|---|---|
| Trade payables (suppliers) | Buying goods or services for the business activity on credit, supported by a supplier invoice | A raw-materials invoice on credit from a trade supplier for 80,000 |
| Accrued expenses | An expense actually consumed during the period whose invoice has not been received by its end — recorded by an adjusting entry, estimated if needed until the invoice arrives | December electricity consumed with no bill issued yet; salaries for the last days of the month |
| Other credit balances | Miscellaneous non-trade obligations that are neither trade suppliers nor accrued expenses | Payroll taxes withheld not yet remitted, the social-insurance share, deposits received from others, advances received from customers |
Ask three questions in order: is there a trade supplier's invoice behind it? → trade payables. Is it an expense consumed during the period whose invoice has not arrived? → accrued expenses. Any other obligation? → other credit balances. And note the essential difference between a payable and an accrual: the first is a confirmed obligation with an invoice, the second is an obligation born by consumption that may be estimated until the invoice arrives.
A share is an ownership instrument: a stake in a company's capital that makes its holder a part-owner. A bond is a debt instrument: a loan its holder grants to the company (or the government), making him a creditor — not an owner.
| Comparison | Share | Bond |
|---|---|---|
| Nature of the instrument | Ownership — a stake in capital | Debt — a loan to the issuer |
| Holder's status | Part-owner (shareholder) | Creditor |
| Return | Unguaranteed dividends — depend on profits being made and a distribution decision | A fixed periodic interest due whether the company profits or loses |
| Maturity | None — lives as long as the company lives | A set term at which its face value is repaid |
| On liquidation | The holder collects last — after all debts are settled | The holder ranks ahead of shareholders among creditors |
| In the issuer's books | Within equity — and dividends are not an expense | A liability — and its interest is a finance expense in the income statement |
Note the accounting effect on the issuer: financing with bonds charges the income statement with interest expense and lowers profit, while financing with shares never touches the income statement — dividends are deducted from retained earnings within equity, not recorded as an expense.
Both are capital companies: the partner's or shareholder's liability in either is limited to his shares or quotas — it never reaches his personal assets. They differ, however, in size, form and governance:
| Comparison | Limited Liability Company (LLC) | Joint Stock Company |
|---|---|---|
| Capital | No binding minimum (after the companies-law amendments) — set by the articles | A minimum issued capital set by the regulations, rising sharply for a public offering |
| Partners | From two up to 50 partners (a single-member company is allowed) | At least three founders — with no maximum number of shareholders |
| Instruments | Quotas that cannot be offered publicly or traded on the exchange; their transfer is restricted by the partners' pre-emption right | Shares that are tradable, listable on the exchange and open to public subscription |
| Issuing bonds | May not issue shares or bonds | May issue bonds to borrow |
| Management | One or more managers appointed by the partners | A board of directors (at least three members) and a general assembly |
| Activities | Barred from banking, insurance, savings and receiving public funds | The mandatory form for those activities and for major ventures |
| Practical use | Family, small and medium businesses | Large ventures, attracting investors, and public offerings |
The link to the previous topic: it is the joint stock company that issues shares and bonds — an LLC's capital is quotas held between its partners, not traded instruments. In Egypt both are governed by Companies Law No. 159 of 1981 as amended.
The auditor's report is the product of a full audit under auditing standards, while the limited review report is the product of a narrower examination usually performed on interim statements — the essential difference lies in the extent of procedures, the level of assurance, and how the outcome is worded:
| Comparison | Auditor's report (the audit) | Limited review report |
|---|---|---|
| When prepared? | On the annual financial statements | Usually on interim statements (quarterly or half-yearly) |
| Governing standard | The Egyptian Standards on Auditing — chiefly Egyptian Auditing Standard No. 700 (the auditor's report on a complete set of general-purpose financial statements) | Egyptian Limited Review Standard No. 2410 (the limited review of an entity's interim financial statements performed by its own auditor) |
| Extent of procedures | A full audit: understanding internal control, testing, physical counts, customer and bank confirmations, documentary examination, sufficient appropriate evidence | Mainly inquiries of management and analytical procedures |
| Level of assurance | Reasonable assurance (high) | Limited assurance (lower) |
| Wording of the outcome | An opinion expressed positively: "the statements present fairly, in all material respects..." | A conclusion expressed negatively: "nothing has come to our attention that causes us to believe the statements do not present fairly..." |
A limited review is not a mini-audit that replaces the audit — the auditor issues no "opinion" in it, only a "conclusion" with limited assurance. The usual practice: listed companies file their quarterly statements with a limited review and their annual statements with a full audit. The Egyptian auditing and limited-review standards were issued by Ministerial Decree No. 166 of 2008, aligned with the international standards.
| Comparison | Internal audit | External audit |
|---|---|---|
| Objective | Serving the entity from within: evaluating internal control, risk management, operational efficiency and policy compliance | Expressing an independent opinion on the fairness of the financial statements for shareholders and third parties |
| Reporting line | A department inside the entity — reporting functionally to the board or the audit committee | An auditor fully independent of the entity, appointed by the general assembly |
| Scope and timing | Continuous work all year round covering operations, systems and every department | Focused on the financial statements — an annual audit (and interim limited reviews) |
| Standards | Internal auditing standards (IIA) | Auditing standards (Egyptian / International) |
| Output | Periodic internal reports with findings and recommendations — never published | One opinion report published with the financial statements |
The two audits complement rather than compete: a strong internal audit strengthens the control environment the external auditor relies on — and he may even use its work after assessing its competence and objectivity. The essential difference remains independence: the internal auditor is the entity's employee; the external auditor is independent of it.
The auditor's opinion is determined by two questions: is there a misstatement in the statements, or an inability to obtain sufficient evidence? then is the effect material only, or material and pervasive (touching the statements as a whole)? Hence the four types:
| Type | When issued? | Its signature wording |
|---|---|---|
| 1 · Unmodified (clean) opinion | No material misstatements, and sufficient appropriate evidence | "The statements present fairly, in all material respects..." |
| 2 · Qualified opinion | A misstatement that is material but not pervasive, or a lack of evidence that is material but not pervasive | "Except for the matter described in the Basis for Qualified Opinion paragraph, the statements present fairly..." |
| 3 · Adverse opinion | Misstatements that are material and pervasive | "The statements do not present fairly..." |
| 4 · Disclaimer of opinion | Inability to obtain sufficient appropriate evidence with possible effects material and pervasive | "We do not express an opinion on the financial statements..." |
The mental rule: misstatement → qualified (material) or adverse (material and pervasive); lack of evidence → qualified (material) or disclaimer (material and pervasive). An emphasis-of-matter paragraph is not a qualification — merely a pointer to a matter already disclosed in the statements that the auditor considers essential to the reader's understanding.
| Comparison | Provision | Reserve |
|---|---|---|
| What is it? | An amount set up to meet an existing or probable obligation or loss whose amount or timing is not precisely fixed (doubtful debts, lawsuits, warranties) | A portion of profits set aside after the net profit is determined to strengthen the financial position or for future purposes |
| Its source | Charged to the income statement as a burden before reaching net profit — created whether the entity profits or loses | Appropriated from profits after they are earned — it cannot exist without profits |
| Where it sits | Deducted from its related asset (like the doubtful-debts provision against receivables) or within liabilities (like a lawsuits provision) | Within equity on the balance sheet |
| Effect on profit | Reduces the period's net profit | Never touches net profit — merely a redistribution inside equity |
A provision is a charge against revenue; a reserve is an appropriation of profit — the first is mandatory once its cause exists even in a loss year, the second cannot exist without profits.
| Comparison | Legal reserve | Other reserves (statutory / voluntary / general) |
|---|---|---|
| Source of obligation | The law itself — the companies law obliges capital companies to build it | The company's articles (statutory) or a general-assembly resolution (voluntary) |
| Rate and ceiling | Setting aside at least 5% of net profits each year, and the appropriation may stop once the reserve reaches 50% of the issued capital | At whatever rate the articles set or the assembly decides — with no legal ceiling |
| Use | Restricted — essentially to cover losses or increase capital under the law's provisions | Broader — according to the purpose it was built for (expansions, general strengthening...) |
All of them are appropriations of profit shown within equity — the difference is only in who imposes them, their limits, and the restrictions on their use. The Egyptian reference: Companies Law No. 159 of 1981 and its regulations.
Capital expenditure is spending whose benefit extends beyond one financial period: acquiring a new asset, or an addition that increases the asset's capacity or extends its life — capitalized on the asset and depreciated over its useful life. Revenue expenditure is spending whose benefit belongs to the current period alone — operations and routine maintenance — charged to the income statement in its period.
① Buying a new machine for 200,000 from the bank (capital — a new asset):
| Account | Debit | Credit |
|---|---|---|
| Machinery & Equipment (asset) | 200,000 | |
| Bank | 200,000 |
② Routine maintenance of the machine for 5,000 (revenue — keeps its condition, adds no capacity):
| Account | Debit | Credit |
|---|---|---|
| Maintenance Expense | 5,000 | |
| Bank | 5,000 |
③ A major overhaul for 50,000 that extended the machine's life (capital — added to the asset):
| Account | Debit | Credit |
|---|---|---|
| Machinery & Equipment (asset) | 50,000 | |
| Bank | 50,000 |
Mixing the two distorts profit: capitalizing a revenue expense inflates profit and assets, and expensing a capital item understates them — both are misstatements. And remember materiality: a small item (like the stapler) is expensed immediately even if its benefit extends.
A cost is a sacrifice of resources to obtain a benefit — if that benefit is not yet consumed, it appears as an asset on the balance sheet (inventory, a fixed asset, a prepaid expense). An expense is a cost whose benefit was consumed during the period in generating revenue — so it is charged to the income statement.
| Concept | Its essence | Where it appears | Example |
|---|---|---|---|
| Cost | A benefit not yet consumed | An asset on the balance sheet | Goods bought for 100,000 still in the warehouse |
| Expense | A cost consumed in generating revenue | The income statement | When half the goods are sold: 50,000 becomes cost of goods sold |
| Loss | A cost consumed with no benefit or revenue in return | The income statement | Goods worth 10,000 damaged with no compensation |
You bought a car for 500,000 → that is a cost, and the car is parked outside your home — an asset; you have lost nothing yet.
Each year you consume part of the car's benefit → a slice of its cost is allocated to that year as an expense — that is depreciation: a systematic allocation of cost over the useful life, not a measure of the car's falling market price.
And the petrol you put in it? An expense immediately — burned the same day, with nothing left of it for tomorrow.
The mental rule: every expense was once a cost, but not every cost is an expense — an unconsumed cost is an asset, one consumed with benefit is an expense, and one consumed with no benefit is a loss. This is the heart of the matching principle: a cost becomes an expense in the same period as the revenue it produced.
Revenue is the gross amount the activity generated from selling goods or performing services during the period before deducting anything — the first line of the income statement. Profit is what remains of revenue after deducting costs and expenses — its last line. In between come the levels: gross profit (revenue − cost of sales), then operating profit (after operating expenses), then net profit (after all expenses and taxes).
| Revenue (sales) | 500,000 |
| (Cost of sales) | (300,000) |
| Gross profit | 200,000 |
| (Operating and administrative expenses) | (150,000) |
| Net profit | 50,000 |
(Half a million of revenue ended in only 50,000 of profit — big revenue does not necessarily mean big profit; income tax is ignored to keep the example simple)
| Concept | What is it? | When is it recognized? |
|---|---|---|
| Revenue | The value of goods or services sold | When it is earned (goods delivered or service performed) even if not yet collected — the accrual basis |
| Profit | Revenue minus costs and expenses | At period end, after matching revenue with its expenses |
| Cash inflow | The cash actually collected during the period | The moment cash enters the till or bank — regardless of when the sale happened |
Revenue is the top line of the income statement and profit is its bottom line — an entity with huge revenue can be loss-making because its costs devour it, while one with modest revenue can be profitable on a healthy margin. That is why an entity's performance is never judged by its sales figure alone. Nor is its liquidity judged by profit: an entity can be profitable yet cash-starved because it sold on credit and has not collected — profit is one thing, cash inflow is another.
The idea is identical in both — a systematic allocation of the asset's cost over the years of its useful life — and the only difference is the type of asset: a tangible asset is depreciated, an intangible asset is amortized.
| Comparison | Depreciation | Amortization |
|---|---|---|
| On which asset? | A tangible fixed asset with physical substance (buildings, machinery, vehicles, equipment) | An intangible asset with no physical substance (patent, trademark, software, franchise right) |
| Example rates | Building 5%, vehicle 20%, computer 25% (indicative rates) | Spread over the period of benefit or the licence term |
| An exception you get asked about | Land is not depreciated — its life is indefinite | Goodwill is not amortized periodically but tested annually for impairment |
Both are an allocation of cost, not a measure of the asset's falling market value. Tangible is depreciated, intangible is amortized — and for the depletion of natural resources (mines, wells) there is a third term: depletion.
Stocktaking is an action; inventory is a thing. Stocktaking is a procedure we perform, inventory is an asset we own — we perform a "stocktake" of the "inventory".
| Comparison | Stocktaking (count) | Inventory |
|---|---|---|
| What is it? | The procedure of physically counting and checking assets at a point in time to confirm the books match reality | The asset itself: goods owned for sale or for use in the activity |
| Its nature | An activity/process performed (inventory count, cash count, fixed-asset count) | An account within current assets on the balance sheet |
| The relation | We "count" the "inventory" to find any shortage or surplus and reconcile the book balance to the actual | |
Stocktaking is broader than inventory: it is done for cash and fixed assets too. See Section 10 (perpetual vs periodic inventory) for the two ways of tracking the inventory balance through the year.
| Type | When is it given? | Accounting treatment |
|---|---|---|
| Trade discount | A reduction off the list price given at the time of sale (for a large quantity or a favoured customer) | Never recorded in the books — the transaction is booked net of the discount |
| Discount allowed (cash, we give) | We give it to the customer for early payment — we are the seller | An expense that reduces our profit |
| Discount received (cash, we get) | We get it from the supplier for our early payment — we are the buyer | Income to us |
① A customer owing 10,000 paid early, so we granted a 2% cash discount (200):
| Account | Debit | Credit |
|---|---|---|
| Bank | 9,800 | |
| Discount allowed (expense) | 200 | |
| Trade receivables | 10,000 |
② A supplier we owed 10,000 gave us a 2% cash discount (200) for paying early:
| Account | Debit | Credit |
|---|---|---|
| Trade payables | 10,000 | |
| Bank | 9,800 | |
| Discount received (income) | 200 |
The trade discount never appears in the books because it is built into the price; the cash discount does appear: allowed is an expense to us as seller, received is income to us as buyer — the same cash discount changes its name and treatment depending on which side of the deal you are on.
| Comparison | Doubtful debts | Bad debts |
|---|---|---|
| The situation | Collection is uncertain but not yet confirmed lost | Confirmed uncollectible for good |
| Treatment | Set up a provision by estimate — the debt stays on the books | Write off the debt and remove it from receivables |
| Effect | A prudent estimate that reduces profit | Final recognition of a loss |
① Setting up a doubtful-debts provision of 8,000:
| Account | Debit | Credit |
|---|---|---|
| Doubtful-debts expense | 8,000 | |
| Doubtful-debts provision | 8,000 |
② A customer's debt of 5,000 is confirmed bad, written off against the provision:
| Account | Debit | Credit |
|---|---|---|
| Doubtful-debts provision | 5,000 | |
| Trade receivables | 5,000 |
The natural sequence: an ordinary debt → becomes doubtful (an estimated provision) → if confirmed lost it becomes bad (written off against the provision). Tax note: a bad debt may be accepted as a cost once the conditions proving genuine collection efforts are met, whereas the provision is generally not a tax-deductible cost (except for banks, which have their own rules).
Cost of sales is the cost of the "goods" sold themselves; selling expenses are the cost of the "selling activity" around the goods.
| Comparison | Cost of sales | Selling & distribution expenses |
|---|---|---|
| What it represents | The purchase or production cost of the units actually sold | What is spent and incurred to earn the revenue — distribution and marketing, and others |
| Examples | Goods purchases, materials and labour of the product sold | Salesmen's salaries, commissions, advertising, delivery to customers, showroom rent |
| Place in the income statement | Deducted from revenue to reach gross profit | Deducted after gross profit to reach operating profit |
The rule: cost of sales relates to "what was sold" (the product); selling expenses to "the act of selling" (the activity). Mixing them distorts gross profit and gives a false picture of the product's own margin.
| Comparison | Prepaid expense | Accrued expense |
|---|---|---|
| Meaning | Paid in advance and its benefit not yet consumed | Benefit consumed and not yet paid |
| Its nature | An asset (a right owed to us) | A liability (owed by us) |
| Place on the balance sheet | Within current assets | Within current liabilities |
① We paid 120,000 in advance for next year's rent:
| Account | Debit | Credit |
|---|---|---|
| Prepaid rent (asset) | 120,000 | |
| Bank | 120,000 |
② December salaries of 50,000 are earned but not yet paid:
| Account | Debit | Credit |
|---|---|---|
| Salaries expense | 50,000 | |
| Accrued salaries (liability) | 50,000 |
Fixed and intangible assets are two types of "assets" — "asset" is the broadest term that covers them and others.
| Comparison | Assets (general) | Fixed assets (tangible) | Intangible assets |
|---|---|---|---|
| Definition | Any resource the entity controls with future economic benefit | Long-term assets with physical substance used in operations | Long-term assets with no physical substance but real value |
| Examples | Includes them all: cash, receivables, inventory, buildings, patents | Land, buildings, machinery, vehicles, equipment | Patent, trademark, software, goodwill, franchise right |
| Treatment | Split into current and non-current | Depreciated over their life (except land) | Amortized over their life (goodwill is tested for impairment) |
Every fixed or intangible asset is an "asset", but not every asset is fixed — cash, receivables and inventory are current assets, not fixed. The difference between fixed and intangible is simply the presence or absence of physical substance.
Notice the definition says the entity "controls" it, not necessarily "owns" it — remember right-of-use assets under leases: the entity controls them and shows them among its assets without legally owning them.
| Item | What is it? | How it is calculated |
|---|---|---|
| Bank charges | Fees the bank takes for a service (account management, cheque books, transfers, SMS) | A flat amount per service |
| Debit interest | Interest on the amounts drawn that became owed by you (overdraft or loan) | Debit balance × interest rate × time |
| Highest-debit-balance commission | A commission for making the overdraft facility available, regardless of how long it is used | The highest debit balance reached during the period × commission rate (usually quarterly) |
The bank charged on the statement: charges 150, debit interest 2,000, highest-debit-balance commission 500:
| Account | Debit | Credit |
|---|---|---|
| Bank charges | 150 | |
| Debit interest | 2,000 | |
| Highest-debit-balance commission | 500 | |
| Bank | 2,650 |
All three are bank burdens but different in nature: charges are for a service, debit interest is the price of the borrowed money over time, and the highest-debit-balance commission is the price of making the facility available regardless of how long it is used.
| Comparison | Overdraft | Bank loans |
|---|---|---|
| The idea | Letting the current account go into debit up to a set limit | A fixed amount disbursed in one lump and repaid in installments |
| Term | Short-term and revolving (drawn and repaid repeatedly) | For a fixed term (short or long) |
| Interest | On the amount actually drawn and how long it is used | On the loan principal per the repayment schedule |
| Balance-sheet classification | Within current liabilities (short-term) | The part due within a year is current, the rest is non-current liabilities (long-term) |
Yes — banking facilities are the broader umbrella, and an overdraft is one type of them.
| Comparison | Banking facilities | Overdraft |
|---|---|---|
| What is it? | Every form of credit the bank grants the client | One form of facility (a direct cash facility) |
| Its types | Direct/cash facilities (overdraft, loans) + indirect facilities (letters of guarantee, documentary credits) | — |
Facilities are of two kinds: direct (cash facilities that appear on the balance sheet as a liability when used) and indirect (contingent liabilities disclosed in the notes, like letters of guarantee and documentary credits). So every overdraft is a facility, but not every facility is an overdraft.
| Comparison | Letter of guarantee (LG) | Documentary credit (LC) |
|---|---|---|
| Purpose | A bank undertaking to pay the beneficiary if the client defaults on an obligation (bid / performance / advance-payment guarantee) | A bank undertaking to pay the seller (exporter) on presenting compliant shipping documents — a payment tool in trade and imports |
| When is it paid? | Only if the client defaults — a guarantee that may never be called | On executing the deal and presenting compliant documents — an execution tool for buying |
| Parties | Three: the applicant (the client requesting the guarantee) + the issuing bank + the beneficiary (the one entitled, e.g. the project owner) | Four: the buyer (the applicant) + his bank (issuing) + the seller/exporter (beneficiary) + the seller's bank (advising/confirming) |
| Comparison | Bank statement | Bank certificate |
|---|---|---|
| What is it? | A detailed list of all account movements over a period (deposits / withdrawals / running balance) | An official document attesting a specific fact at a given date (balance, facilities, indebtedness) and all the accounts owned by or granted to the company |
| Purpose | Tracking movement and performing the bank reconciliation | Proof / official evidence (for the auditor, tenders, authorities) |
| Nature | A continuous record of movements | A stamped attestation of a fact at a given moment |
The auditor requests a "bank certificate / confirmation" as independent audit evidence of balances and facilities, and does not rely on the statement alone. The statement says "what moved", the certificate says "this is the official fact as at such-and-such date".
In short: the accountant prepares and records, the auditor examines and gives an opinion — and the essential difference is independence.
| Comparison | External auditor | Accountant in a company |
|---|---|---|
| Where do they work? | In an independent audit firm, serving many clients | An employee inside the company itself |
| What do they do? | Examines the financial statements and gives an opinion on their fairness — does not keep the books | Keeps the books, records transactions, and prepares the statements and day-to-day returns |
| For whom? | For users of the statements outside the company (banks, investors, tax) | For the company's management internally |
| Independence | Must be independent of the company being audited | Part of the company and reports to its management |
| Framework | Auditing standards and the rules of conduct and independence | Accounting standards and the tax and companies laws |
From a career angle: audit gives breadth (you see many companies and sectors quickly), while in-house accounting gives depth (you master one company's full cycle).
A direct tax is imposed on income or wealth and its burden is borne by the taxpayer himself, who cannot pass it on. An indirect tax is imposed on consumption and transactions, where the entity is merely an intermediary collector — the real burden shifts to the final consumer.
| Tax | Quick hint |
|---|---|
| Corporate income tax | 22.5% of the taxable profit (accounting profit after tax adjustments); an annual return filed within four months of the financial year end |
| Salaries tax (payroll tax) | Progressive brackets on the employee's income, starting at 0% then 10% and rising to 27.5%; the employer withholds it from the monthly salary and remits it — the employee is the taxpayer, the company a withholding agent |
| Withholding tax (WHT) | Not a separate tax but an advance collection of the supplier's income tax: a percentage is deducted from what is due to him (1% supplies & contracting, 3% services, 5% professional fees & commissions) and remitted quarterly (Form 41) |
| Real estate tax | On built properties according to their annual rental value — borne by the property owner |
① Corporate income tax: taxable profit 1,000,000 × 22.5% = 225,000 recognized at year end:
| Account | Debit | Credit |
|---|---|---|
| Income Tax Expense | 225,000 | |
| Income Tax Payable (liability) | 225,000 |
(And on payment with the return: DR Income Tax Payable / CR Bank)
② Salaries tax: gross monthly payroll of 100,000 including withheld payroll tax of 8,000:
| Account | Debit | Credit |
|---|---|---|
| Salaries & Wages Expense | 100,000 | |
| Salaries Tax Payable (liability) | 8,000 | |
| Bank (net salaries) | 92,000 | |
| Total | 100,000 | 100,000 |
③ Withholding tax: paying a supplier's services invoice of 50,000 with 3% withheld = 1,500:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable (supplier) | 50,000 | |
| Withholding Tax Payable (liability) | 1,500 | |
| Bank | 48,500 | |
| Total | 50,000 | 50,000 |
④ Real estate tax: an annual tax of 12,000 on the company's building paid from the bank:
| Account | Debit | Credit |
|---|---|---|
| Real Estate Tax Expense | 12,000 | |
| Bank | 12,000 |
Only two of these entries are truly the company's expense: income tax and real estate tax. Salaries tax and withholding tax are not an expense of the company — they are amounts withheld from what is due to others (the employee and the supplier), passing through a liability account until remitted to the Tax Authority.
| Tax | Quick hint |
|---|---|
| Value added tax (VAT) | The standard rate is 14% on goods and services; a monthly return; input VAT (on purchases) is deducted from output VAT (on sales) and the difference remitted |
| Table tax | Special rates on specific goods and services listed in a schedule attached to the VAT law — and table tax is not deductible as a general rule |
| Customs duties | On imported goods at customs clearance according to the tariff — they enter the cost of the imported goods |
| Stamp tax | On specific documents and transactions (such as advertisements and certain contracts and papers) — fixed amounts or a percentage of value |
A direct tax is a burden on the entity itself (its profits tax appears in the income statement). In an indirect tax the entity is a collection intermediary: VAT collected from the customer is not revenue, and VAT paid on purchases is not an expense — both pass through a liability account owed to the Tax Authority, and the difference is what gets remitted with the return.
Rates and rules change with legislative amendments — memorize the idea, not the number, and always check the latest text: Income Tax Law 91 of 2005 as amended, VAT Law 67 of 2016 as amended, and the e-invoicing system is now a condition for deducting input VAT and recognizing costs.
The general rule is that a registered entity may deduct the input VAT on goods and services purchased for its taxable activity from its output VAT in the monthly return, under Article 22 of VAT Law No. 67 of 2016 as amended and its executive regulations — but the practical answer is: no, not every expense invoice is deductible; the deduction is conditional and has well-known exceptions.
| Condition | What it means |
|---|---|
| 1 · Related to the taxable activity | The purchases are needed to carry on the taxable activity — whether related to it directly or indirectly, or within the company's administrative expenses — not for personal purposes |
| 2 · A proper tax invoice | In the entity's name with its registration number — and the approved e-invoice has become a condition for the deduction to be accepted |
| 3 · Not loaded onto cost | You cannot both deduct the VAT and include it in the cost of the expense or asset at the same time |
| Item | Why not deductible? |
|---|---|
| Table tax | Not deductible as a general rule, in either of its forms — it enters cost, except where the law provides otherwise (chiefly: trading in the same table goods resold in the same condition) |
| Inputs of exempt activities | No deduction for VAT on purchases serving exempt goods or services; for a mixed activity (taxable and exempt) the deduction is taken pro-rata |
| Purchases unrelated to the activity | Personal expenses or items with no connection to the business — outside the deduction by nature |
| Passenger cars and their expenses | Unless the cars themselves are the business (trading in or renting them), their VAT is not deductible and is charged to cost |
| Deficient invoices | An invoice without a registration number, not in the entity's name, or not electronic where required — rejected on examination |
VAT that cannot be deducted is not lost for accounting — it is charged to the cost of the expense or asset itself (entering the income statement or depreciating with the asset), and it never appears in the VAT account.
Before deducting any invoice ask three questions: is it for our taxable activity? Is the invoice a proper e-invoice in our name? Is the item on the exceptions list? — and always check the Tax Authority's latest instructions; deduction rules are among the most frequently amended.