FAC1602 STUDY GUIDE 001 - 2019 - 4 - B

Only study guide for
FAC1601
FINANCIAL
ACCOUNTING
REPORTING
2019
Department of Financial Accounting
University of South Africa, Pretoria
© 2018 University of South Africa
All rights reserved
Printed and published by the

University of South Africa
Muckleneuk, Pretoria
FAC1601/3/2019-2021
70780498
Shutterstock.com images used

CONTENTS
Introduction and overview of the module....................................................................iv
LEARNING UNIT 1 .................................................................................................... 1

Introduction to the preparation of financial statements ................................ 1
LEARNING UNIT 2 .................................................................................................. 25

Financial statements of a sole proprietorship ............................................ 25
LEARNING UNIT 3 .................................................................................................. 45

Establishment and financial statements of a partnership........................... 45
LEARNING UNIT 4 .................................................................................................. 67

Changes in the ownership structure of partnerships.................................. 67
LEARNING UNIT 5 .................................................................................................. 85

The liquidation of a partnership ................................................................. 85
LEARNING UNIT 6 ................................................................................................ 101

Close corporations................................................................................... 101
LEARNING UNIT 7 ................................................................................................ 143

Introduction to companies ....................................................................... 143
LEARNING UNIT 8 ................................................................................................ 163

Branches ................................................................................................. 163
LEARNING UNIT 9 ................................................................................................ 185

Statement of cash flows .......................................................................... 185
iii
Introduction and overview of the module
1. Word of welcome
Dear Student,
We are pleased to welcome you to this module and hope that you will find the content both
interesting and rewarding. We shall do our best to assist you to master this module and we
recommend that you start studying immediately after enrolment. Accounting is a subject that
requires continued exercise by working through many examples and you will be required to
work continually throughout the semester.
First-year accounting at UNISA consists of the following modules namely FAC1502 and
FAC1601 or FAC1602. If you aim to become a chartered accountant (CA) or plan to include
second and third-year Financial Accounting modules in your degree, the FAC1601 module is
compulsory for the Bachelor of Accounting Sciences degree and other qualifications where
second and third-year Financial Accounting is required. Completing FAC1502 and FAC1601
successfully, allow you to enrol for the second-year modules FAC2601 and FAC2602. If your
focus is certain diplomas and other Bachelors of Commerce degrees where you only need
first-year Financial Accounting, we recommend that you enrol for the FAC1602 module.
However, ensure that FAC2601 and FAC2602 are not included in your degree’s syllabus as
only FAC1601 allows access to further studies in Financial Accounting.
2. Overview of FAC1601 and assumed knowledge from FAC1502
FAC1601 concerns itself with the issues of accounting reporting for different entities and builds
on the learning outcomes of FAC1502. You will remember that in FAC1502 the following topics
were covered:
iv
Basic principles of accounting
Including the nature of accounting, financial position and performance,
double entry and the accounting process
Collecting and processing accounting data

FAC1502
Including the processing of data and adjustments, closing off

procedures and preparing financial statements
Accounting for current and non-current assets

Including cash and cash equivalents, trade and other receivables,
inventory, property, plant and equipment, and other non-current assets
Accounting for current and non-current liabilities
Accounting Reporting
Including the financial statements of a sole proprietor, non-profit entities
and incomplete records
FAC1502 taught the basic bookkeeping functions and introduced you to the concepts,
principles and procedures of accounting. It is important to realise that FAC1502 forms the
foundation for all other financial accounting modules. The knowledge that you gained in
FAC1502 forms the building block of this module and cannot be repeated. If you need to
refresh your memory on these concepts, please refer to your FAC1502 guide and About
Financial Accounting Volume 1 textbook.
Although the aim is not to provide an exhaustive list of concepts dealt with in FAC1502, we
provide you with a summary of the most important ones to enable you to refer back with ease:
x Value-added tax (VAT) – section 5.10 in the FAC1502 guide and section 5.4 in the
textbook. Remember that the input and output VAT accounts are closed off to a VAT
control account which can be either a debtor (if VAT input is greater than VAT output for
the period) or a creditor (when VAT output is greater than VAT input for the period). In
this module, we refer to the VAT debtor account as VAT receivable and the VAT creditor
account is referred to as VAT payable.
x The recording of depreciation – section 6.3 and section 11.5 – 7 in the FAC1502 guide
and section 11.7 in the textbook. Familiarise yourself with the reason for depreciation,
the journal entries to provide for depreciation and the different methods that can be used
v
to calculate depreciation. These methods are the diminishing balance, the straight-line
and the production unit method. Remember that the useful life of an asset is an
estimation that must be reviewed annually and the depreciable amount is reduced with
the residual value or scrapping value of the asset.
x Credit losses and allowances for credit losses – section 9.5 in the FAC1502 guide and
section 9.4 – 9.6 in the textbook. Refresh your memory on the journal entries to write off
credit losses as well as to create, increase or reduce an allowance for credit losses. Also
refer to section 9.8 in the textbook where the VAT on credit losses is discussed and how
to journalise the VAT amount when credit losses are written off. Remember that when
credit losses previously written off are recovered, that a VAT output must again be
accounted for.
x Settlement discount granted and allowance for settlement discount granted – section
5.9 and 9.2 – 9.3 in the FAC1502 guide and section 9.3 in the textbook. Remember that
settlement discount granted reduces sales in financial statements. Refresh your memory
on the VAT implications that arose with settlement discount granted and how to account
for VAT on settlement discounted granted in the journals of first entry.
x Settlement discount received – section 5.9 in the FAC1502 guide and section13.6 in the
textbook. Remember that settlement discount received reduces purchases in financial
statements. The same VAT implications as for settlement discount granted is applicable
and you need to refresh your memory on the treatment of settlement discount received
in the journals of first entry.
x Inventory systems – section 7.4 in the FAC1502 guide. Remember that an entity can
either use a perpetual (continuous) inventory system or a periodic inventory system.
When a perpetual inventory system is used, the cost of sales is determined for every
transaction and the inventory account reflects the purchases and sales of inventory
items. Under this inventory system, a purchase journal and purchase returns journal are
not used and a physical inventory count will disclose shortages or surpluses in inventory.
When a periodic inventory system is used, purchases and purchases returns journals
are used. Accounts are closed off to a trading account. The trading account is used to
calculate cost of sales as no cost of sales account is kept and a physical inventory count
is essential to establish the closing inventory.
x Inventory valuation – refer to Chapter 10 in the textbook where the measurement and
the value determination for inventory are discussed. Please familiarise yourself with the
calculation of the cost of inventory which includes the cost of purchases, conversion
costs and other cost. The cost of purchases includes the purchase price, import duties,
non-recoverable taxes, transportation costs and handling costs. The cost of purchases
must be reduced by trade discounts, settlement discounts and rebates on purchases.
Conversion costs include, for example, direct labour cost, variable production overhead
costs and fixed overhead cost based on production at normal capacity. Other cost could
include for example designing and storage costs. Refresh your memory on the different
inventory valuation methods such as first-in-first-out (FIFO) and weighted average that
were covered in FAC1502. Remember that inventory is valued in the financial
statements at the lower of cost or net realisable value (NRV). The NRV is the selling
price less the cost to make the sale and these costs can include inventory completion
costs, trade and other discounts allowed, advertising cost, sales commission, packaging
costs and transport costs.
Assuming that your abovementioned knowledge is refreshed and sufficient, we can now
discuss the module objective and content of FAC1601.
vi
3. Module objective of FAC1601
The main objective of this module is to teach you certain aspects of financial accounting and
reporting so that you are able to do the following:
x Discuss specified aspects of the Conceptual Framework for the preparation and
presentation of financial statements.
x Understand and apply the concept of International Financial Reporting Standards (IFRS).
x Prepare the financial statements for sole proprietors, partnerships and close corporations
according to certain of the requirements of International Accounting Standards 1 (IAS 1).
x Apply the accounting procedures to record changes in the ownership structure of
partnerships on the admittance, retirement or death of partners.
x Apply the accounting procedures to record the simultaneous and piecemeal liquidation of
partnerships.
x Record transactions pertaining to the capital structure of companies.
x Explain how a business entity with branches operates, and record the transactions
between head offices and their branches.
x Prepare statements of cash flows for sole proprietors, partnerships and close corporations
according to the requirements of International Accounting Standard 7 (IAS 7).
vii
The FAC1601 module content is illustrated in the following diagram:
Study Unit 1
Introduction to the preparation of financial statements
Study Unit 2
Financial statements of a sole proprietorship
FAC1601 + applied knowledge from FAC1502
Study Unit 3
Establishment and financial statements of a partnership
Study Unit 4
Change in the ownership structure of partnerships
Study Unit 5
The liquidation of a partnership
Study Unit 6
Close Corporations
Study Unit 7
Introduction to companies
Study Unit 8
Branches
Study Unit 9
Statement of cash flows
viii
4. Using the study guide, Tutorial Letter 101 and the prescribed textbook
The study guide and the prescribed textbook, About Financial Accounting Volume 2, are the
primary sources of learning content for this module. The prescribed textbook contains a major
part of the learning content and must be used according to the directives given in the study
guide. For example, the guide will indicate that certain sections in the prescribed textbook
need only be read, whereas other sections must be studied thoroughly. Such references
usually include action words. In this regard, the following action words should be interpreted
as follows:
ACTION WORD
Read Read to obtain broad and basic background knowledge of the subject
under discussion. You must read attentively so that theory/explanations
are clearly understood. You may be assessed on the theory by means
of short questions in activities and also in assignments.
Study Learn with a view to gaining the highest level of understanding that is
necessary to solve problems in exercises, assignments and in the
examination. This level of knowledge will also be necessary for further
studies in financial accounting and/or your career. You will, never be
required to give a definition of a concept or to discuss theory in the
examination. You will however, be required to apply the theory in the
correct accounting format and to apply the correct steps/procedures.
For example, the layout and terminology to be used in the preparation
of financial statements are prescribed by the International Accounting
Standards. You may not use any other format.
Each learning unit starts with a number of learning outcomes, which will direct your learning.
The learning outcomes indicate what are expected of you to understand, know, calculate,
disclose and apply and will help you to structure your learning. In each learning unit, keywords
or key concepts are provided and should give you an indication of the issues that are being
dealt with in the learning content. Activities, examples and exercises will get you involved
in the content of the particular learning unit. These are designed to find out if you have the
necessary assumed knowledge, understand the work and can apply new knowledge gained.
Activities can be in the form of theory questions, multiple-choice questions, calculations,
journal entries, true or false questions, etc. whereas examples/exercises are detailed
questions dealing with the learning content. Exercises are indicative of the types of questions
that can be expected in assignments and in the examinations. Activities, examples and
exercises imply “doing”. They help you to cover the content of the module systematically. For
you to become an active learner, you should first do the activity, example and exercise before
referring to the feedback and solutions.
ix
The following icons are used in this study guide to refer to the above-mentioned concepts that
you will encounter in the study guide:
ICON DESCRIPTION
Learning outcomes. This icon indicates what aspects of

the particular topic you have to master and be able to show
that you understand.
Key concepts. The learning content will address the

following issues.
Activity. This icon indicates activities that you must do in

order to develop a deeper understanding of the learning
material.
Self-assessment. This icon indicates that you will be

required to test your knowledge, understanding and
application of the material you have just studied.
Feedback. This icon indicates that you will receive feedback

on your answers to the activities.
Read. If it is suggested that you should read a certain

section, you should take note of the contents because that
section will contain useful background information or offer
another perspective of further examples.
Study. This icon indicates which aspects of the study

material you need to study and internalise.
Timeout. Well done – you have completed the learning unit!
x
To indicate the length, scope and format of answers to questions, action verbs are deliberately
applied. An analysis of the action verbs in a question should enable you to:
x plan the answer systematically;

x ensure that you comply with the lecturer’s/examiner’s requirements.
A clear understanding of the meaning of certain words is required and for the purpose of this
module the following interpretations are given:
WORD INTERPRETATION
Adjust To adapt to new conditions/environment; to put in order;
add, change
Apply Use in a practical manner; use as relevant or suitable
Calculate Ascertain by mathematical procedure/exact reckoning
Clarify Make clear the meaning of; explain the intention of;
show by reasoning/evidence
Compare Examine in order to observe resemblances,

relationships and differences
Complete Finish/add what is required; show the necessary detail
Define State precisely the meaning/scope/total character of;

make clear (especially the outline of); give a concise
description of the distinguishing features of
Describe Give clearly the distinguishing details or essential

characteristics of
Discuss Examine by argument, debate, hold conversation about
Explain Set out in detail (interpret); the meaning of account for

something; make something understandable
List Record/itemise names or things belonging to a class
Mention/name/state Specify by name; cite names, characteristics, items,

elements of facts
Prepare Make ready/complete for a particular purpose; to put

together using parts; compose, construct. Also meaning
to compile or complete what is required on the basis
of prior knowledge
Reconcile To make or become visible, noticeable; to exhibit or

present; to indicate
Record Put in writing; set down for reference or retention
Show To make compatible or consistent with each other
xi
At the end of each learning unit there is an elementary self-assessment questionnaire,
which you must complete in order to evaluate your knowledge of the learning content of each
learning unit and to monitor your progress. These questionnaires are presented in the form of
questions to which you must answer either “yes” or “no”. If you have answered “yes” to all the
questions you may proceed to the next learning unit. If you have any “no” answers, you must
study that particular section of the work again. Since a clear understanding of certain aspects
in a learning unit may be essential for your further understanding of the course, you are
advised not to go on to the next learning unit until you have resolved all your problems in the
preceding one.
Before you start studying, please read the discussion section in Tutorial Letter 101. Apart from
details on the prescribed textbook, this tutorial letter contains valuable guidelines on how to
go about studying this module, as well as suggested time specifications pertaining to each
learning unit in order to ensure that you cover the whole syllabus in time. It also provides you
with the contact and communication details of your lecturers for the FAC1601 module.
5. Calculations and cash transactions
It is very important that you show all your calculations in your answers to exercises and
questions. In the study guide and the prescribed textbook, short calculations are disclosed in
brackets after an entry in a journal, ledger account or financial statement. Note that these
calculations do not form part of the actual accounting disclosures. They are disclosed as such
for practical illustrative purposes only. Calculations that are more elaborate are referred to by
encircled symbols, for example “߇”. Sub-calculations are referred to by shaded encircled
symbols, for example “ᬚ”. You may follow the same or a similar approach when preparing
your answers in assignments and examinations.
You should be aware that the books of first entry in respect of cash transactions are the cash
receipts journal and the cash payments journal as taught in FAC1502. However, to simplify
matters in this module, cash transactions where required, are disclosed in the general journal.
6. Feedback request
If there is anything discussed in the prescribed textbook or the study guide which in your
opinion needs to be explained in more detail or in a different fashion, please notify us
accordingly by post or e-mail. The postal and e-mail addresses of this module are provided in
Tutorial Letter 101.
We trust that you will enjoy this module and wish you all the best!
Lecturers
FAC1601: Financial Accounting and Reporting
“Aim for success, not perfection.
Never give up your right to be wrong, because then you will lose the ability to learn new
things and move forward with your life. Remember that fear always lurks behind
perfectionism”
David M Burns
xii
LEARNING UNIT 1
1
Introduction to the preparation of financial statements
Learning outcomes ..............................................................................................................2
Key concepts .......................................................................................................................3
1.1 Introduction .................................................................................................................4
1.2 Conceptual framework for financial reporting ..............................................................5
1.3 Applicable International Financial Reporting Standards ............................................11
1.4 Presentation of financial statements: IAS 1...............................................................11
1.5 Financial instruments ................................................................................................15
1.6 Practical applications of IAS 1 and financial instruments...........................................17
1.7 Exercises and solutions ............................................................................................18
Self-assessment ................................................................................................................22
1
Learning outcomes
After studying this learning unit, you should be able to:
x explain the acronyms IFRS, IAS, APB, FRSC and SAICA, and know what they entail
x describe what the concept "Conceptual Framework" entails
x list the specific purposes of the Conceptual Framework regarding the preparation
and presentation of financial statements
x explain the main objectives of financial statements per the Conceptual Framework
x explain the underlying assumption when preparing financial statements per the
Conceptual Framework
x discuss the qualitative characteristics of financial statements per the Conceptual
Framework
x explain what the Conceptual Framework implies when it refers to the constraints in
preparing financial statements as it is referred to in the Conceptual Framework
x discuss the elements of financial statements as explained in the Conceptual Framework
and indicate which elements pertain to the statement of financial position and which to
the statement of profit or loss and other comprehensive income
x discuss the concepts of recognition and disclosure of the elements incorporated in
financial statements, as explained in the Conceptual Framework
x explain what is meant by the measurement of the elements of financial statements by
referring to the measurement methods discussed in the Conceptual Framework
x explain what type of business ownership must comply with IFRS
x define each of the following terms per IAS 1:
fair presentation
going concern
accrual basis of accounting
materiality and aggregation
offsetting
frequency of reporting
comparative information
consistency of presentation
x list the individual statements that, per IAS 1, together form the complete set of
financial statements of a reporting entity
x explain what is meant by the identification of financial statements
x explain what is meant by reporting period
x explain which items comprise current assets and current liabilities per IAS 1
x list the items that must be presented on the face of the Statement of Financial Position
and the Statement of Profit or Loss and Other Comprehensive Income respectively by
referring to IAS 1
x list the items that can be presented on either the face of the Statement of Financial
Position and the Statement of Profit or Loss and Other Comprehensive Income or in the
notes to these statements for the particular reporting period per IAS 1
x discuss the purpose of notes, by referring to IAS 1
x discuss, according to IAS 1, the order in which items are disclosed as notes to financial
statements
2
x explain or define the following:
a financial instrument
a financial asset
a financial liability
fair value
a contract
x distinguish between financial instruments, financial assets and financial liabilities
x recognise, measure and present certain financial assets and liabilities in the financial
statements
Key concepts
x Conceptual
C Framework
x Underlying assumption
x Qualitative characteristics
x Components of financial statements
x Elements of financial statements
x Recognition
x Measurement of elements
x Capital
x Capital maintenance
x Reporting period
x Financial instruments
x Financial assets
x Financial liabilities
x Fair value
3
1.1 Introduction
In FAC1502, we learnt that every business entity usually uses some accounting system to
collect financial data from a multitude of financial transactions. The entity then uses the data
and processed information about the entity’s financial performance and financial position to
present the information in a usable format (e.g. financial statements, budgets etc.) that will
assist the users to make economically viable decisions. Remember that the accounting
system covered in FAC1502 forms the foundation for reporting the information to users. In the
introduction to this learning unit we will briefly explain the regulatory framework applicable to
financial reporting in South Africa and give you an overview of why financial statements must
comply with certain requirements and who is responsible for issuing and overseeing
compliance with regard to the regulatory framework.
In order to have financial information available that is meaningful and comparable across
different types of entities in countries around the world, the quest became to develop a set of
prescriptive standards that will provide guidance and prescribe certain principles that can be
used to prepare financial statements. Most countries established governing bodies with a
mandate to develop these standards. One of the many governing bodies mandated to embark
on this quest was the Accounting Practices Board (APB) which was established in South Africa
in 1973. The APB issued accounting standards which were collectively known as South
African Statements of Generally Accepted Accounting Practice or SA GAAP. All listed and
unlisted companies in South Africa were required to use SA GAAP as their reporting
framework when preparing financial statements.
In the 1990s the APB decided to incorporate South Africa into the international accounting
standards arena and to harmonise SA GAAP with the standards issued by the International
Accounting Standards Board (IASB) and its predecessor. The predecessor of the IASB issued
International Accounting Standards (IASs) from 1973 until 2001 when the IASB was
established. These IASs are now designated as part of International Financial Reporting
Standards (IFRSs) as these international standards are currently called. As from January
2005, the Johannesburg Securities Exchange (JSE) requires all listed companies to comply
with IFRS. The Companies Act 71 of 2008 that came into effect in May 2011 established a
body known as the Financial Reporting Standards Council (FRSC) which is now the South
African governmental accounting standard-setting body. The South African Institute of
Chartered Accountants (SAICA) serves as the technical advisor to the FRSC.
Because of the high regard of the usefulness of these standards to prepare financial
statements that are usable and comparable across countries it became common practice to
also apply these statements, either in full or to a limited extend, when preparing the financial
statements of entities other than companies. IFRSs deal with recognition, measurement,
presentation and disclosure requirements in general purpose financial statements.
These financial standards are directed at a wide range of users such as investors,
shareholders, creditors, banks, South Africa Revenue Service (SARS), employees and other
interest parties. There are currently two reporting frameworks available namely full IFRS or
IFRS for SMEs.
You can read more on the regulatory reporting framework and which
companies must comply with either full IFRS or IFRS for SMEs in section 1.3
in the prescribed textbook.
FAC1502 introduced you to the Conceptual Framework which is also the starting point of this
learning unit.
4
1.2 Conceptual framework for financial reporting
1.2.1 Introduction
The Conceptual Framework for Financial Reporting was issued by the International
Accounting Standards Board (IASB). This document contains a group of interrelated
objectives and theoretical principles that serve as a frame of reference for financial accounting
and more specifically financial reporting. The content of the Conceptual Framework is
discussed in sufficient detail in the prescribed textbook of this module and it is unnecessary
to obtain a copy of the Conceptual Framework.
Read paragraph 1.1 and 1.2.1 in the prescribed textbook. Take note of the
overview of the conceptual framework diagram which will help you to place the
content of the Conceptual Framework into perspective.
Activity 1.1
a) Describe in your own words what you perceive a framework to be.
b) Describe the purpose of the Conceptual Framework. Would you say that the
Conceptual Framework is similar to an IFRS?
Feedback 1.1
a) A framework serves as a reference for an area of enquiry and often provides the
theoretical background to test practical problems. The financial accounting
framework is a set of theoretical concepts and principles, which forms the basis for
establishing and developing reporting practices.
b) The purpose of the Conceptual Framework inter alia is to assist

x in the development of future standards
x in harmonising legislation and reducing the number of alternative accounting
treatments
x standard setters to develop national standards
x the preparers of financial statements in applying IFRSs
x auditors to form opinions on the compliance of IFRS in financial statements
x users in interpreting the information in financial statements when compiled
according to IFRS
The Conceptual Framework is not an IFRS and also does not override any particular
disclosure or measurement requirement in any IFRS. It is the foundation on which
principle-based IFRSs is founded.
5
1.2.2 Financial statements as part of financial reporting
Study paragraph 1.2.2 in the prescribed textbook. You must also ensure that
you can describe in your own words the information that is contained in each
of these statements.
Activity 1.2
a) We refer to the communication of financial information as an accounting system.

True or False?
b) List the different components that are normally included in an entities complete set of
financial statements.
Feedback 1.2
a) False. Communication of financial information is referred to as financial reporting. The

accounting system only provides the accounting data that must be reported.
b) The statement of financial position

The statement of profit or loss and other comprehensive income
The statement of changes in equity
The statement of cash flows
Notes to the financial statements
1.2.3 Objective of general purpose financial reporting
The objective of general purpose reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. These decisions involve buying,
selling or holding equity and debt instruments, and providing or settling loans and other forms
of credit. Potential and existing investors are interested in the returns they expect, while
creditors and other lenders are interested in principal repayments and interest payments they
expect.
Read paragraph 1.2.3 in the prescribed textbook.
Activity 1.3
Who do you think are the users of financial statements? Name a few.
6
Feedback 1.3
The primary users of financial statements are present and potential investors of the entity,
lenders [private (informal) and corporate lending institutions (formal) such as
abomashonisa/loansharks and banks], customers and creditors. Other users include the
owners/shareholders of the entity, employees and the entity’s management, regulators such
as the South African Revenue Service (SARS) and the general public.
1.2.4 Underlying assumption when preparing financial statements
The Conceptual Framework sets out one underlying assumption that should be taken into
consideration when preparing financial statements. An underlying assumption is a belief that
is assumed to apply in every financial statement that is prepared.
Study paragraph 1.2.3 in the prescribed textbook.
Activity 1.4
Name the underlying assumption that is applicable to the preparation of financial statements
according to the Conceptual Framework?
Feedback 1.4
The going concern principle is the one underlying assumption of the Conceptual Framework.
Make sure that you can explain this assumption in your own words.
1.2.5 Qualitative characteristics of useful financial information
In paragraph 1.2.5 in the prescribed textbook the qualitative

characteristics that make financial information useful are discussed. Study
them diligently. You must be able to explain in your own words what each
qualitative characteristic entails.
Activity 1.5
a) Name the fundamental and enhancing qualitative characteristics of financial reporting

as stipulated in the Conceptual Framework.
b) Should one report all matters irrespective of the cost of reporting?
7
Feedback 1.5
a)
Fundamental qualitative Enhancing qualitative
characteristics characteristics
1. Comparability
1. Relevance
2. Verifiability
2. Materiality
3. Timeliness
3. Faithful representation
4. Understandability
b) The cost of providing reporting information must be justified by the benefits derived from
the information.
1.2.6 Elements of financial statements
Elements that pertain to the statement of financial position are assets, liabilities and equity
whilst elements that pertain to the statement of profit or loss and other comprehensive income
are income and expenses. You must learn the definitions of these elements by heart as you
will have to apply the definitions to establish whether a transaction results in the creation of
an asset, liability, equity, income or an expense.
The value of a reporting entity lies in the net assets (assets minus liabilities) under its control.
It is therefore important to realise that assets can be recognised in the statement of financial
position even though the entity may not be the legal owner thereof.
Activity 1.6
Define an asset, a liability and equity according to the Conceptual Framework.
Feedback 1.6
An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
A liability is a present obligation arising from past events, the settlement of which is
expected to result in an outflow of economic resources.
Equity is the residual interest in the assets of the entity after deducting all the liabilities.
Remember to also learn the definition of an income and expense as they are defined in
paragraph 1.2.6.3 in the prescribed textbook. Income encompasses revenue and gains and it
8
is important to understand the difference between revenue and gains and give examples.
Revenue and gains are normally separately reported. Expenses on the other hand also
encompass losses which are also normally separately reported.
1.2.7 Recognition of the elements of financial statements
Before an item can be disclosed in a financial statement, it must first be recognised. However,
all recognised items need not be disclosed. Take note of when an element of the financial
statements should be recognised and what the criteria for the recognition of each element are.
Activity 1.7
When will each of the following elements be recognised in the appropriate financial statement?
a) Asset
b) Liability
c) Income
d) Expense
Feedback 1.7
a) An asset is recognised in the statement of financial position when it is probable that the
future economic benefits thereof will flow to the entity, and when the asset has a cost or
a value that can be measured reliably.
b) A liability is recognised in the statement of financial position when it is probable that an

outflow of resources embodying economic benefits will result from the settlement of a
present obligation, and the amount at which the settlement will take place can be
measured reliably.
c) Income is recognised in the statement of profit or loss and other comprehensive income
when an increase in future economic benefits related to an increase in an asset or a
decrease of a liability has arisen that can be measured reliably. This means that the
recognition of income occurs simultaneously with the recognition of increases in assets
or decrease in liabilities, for example inventory sold for cash where the bank account
(asset) is debited and sales are credited.
d) Expenses are recognised in the statement of profit or loss and other comprehensive
income when a decrease in future economic benefit related to a decrease in an asset or
an increase of a liability has arisen that can be measured reliably. This means that the
recognition of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets.
9
1.2.8 Measurement of the elements of financial statements
“Measurement” means the process of determining the monetary value (amounts) at which the
elements of the financial statements are to be recognised and disclosed. Four bases of
measurement are listed in the Conceptual Framework, namely (1) historical costs,
(2) realisable value, (3) current costs and (4) present value. Take note that although the
Conceptual Framework doesn’t specifically mention “fair value” as a measurement basis,
there is a tendency to move more towards fair value and to move away from historical cost.
This was necessitated due to the many corporate failures that you so often read about in the
press.
Study historical cost and realisable value carefully as these are the two bases you will
encounter the most in this module. Remember from FAC1502 that inventory is measured at
the lowest of cost (historical) or net realisable value. Financial instruments which you will
encounter later in this learning unit are mainly measured at fair value whereas property, plant
and equipment are often measured at historical cost less accumulated depreciation and
impairment unless entities choose to incorporate a revaluation model which will allow these
assets to be revalued to more recent values. Revaluations are covered in more detail in
advanced accounting studies.
In paragraph 1.2.8 in the prescribed textbook each of these measurement bases

are explained. Make sure that you can describe each in your own words.
Activity 1.8
Name five measurement bases that are often encountered in a set of financial statements.
Feedback 1.8
Historical cost, realisable value, current cost, present value and fair value.
1.2.9 Concepts of capital and capital maintenance
The selection of a measurement basis and the concepts of capital and capital maintenance
determine the model according to which financial statements are prepared. There are two
basic concepts of capital and capital maintenance, namely (1) the financial concept and (2)
the physical concept.
The financial concept of capital is synonymous with the net assets or equity of a business
entity. The physical concept pertains to the productive capacity of the entity, for example the
units of production per day.
10
1.3 Applicable International Financial Reporting Standards
IFRS must be applied when the financial statements of entities that are incorporated under
the Companies Act No 71 of 2008 (hereinafter referred to as the Companies Act) are prepared.
The fact that such compliance is not required by any other form of business ownership does
not mean that the requirements of these statements cannot be applied when the financial
statements of business entities other than companies are prepared. In the remainder of your
accounting studies IFRS is taught and made applicable to all types of reporting entities.
The remainder of this learning unit deals with some important IFRSs issued to assist us to
present financial statements in a useful and comparable way, namely IAS 1, IFRS 7 and 9
and IAS 32 and 39. In IAS 1, many of the concepts that you have encountered in the
Conceptual Framework are enforced for example the purpose of general purpose financial
statements, the users thereof, the elements of financial statements and the underlying
principle of going concern. Although you will encounter financial instruments (IFRS 7 and 9
and IAS 32 and 39) in more advanced accounting studies, this learning unit introduces the
concept and the main definitions. The aim is to lay a foundation as all entities encounter
financial instruments in some form and have to include them in their respective financial
statements. Ensure that your foundation on financial instruments as presented in this learning
unit is solid and that you know and understand the content as presented in the textbook and
this learning unit.
1.4 Presentation of financial statements: IAS 1
Read the overview of IAS 1 in the prescribed textbook.
1.4.1 Introduction
The objective of IAS 1 is to prescribe the basis for the presentation of general purpose financial
statements to ensure comparability with:
x an entity's financial statements of previous financial periods

x the financial statements of other comparable entities.
Read paragraph 1.4.1 in the prescribed textbook to learn more about the
objective and purpose of IAS 1.
11
1.4.2 Definitions
Certain accounting terms are defined in IAS 1 and are listed in paragraph 1.4.2 in the
prescribed textbook.
Study the definitions in paragraph 1.4.2 in the prescribed textbook.
Activity 1.9
Make a list of the new definitions that you will encounter in IAS 1. You don’t have to define
them for the purpose of this activity.
Feedback 1.9
x General purpose financial statements

x Impracticable
x Material omissions
x Notes
x Owners
x Profit or loss
x Other and total comprehensive income.
1.4.3 The purpose of financial statements
The main purpose of financial statements is to provide useful information to the users thereof.
To achieve this purpose, financial statements must provide information about each of the
elements that are listed in the Conceptual Framework in a specific format.
Read paragraph 1.4.3 in the prescribed textbook, which explains the elements
that should be reported on, and what IAS 1 regards as a complete set of financial
statements.
1.4.4 Overall considerations of financial statements
You have already encountered some of the overall considerations when preparing financial
statements in the Conceptual Framework such as going concern, materiality, comparability
and consistency. Make sure that you understand the addition ones such as fair presentation,
accrual basis, offsetting and the frequency of reporting
12
1.4.5 Structure and contents of financial statements
Structure and contents have to do with the format in which financial statements must be
presented and with the items that must be disclosed. Structure and contents are essential
aspects that pertain to the preparation of financial statements and you must study them
carefully.
Read paragraph 1.4.5.1 in the prescribed textbook.
1.4.5.1 Identification of financial statements

Each financial statement and its component(s) must be identified by giving it a name that
pertains to its particular function.
Study paragraph 1.4.5.2 in the prescribed textbook.
1.4.5.2 Statement of financial position

Remember that the purpose of a statement of financial position is to report on the financial
position of an entity. It consists of three elements namely assets, liabilities and equity. In this
paragraph the minimum line items that must be included in a statement of financial position
are listed. Study them by heart. The classification of assets into non-current and current
assets, and of liabilities into non-current and current liabilities, is highlighted. Make sure that
you know when assets or liabilities must be classified as “current”.
You will also learn which information must be presented:
x on the face of a statement of financial position, and

x either on the face or in the notes to the statement of financial position. Further sub-
classification of the main line items are normally presented in notes.
1.4.5.3 Statement of profit or loss and other comprehensive income
A statement of profit or loss and other comprehensive income provide information about the
results of its operations. In simple terms, it shows whether the entity made a profit or loss on
its operating activities during a financial period.
In this section the line items which must be presented on the face of the statement of profit or
loss and other comprehensive income, and which can be presented either on the face of the
statement of profit or loss and other comprehensive income or in the notes are presented.
13
Note that for the purpose of this module, expenses are disclosed in a statement of profit or
loss and other comprehensive income according to their function, and that IAS 1 requires
certain minimum disclosures when this method is applied.
1.4.5.4 Statement of changes in equity

A statement of changes in equity is a statement of changes in the capital structure of an entity
and shows the movement in equity (ownership) between two reporting periods. Information
can again be presented (disclosed) either on the face or in the notes to a statement of changes
in equity.
Note that the format of the statement of changes in equity depends on the type of business
ownership for which it is prepared. Also note that if this statement is prepared for a close
corporation, the name of the statement is shown as: "Statement of changes in net investment
of members". The learning unit on close corporations will discuss this statement in greater
detail.
1.4.5.5 Statement of cash flows

Although a statement of cash flows is a financial statement, we discuss it separately in a later
learning unit in this module.
Read paragraph 1.4.5.6 in the prescribed textbook.
1.4.5.6 Notes
x Notes represent information about the basis of preparation and the accounting policies
that an entity subscribe to in the preparation of financial statements. Usually an affirmation
that the financial statements were prepared according to the requirements of IFRS is
given as well as a list and description of the significant accounting policies adapted in the
preparation of the financial statements.
x Notes also disclose information prescribed by other IFRSs that is not presented
elsewhere and is relevant to an understanding of the different IFRSs.
Please take note that a calculation, for example the calculation of depreciation, is NOT a note
to a financial statement and must not be indicated as such.
14
Activity 1.10
When are assets regarded as being current in nature and when are liabilities regarded as
being current in nature per IAS 1?
Feedback 1.10
An asset is classified as current when it satisfies any of the following criteria:
x It is expected to be realised, or intended for sale or consumption, in the entity's normal

operating cycle.
x It is held primarily for the purpose of being traded.
x It is expected to be realised within 12 months after the statement of financial position date.
x It is cash or a cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least 12 months after the statement of financial position date.
A liability is classified as current when it satisfies any of the following criteria:
x It is expected to be settled in the entity's normal operating cycle.

x It is held primarily for the purpose of being traded.
x It is due to be settled within 12 months after the statement of financial position date.
1.5 Financial instruments

Read the overview of financial instruments in paragraph 1.5 in the prescribed
textbook.
Read paragraph 1.5.1 in the prescribed textbook to learn more about the reason
why financial instruments are dealt with and which standards were issued to
cover this important topic.
1.5.1 Definitions
Study paragraph 1.5.2 in prescribed textbook where various definitions

applicable to financial instruments are discussed.
Activity 1.11
Make a list of the definitions that you will encounter in dealing with financial instruments. You
don’t have to define them for purposes of this activity.
15
Feedback 1.11
x Financial asset
x Financial liability
x Equity instrument
x Fair value
x Contract
1.5.2 Identification of financial assets and liabilities
Read paragraph 1.5.3 in the prescribed textbook where the different financial
assets and liabilities that you will encounter in first-level accounting are
discussed.
Activity 1.12
Classify the following financial statement line items as financial assets, financial liabilities or
other (indicate if it is a non-current assets/liability or a current asset/liability):
x Cash deposit with a bank or in a stokvel

x Inventory
x Trade receivable accounts
x Trade payable accounts
x Loans receivable
x Bank overdraft
x Property plant and equipment
x Trademark for example “Apple” or “Dell”
x Prepaid rent
x Income received in advance
x VAT payable
Feedback 1.12
Financial assets Financial Liabilities Other

x Cash deposit with x Trade payable x Inventory – current asset
a bank or in a accounts
stokvel x Property plant and equipment –
x Bank overdraft non- current asset
x Trade receivable
accounts x Trademark for example “Apple”
or “Dell” – non-current asset
x Loans receivable
x Prepaid rent – current asset
x Income received in advance –
current liability
x VAT payable – current liability
16
1.5.3 Classification, recognition and measurement of financial assets and
financial liabilities
Read paragraph 1.5.4.1 to 1.5.4.4 in the prescribed textbook.
Financial assets are classified as:

• financial assets at fair value through profit or loss
• financial assets at amortised cost
• equity investments at fair value through other comprehensive income.
Financial assets that are not equity instruments are measured at initial recognition and
subsequently at either fair value or amortised costs depending on the abovementioned
classification. You must be able to identify which financial assets are measured at amortised
cost and which at fair value. If the financial asset is an equity instrument and it is held for
trading it must be measured at fair value through profit or loss.
Financial liabilities are classified as:

• financial liabilities at fair value through profit or loss (not in the syllabus for first level
accounting
• financial liabilities at amortised cost.
You must be able to name financial liabilities that are measured at amortised cost.
Study the overview of financial instruments to determine when transactions

costs must form part of a financial asset /liability (capitalised) and when it must
be expensed.
Activity 1.13
Work through example 1.1 in the prescribed textbook.
Before we get to more advanced examples and solutions, the practical application of IAS 1
and financial instruments must be studied.
1.6 Practical applications of IAS 1 and financial instruments

In paragraph 1.6 in the prescribed textbook the theory discussed in this learning unit is applied
in the preparation and presentation of financial statements.
Study the example in paragraph 1.6 in the prescribed textbook.
Read paragraphs 1.7 and 1.8 in the prescribed textbook.
17
1.7 Exercises and solutions
EXERCISE 1.1- Conceptual framework (adapted from Introduction to the understanding of
accounting question book)
Vusi Mailane was a famous sculptor who recently passed away. His daughter, Grace Modise,
bequeathed a sculpture of one of the founder members in distance education to UNISA. The
cost of creating the sculpture amounted to R25 000. A few weeks ago, while his estate was
being finalised, a similar sculpture from Mailane was sold for £80 000 (£ = British pound) which
when converted to rand, amounted to R1 240 000 on 28 February 20.17 which is also the date
of the donation. The university approached your audit firm for advice on the treatment of the
sculpture in the financial statements at year end on 28 February 20.17.
REQUIRED
With reference to the Conceptual Framework only, discuss the treatment of the sculpture in
the financial statements of UNISA on 28 February 20.17. Explain which measurement base
would be appropriate to use to determine the value at which the sculpture can be recorded in
the financial statements of UNISA.
SOLUTION 1.1
Recognition of the The university as the rightful owner now owns the sculpture
element as an asset: and also controls what happens with the sculpture from
Resource under the hereon.
control
As a result of a past event The university is in possession of the sculpture as a result of
the inheritance.
Future economic benefits Should the university decides to sell the sculpture in future,
future economic benefits in the form of money is expected
from the sale of the sculpture.
Recognition criteria: The value of the sculpture can be determined reliably by
Realisable measurement looking at the value of similar sculptures that the artist sold.
Probability of a future It is probable that the sculpture will retain its value and that it
economic benefit may be sold, which would result in an inflow of economic
benefits (money) to the university.
Conclusion The sculpture must be treated as an asset in the financial
statements of UNISA because it complies with the recognition
criteria as well as the definition of an asset.
Measurement basis The asset should be measured at its realisable value, which
is the cash or cash equivalents that could currently be
obtained by selling the sculpture in an orderly disposal.
Because UNISA did not pay for the sculpture it cannot be
recorded at its historical cost of R25 000 and it should be
accounted for at R1 240 000.
18
EXERCISE 1.2 – Financial instruments
On 1 March 20.14 Louis CC purchased 100 ordinary shares of R100 each in Marble Ltd, a
company listed on the Johannesburg Securities Exchange (JSE). The purpose of this
investment was speculative in nature. The transaction costs amounted to R500. On
28 February 20.15, the end of the financial year of Louis CC, the shares were trading at R125
per share on JSE.
REQUIRED
Record the above transactions in the general journal of Louis CC.
SOLUTION 1.2
LOUIS CC
GENERAL JOURNAL
Debit Credit
R R
20.14
Mar 1 Investment: Shares in Marble Ltd (R100 x 100) 10 000
Investment expenses (transaction costs) 500
Bank 10 500
Initial recognition of investment at cost and recording of
investment expenses
20.15
Feb 28 Profit or loss account 500
Investment expenses 500
Closing off of investment expenses
Investment: Shares in Marble Ltd (R25 x 100) 2 500
Fair value adjustment: Listed investment 2 500
Adjustment on subsequent measurement of investment
in the shares of Marble Ltd at the financial year end
Fair value adjustment: Listed investment 2 500
Profit or loss account 2 500
Closing-off of fair value adjustment of listed investment
EXERCISE 1.3 – IAS 1
N Naidoo purchased a diamond cutting machine for her jewellery manufacturing business on
2 March 20.16. She incurred the following costs to get the machine installed and ready for
use:
- Cost of the machine R627 000
- Delivery cost R1 425
- Installation cost R4 332
- Training cost to operate the machine R855
During the year she also paid R2 750 to a repairman to fix the machine. The repairman was
not a registered VAT vendor.
19
N Naidoo currently depreciates all manufacturing equipment at 25% according to the
diminishing balance method. The residual value of the machine is R5 000 (VAT exclusive).
N Naidoo is a registered VAT vendor and VAT at 14 % is included except where stipulated to
the contrary.
REQUIRED
Disclose the machine and related costs in the financial statements of N Naidoo at
31 December 20.16 to comply with the requirements of IAS 1. The accounting policy note is
not required.
SOLUTION 1.3
1. Calculation of the cost of the machine
R
Purchase price (R627 000 x 100/114) 550 000
Delivery cost (R1 425 x 100/114) 1 250
Installation cost (R4 332 x 100/114) 3 800
Training cost (R855 x 100/114) 750
Total cost of the machine 555 800
2. Calculation of depreciation
R(555 800 – 5 000) x 25% x 10/12 114 750
N NAIDOO
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20.16 (EXTRACT)
Other expenses R
Depreciation - machinery 114 750

Repair costs 2 750
N NAIDOO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16 (EXTRACT)
ASSETS Note R
Non-current assets
Property, plant and equipment R(555 800 – 114 750) 3 441 050
20
SOLUTION 1.3 (continued)
N NAIDOO
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 20.16 (EXTRACT)
Property, plant and equipment Machinery

R
Carrying amount – 1 January 20.16 xxx
Cost xx
Accumulated depreciation (x)
Movement during the year
Additions 555 800
Disposals (x)
Depreciation (114 750)
Carrying amount – 31 December 20.16 xxx
Cost xxx
Accumulated depreciation (xx)
21
Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes No
Explain the acronyms IFRS, IAS, APB, FRSC and SAICA.
Describe what the concept "Conceptual Framework" entails.
List the specific purposes of the Conceptual Framework regarding the

preparation and presentation of financial statements.
Explain the main objectives of financial statements per the Conceptual
Framework.
Explain the underlying assumption when preparing financial statements per

the Conceptual Framework.
Discuss the qualitative characteristics of financial statements per the
Conceptual Framework.
Explain what the Conceptual Framework implies when it refers to the
constraints in preparing financial statements as it is referred to in the
Discuss the elements of financial statements as explained in the
Conceptual Framework and indicate which elements pertain to the
statement of financial position and which to the statement of profit or loss
and other comprehensive income.
Discuss the concepts of recognition and disclosure of the elements

incorporated in financial statements, as explained in the Conceptual
Framework.
Explain what is meant by the measurement of the elements of financial
statements by referring to the measurement methods discussed in the
Explain what type of business ownership must comply with IFRS.
Define each of the following terms imply per IAS 1:
fair presentation
going concern
accrual basis of accounting
materiality and aggregation
offsetting
frequency of reporting
comparative information and
consistency of presentation.
List the individual statements that, per IAS 1, together form the complete
set of financial statements of a reporting entity.
22
Yes No
Explain what is meant by the identification of financial statements.
Explain what is meant by reporting period.
Explain which items comprise current assets and current liabilities per
IAS 1.
List the items that must be presented on the face of the Statement of
Financial Position and the Statement of Profit or Loss and Other
Comprehensive Income respectively by referring to IAS 1.
List the items that can be presented on either the face of the Statement of
Financial Position and the Statement of Profit or Loss and Other
Comprehensive Income or in the notes to these statements for the
particular reporting period per IAS 1.
Discuss the purpose of notes, by referring to IAS 1.

Discuss, according to IAS 1, the order in which items are disclosed as notes
to financial statements.
Explain or define the following:
a financial instrument
a financial asset
a financial liability
fair value
a contract.
Distinguish between financial instruments, financial assets and financial

liabilities.
Recognise, measure and present certain financial assets and liabilities in

the financial statements.
If you answered "yes" to all of the above assessment criteria, you can move on to
learning unit 2. If your answer was "no" to any of the above criteria, revise those
sections concerned before progressing to learning unit 2.
23
24
LEARNING UNIT 2
2
Financial statements of a sole proprietorship
Learning outcomes ............................................................................................................26
Key concepts .....................................................................................................................26
2.1 Introduction ...............................................................................................................27
2.2 Establishment of a sole proprietorship ......................................................................28
2.3 Statement of profit or loss and other comprehensive income ....................................28
2.4 Statement of changes in equity .................................................................................30
2.5 Statement of financial position and notes..................................................................31
Self-assessment ................................................................................................................44
25
Learning outcomes
After studying this learning unit you should be able to:
x record adjustments in the financial statements of a sole proprietorship

x prepare a statement of profit or loss and other comprehensive income of a sole
proprietorship
x prepare a statement of changes in equity of a sole proprietorship
x prepare a statement of financial position of a sole proprietorship
x draft the notes to the financial statements of a sole proprietorship
Key concepts
x Sole proprietor/sole trader

x Investment in a sole proprietorship
x Equity
x Capital
x Profit/loss for the period/year
x Drawings
26
2.1 Introduction
In the FAC1502 module the financial accounting cycle concerning input and processing was
dealt with and you were introduced to the preparation of financial statements of a sole
proprietorship.
In FAC1601 we deal specifically with the preparation of the output (financial statements) for
different entities such as sole proprietorships (revision), partnerships and close corporations.
We also introduce you to companies. However, the statement of cash flows for these different
entities (except companies) is covered in learning unit 9.
The accounting process that presents the output can be illustrated as follows:
Input Transaction data is recorded on

FAC1502 Source documents which is used to prepare
Subsidiary journals which is posted to

General ledger which is used to
Processing Prepare a pre-adjustment trial balance
FAC1502 Adjustments are done
Post-adjustment trial balance is prepared
Closing transfers are done
Statement of profit or loss and other comprehensive income

Output Statement of financial position
FAC1601 Statement of changes in equity
Statement of cash flows (dealt with in learning unit 9)
Notes
When closing transfers are done as part of the accounting process, two accounts are created
in the general ledger, namely the trading account and the profit or loss account. Generally, the
gross profit of the entity is calculated in the trading account whilst the profit and loss account
presents the income and expenditure of the entity. These two accounts pave the way to
prepare financial statements. Financial statements are prepared to provide information on the
state of financial affairs of the entity and to enable decision making.
This learning unit is a revision of the preparation of the financial statements of a sole
proprietorship (also known as a sole trader). Sole proprietorship is the simplest form of
business ownership and is often managed by the owner himself. There is no legislation
prescribing how a sole proprietorship should be established. The accounting process and
preparation of financial statements have been dealt with extensively in FAC1502 and we
therefore mainly provide you with additional questions and suggested solutions to refresh your
knowledge. Reference to Volume 1 of the prescribed textbook is given to help you to refer
back if you feel that your knowledge may be lacking. However, Volume 1 is not prescribed for
this module.
27
Cash and/or any other type of asset, for example a motor vehicle, are required to start the
business entity. The equity simply consists of the capital invested in the business entity plus
the profit made (or less a loss suffered), and less any money and/or goods withdrawn by the
owner for personal use.
Read paragraphs 15.1 in your prescribed textbook – About financial

accounting Volume 1 to refresh your memory on sole proprietorships.
2.2 Establishment of a sole proprietorship

A sole proprietor usually contributes capital in the form of cash, and/or non-current assets in
the form of property, plant and equipment towards the starting of the business. The following
example illustrates the accounting entries that are made when a sole proprietorship is
established.
Activity 2.1
On 1 March 20.1, J Manjane invests R25 000 to start JM Spaza Supplies. His investment
consists of R3 000 cash, equipment valued at R8 000 and a motor vehicle valued at R14 000.
Prepare the general journal entry that will be made to record the relevant information of JM
Spaza Supplies on the date of the investment.
Feedback 2.1
JM SPAZA SUPPLIES
GENERAL JOURNAL
DR CR
20.1 R R
Mar 1 Bank 3 000
Equipment 8 000
Motor vehicles 14 000
Capital 25 000
Deposit of cash in the bank account of the entity and

recording of other assets brought into the entity at valuation
In the above activity, no other journals were requested. Normally the cash portion of the capital
is recorded in the cash receipts journal.
2.3 Statement of profit or loss and other comprehensive income

Once the sole proprietorship is established, the accounting cycle commences. At the end of
the accounting period a trail balance is prepared. As explained in the introduction, in this
module you will be required to do some adjustments whilst preparing the financial statements
and accompanying notes. It is therefore in your own interest to study the layout of a statement
of profit or loss and other comprehensive income to be able to present the accounting
information in the required format as prescribed by IAS 1.
28
Activity 2.2
Study the layout illustrated in paragraph 1.6 in Volume 2 of the prescribed

textbook.
A statement of profit or loss and other comprehensive income is the statement that indicates
the result of the operating performance of the entity for a specific period.
Recall that revenue (in the example revenue consists of net sales) is calculated as the balance
of the sales account in the general ledger minus settlement discount granted and less any
adjustments that may be applicable to sales which have not been taken into account yet.
Assuming that the sole proprietorship is also a registered VAT vendor, you have to realise that
VAT is already excluded from applicable amounts such as sales, purchases, etc. The reason
is that in the journals of first entry, VAT input and VAT output have been separately accounted
for and transferred to a VAT control account which is either a VAT receivable (debit control
account) or a payable (credit control account).
When the perpetual inventory system is used, cost of sales in the statement of profit or loss
and other comprehensive income is the balance of the cost of sales account in the general
ledger less settlement discount received plus an inventory deficit (if a deficit exists when the
physical inventory count shows less closing inventory than the inventory account at the end
of the accounting period). When the periodic inventory system is in use, the calculation of the
cost of sales is shown on the face of the statement of profit or loss and other comprehensive
income. The example in paragraph 1.6 in the prescribed textbook illustrates the use of a
perpetual inventory system whereas example 15.2 in Volume 1 illustrates the use of a periodic
inventory system.
Interest paid is a separate line item and is referred to as finance costs. Interest income is
shown separately as part of other income and for purposes of this module it is never offset
against interest paid.
Activity 2.3
Based on your FAC1502 knowledge, prepare the layout of the gross profit section of the
statement of profit or loss and other comprehensive income of Bibi Traders for the year ended
28 February 20.17. Assume that a periodic inventory system is used.
29
Feedback 2.3
BIBI TRADERS
YEAR ENDED 28 FEBRUARY 20.17
Notes R
Revenue xxx xxx
Cost of sales (xx xxx)
Inventory – 1 March 20.16 xx xxx
Purchases (net purchases - after purchase returns and settlement
discount received) xxx xxx
Carriage on purchases xx xxx
xxx xxx
Inventory – 28 February 20.17 (xx xxx)
Gross profit xxx xxx
2.4 Statement of changes in equity

You will remember that a statement of changes in equity is compiled to show the movement
in equity during the financial period. This implies that you commence with the balance of equity
at the beginning of the accounting period (normally a year) and you disclose the movements
that caused a difference in the opening and closing balance of equity. For a sole proprietorship
we also refer to equity as capital.
Activity 2.4
Based on your FAC1502 knowledge, prepare the layout of a statement of changes in equity
for a sole proprietorship, Wong Chu Traders. Assume a 30 June 20.17 year end.
Feedback 2.4
WONG CHU TRADERS

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.17
R
Balance as at 1 July 20.16 xxx
Profit for the year xx
Additional capital contribution xxx
Drawings (x)
Balance as at 30 June 20.17 x xxx
30
2.5 Statement of financial position and notes
The statement of financial position indicates the financial position of the owner of the sole
proprietorship at a specific date, which is normally year end. Notes are prepared to explain
the accounting policies implemented when presenting the financial statements and how the
amounts in the financial statements were calculated. Examples of accounting policies are the
basis on which the statements are presented (for example historical cost) as well as the
accounting framework adapted in the preparation of the financial statements, the methods
used to calculate depreciation and value property, plant and equipment, the valuation methods
adopted to account for inventory, the valuation methods adopted to account for financial
assets/liabilities and many more. Notes must be presented systematically and cross-
referenced to the line items in the statement of profit or loss and other comprehensive income,
the statement of financial position, statement of changes in equity and the statement of cash
flows. Similar as to what you encountered in FAC1502 as notes, we will again introduce you
to the most significant notes applicable to first-year accounting. The notes become more
complicated in later years and it will ensure a good foundation if you can present the notes
that we illustrate in the different learning units.
Activity 2.5
Study the example of a layout of the statement of financial position and the
applicable notes to the financial statements in paragraph 1.6 in Volume 2 of the
In FAC1601 you will mostly be presented with a pre-adjustment trial balance prepared from
the general ledger of the entity. You will then have to do the adjustments and prepare the
required financial statements.
The questions and time for completion will not always allow you to do the adjustments in a
journal and to post it to a ledger. You will thus be required to do the adjustments while
preparing the financial statements; for that reason you must know the journal entries that can
be applicable to account for adjustments, by heart. This will enable you to know which account
is debited and which credited in order to prepare the financial statements with the double-
entry in mind and without physically posting to a general journal and prepare a post-adjustment
trial balance. In paragraph 2.6 of this learning unit we present you with revision exercises and
solutions where you will apply your knowledge of adjustments with and without the aid of a
general journal in preparing the financial statements of sole proprietors.
Always remember the accounting equation:
Assets = Equity + Liabilities
31
The adjustments that were covered in FAC1502 and that you may encounter in FAC1601 are:
Adjustments:
x Inventory on hand
x Depreciation
x Expenses payable
x Prepaid expenses
x Income receivable
x Income received in advance (prepaid income)
x Credit losses
x Allowance for credit losses
x Allowance for settlement discount received
x Allowance for settlement discount granted

EXERCISE 2.1
The following information relates to Lebombo Distributors, which is a sole proprietorship of

L Lebombo:
Pre-adjustment trial balance of Lebombo Distributors as at 31 December 20.1

Debit Credit
R R
Capital (1 January 20.1) .............................................................. 141 700
Land and buildings (at cost) ......................................................... 263 240
Vehicles (at cost).......................................................................... 40 000
Equipment (at cost) ...................................................................... 9 000
Accumulated depreciation: Vehicles (1 January 20.1) ................. 11 200
Accumulated depreciation: Equipment (1 January 20.1) .............. 1 710
Fixed deposit: NBC Bank Ltd (1 January 20.1)............................. 50 000
Inventory: Merchandise ................................................................ 8 500
Trade receivables control ............................................................. 5 200
Bank............................................................................................. 3 100
Petty cash .................................................................................... 100
Cash float..................................................................................... 500
Trade payables control................................................................. 8 800
VAT control .................................................................................. 750
Long-term borrowing: Bean Ltd .................................................... 25 000
Allowance for credit losses........................................................... 300
Sales............................................................................................ 381 790
Cost of sales ................................................................................ 165 400
Sales returns................................................................................ 1 200
Wages.......................................................................................... 2 000
Salaries........................................................................................ 25 000
Assessment rates......................................................................... 1 500
32
Debit Credit
R R
Settlement discount granted......................................................... 380
Licences....................................................................................... 1 000
Vehicle expenses ......................................................................... 3 500
Credit losses ................................................................................ 550
Packaging materials..................................................................... 4 700
Insurance ..................................................................................... 2 250
Water and electricity..................................................................... 2 100
Telephone expenses.................................................................... 1 400
Advertising ................................................................................... 2 000
Rental income .............................................................................. 15 600
Settlement discount received ....................................................... 650
Interest on investment .................................................................. 5 000
Credit losses recovered................................................................ 120
592 620 592 620
The following adjustments must still be accounted for:
1. Packaging material on hand at 31 December 20.1 to the value of R980.

2. The long-term borrowing was entered into on 1 October 20.1. According to the
agreement, interest is payable bi-annually at a rate of 18% per annum.
3. Advertisements includes an amount of R400 paid for January 20.2.
4. Rental income includes an amount in respect of January 20.2. Rental income was
earned evenly throughout the year.
5. Interest on the fixed deposit has not yet been received for the last two months of the
financial year. Interest is calculated at a rate of 12% per annum.
6. Insurance includes an amount of R750 paid for the period 1 November 20.1 to
31 October 20.2.
7. The telephone account of R165 for December 20.1 has not yet been paid.
8. Equipment of R2 000 (cost price) was purchased on 1 July 20.1.
9. Depreciation must be provided as follows:
x Vehicles: 20% per annum on the diminishing balance method.
x Equipment: 10% per annum on the diminishing balance method.
10. The account of Loose-Ends Ltd, a debtor who owes the entity R200, must be written
off as irrecoverable.
11. It was determined that on 31 December 20.1 the allowance for credit losses should
amount to R250.
12. Lebombo Distributors uses a perpetual inventory system.
REQUIRED
a) Prepare the journal entries to record the adjustments above.
b) Prepare the closing journal entries. Post these journal entries to the trading and
the profit or loss accounts on 31 December 20.1.
c) Prepare the statement of profit or loss and other comprehensive income of
Lebombo Distributors for the year ended 31 December 20 1.
33
d) Prepare the statement of changes in equity of Lebombo Distributors for the year
ended 31 December 20.1.
e) Prepare the statement of financial position of Lebombo Distributors as at
31 December 20.1.
f) Prepare the following notes to the financial statements of Lebombo Distributors
for the year ended 31 December 20.1:
x Accounting policy for the basis of presentation, property, plant and
quipment and financial assets
x Property, plant and equipment
x Financial assets
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS) appropriate to the business of the sole trader.
SOLUTION 2.1
a) LEBOMBO DISTRIBUTORS
GENERAL JOURNAL - 31 DECEMBER 20.1
Debit Credit
R R
20.1 Inventory: Packaging material 980
Dec 31 Packaging material 980
Packaging material on hand at 31 December 20.1
Interest on loan (R25 000 x 18% x 3/12) 1 125
Accrued expenses 1 125
Interest on loan still payable
Prepaid expenses 400
Advertisements 400
Advertisements paid in advance
Rental income (R15 600 x 1/3) 1 200
Income received in advance 1 200
Rent received in advance
Accrued income 1 000
Interest on investment (R50 000 x 12% x 2/12) 1 000
Interest on investment not yet received
Prepaid expenses 625
Insurance (R750 x 10/12) 625
Insurance prepaid
Telephone expenses 165
Accrued expenses 165
Telephone account for December brought into account
Depreciation 6 389
Accumulated depreciation on vehicles 5 760
Accumulated depreciation on equipment c 629
Depreciation provided at 20% per annum on the diminishing
balance of vehicles and at 10% per annum on the
diminishing balance of equipment.
Credit losses 200
Loose-Ends/Trade receivables control 200
Account written off as irrecoverable
Allowance for credit losses 50
Credit losses 50
Adjustment of allowance for credit losses
34
Calculation
c Depreciation
The accumulated depreciation is on the equipment owned by the entity at the beginning of the
financial year. Two calculations are therefore needed:
1.1 Equipment purchased in previous years

[(R9 000 – R2 000) – R1 710] x 10%
= R529
1.2 Equipment purchased in the current year

R2 000 x 10% x 6/12
= R100
Total depreciation for equipment:

(R529 + R100) = R629
b) LEBOMBO DISTRIBUTORS
GENERAL JOURNAL - Closing journal entries
Debit Credit
R R
20.1 Sales 380
Dec 31 Settlement discount granted 380
Closing off and transfer of settlement discount granted to
sales
Sales 1 200
Sales return 1 200
Closing off and transfer of sales returns to sales
Sales R(381 790 – 380 – 1 200) 380 210
Trading Account 380 210
Closing off and transfer of sales to trading account
Settlement discount received 650
Cost of sales 650
Closing off and transfer of settlement discount to cost of
sales
Cost of sales R(165 400 – 650) 164 750
Closing off and transfer of cost of sales account to trading
account
Profit or loss 215 460
Transfer of gross profit
Rental income R(15 600 – 1 200) 14 400
Interest on investment R(5 000 + 1 000) 6 000
Credit losses recovered 120
Closing off of above accounts against profit or loss
35
Debit Credit
R R
Wages 2 000
Salaries 25 000
Assessment rates 1 500
Licences 1 000
Vehicle expenses 3 500
Credit losses R(550 + 200 – 50) 700
Packaging material R(4 700 – 980) 3 720
Insurance R(2 250 – 625) 1 625
Water and electricity 2 100
Telephone expenses R(1 400 + 165) 1 565
Advertising R(2 000 – 400) 1 600
Interest on loan 1 125
Depreciation 6 389
Closing off of above accounts against profit or loss
account
Profit or loss R(215 460 + 20 520 – 51 824) 184 156
Capital 184 156
Transfer of profit to capital account
Dr Trading account Cr
R R
20.1 20.1
Dec 31 Cost of sales 164 750 Dec 31 Sales 380 210
Profit or loss account 215 460
(Gross profit)
380 210 380 210
Dr Profit or loss account Cr

R R
20.1 20.1
Dec 31 Wages 2 000 Dec 31 Trading account 215 460
Salaries 25 000 (Gross profit)
Assessment rates 1 500 Rental income 14 400
Licences 1 000 Interest on investment 6 000
Vehicle expenses 3 500 Credit losses recovered 120
Credit losses 700
Packaging material 3 720
Insurance 1 625
Telephone expenses 1 565
Advertising 1 600
Interest on loan 1 125
Depreciation 6 389
Capital (Total 184 156
comprehensive income
for the year)
235 980 235 980
36
c) LEBOMBO DISTRIBUTORS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.1
R
Revenue 380 210
Cost of sales (164 750)
Gross profit 215 460
Other income 20 520
Rental income 14 400
Credit losses recovered 120
Interest income 6 000
235 980
Distribution, administrative and other expenses (50 699)
Wages 2 000
Salaries 25 000
Licences 1 000
Vehicle expenses 3 500
Credit losses 700
Packaging material 3 720
Insurance 1 625
Advertising 1 600
Depreciation 6 389
Finance costs (1 125)
Interest on long-term loan 1 125
Profit for the year 184 156
Other comprehensive income for the year –
Total comprehensive income for the year 184 156
d) LEBOMBO DISTRIBUTORS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.1
Capital
R
Balance at 1 January 20.1 141 700
Balance at 31 December 20.1 325 856
37
e) LEBOMBO DISTRIBUTORS
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1
ASSETS Notes R
Non-current assets 342 941
Property, plant and equipment 2.1, 3 292 941
Fixed deposit: NBC Bank 2.2, 4 50 000
Current assets 19 955
Inventories 9 480
Trade and other receivables R(5 200 – 200 – 250 + 1 000) 5 750
Prepayments R(625 + 400) 1 025
Cash and cash equivalents R(3 100 + 500 + 100) 4 3 700
Total assets 362 896
EQUITY AND LIABILITIES

Equity 325 856
Capital 325 856
Total liabilities 37 040
Non-current liabilities 25 000
Long-term borrowings 25 000
Current liabilities 12 040
Trade and other payables R (8 800 + 750 + 1 125 + 165) 10 840
Income received in advance 1 200
Total equity and liabilities 362 896
f) LEBOMBO DISTRIBUTORS
31 DECEMBER 20.1
Accounting policy
1. Basis of presentation
The annual financial statements have been prepared on the historical cost basis, modified
by the fair value of certain financial instruments and comply with International Financial
Reporting Standards (IFRS).
2. Summary of the significant accounting policies

2.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings. Vehicles and equipment are subsequently measured at
cost less accumulated depreciation. Depreciation on equipment and vehicles are written
off at a rate deemed to be sufficient to reduce the carrying amount of the assets over their
estimated useful life. The depreciation rates are as follows:
Vehicles: 20% per annum using the diminishing balance method
Equipment: 10% per annum using the diminishing balance method
2.2 Financial assets
Financial assets are recognised when the entity becomes a party to the provisions of a
financial instrument. The entity’s classification depends on the purpose for which the
financial asset has been acquired. Financial assets are initially recognised at either fair
value (which excludes transaction costs) or amortised cost as required by IFRS. Financial
assets are subsequently measured at either fair value or amortised cost.
38
3. Property, plant and equipment

Land and
buildings Vehicles Equipment Total
R R R R
Carrying amount – 1 Jan 20.1 263 240 28 800 5 290 297 330
Cost 263 240 40 000 7 000 310 240
Accumulated depreciation – (11 200) (1 710) (12 910)
Additions – – 2 000 2 000
Depreciation for the year – (5 760) (629) (6 389)
Carrying amount – 31 Dec 20.1 263 240 23 040 6 661 292 941
Cost 263 240 40 000 9 000 292 240
4. Financial assets
R
Non-current financial assets 50 000
Fixed deposit at amortised cost: NBC Bank Ltd at 12% p.a. 50 000
Current financial assets 8 450
Trade and other receivables 4 750
Trade receivables control R(5 200 – 200) 5 000
Allowance for credit losses (250)
Cash and cash equivalents 3 700
Bank 3 100
Petty cash 100
Cash float 500
EXERCISE 2.2
At 31 March 20.15, Cartoon Traders had the following general ledger balances before any
adjustments were made:
CARTOON TRADERS
BALANCES AS AT 31 MARCH 20.15
R
Rental income ............................................................................................ 64 000
Stationery................................................................................................... 3 350
Capital........................................................................................................ 149 000
Drawings .................................................................................................... 6 084
Accumulated depreciation: Equipment ....................................................... 15 000
Commission income ................................................................................... 2 700
Credit losses .............................................................................................. 1 600
Property (at cost)........................................................................................ 350 000
Equipment (at cost)……………………………………………………………… 34 000
Bank (favourable) ...................................................................................... 24 208
Trade receivables control ........................................................................... 26 100
Interest on mortgage .................................................................................. 23 870
Municipal taxes .......................................................................................... 4 333
Insurance ................................................................................................... 2 405
Mortgage...................................................... ………………………………… 248 000
Water and electricity…………..................................................................... 2 750
39
The following adjustments must still be accounted for:
1. Cartoon Traders has five tenants, each paying different rental amounts. At the end of
March 20.15, one of the tenants owed two month’s rent to the entity. The monthly rental
payable by the tenant is R1 750.
2. Stationery on hand at 31 March 20.15 amounted to R1 550.
3. Commission income of R750 was earned for April and May 20.15.
4. Mr D Poor disappeared and the management decided to write off his debt amounting to
R2 650 as irrecoverable.
5. Provision should still be made for depreciation on equipment at 10% per annum on the
diminishing balance method.
6. The water and electricity account for March 20.15 amounting to R310, has not yet been
paid.
7. The insurance premium for April 20.15 was paid in advance. The premiums are paid in
equal monthly amounts.
8. Interest on mortgage is calculated at a rate of 10,5% per annum. The interest for
March 20.15 is still to be accounted for.
REQUIRED
a) Calculate the total comprehensive income or loss of Cartoon Traders for the year
ended 31 March 20.15.
b) Prepare the statement of financial position of Cartoon Traders as at 31 March 20.15.
Please note:
All calculations must be shown.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS) appropriate to the business of the entity.
SOLUTION 2.2
a) Calculation of total comprehensive income or loss:

R
Rental income R(64 000 + 3 500) 67 500
Commission income R(2 700 – 750) 1 950
69 450
Less: Expenses (43 603)
Interest on mortgage (R248 000 x 10.5%) 26 040
Water and electricity R(2 750 + 310) 3 060
Municipal taxes 4 333
Insurance R(2 405 – (2 405/13)) 2 220
Stationery R(3 350 – 1 550) 1 800
Credit losses R(1 600 + 2 650) 4 250
Depreciation R(34 000 – 15 000) x 10% 1 900
40
b) CARTOON TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.15
R
ASSETS
Non-current assets
Property, plant and equipment R(350 000 + 34 000 – 15 000 – 1 900) 367 100

Inventories 1 550
Trade and other receivables R(26 100 – 2 650 + 3 500 + 185) 27 135
Cash and cash equivalent 24 208
TOTAL ASSETS 419 993

Equity 168 763
Capital R(149 000 – 6 084 + 25 847) 168 763

Trade and other payables R(750 + 310 + 26 040 – 23 870) 3 230
EXERCISE 2.3
BOJANE TRADERS
PRE-ADJUSTMENT TRIAL BALANCE AT 30 JUNE 20.15
Debit Credit
R R
Capital............................................................................................ – 202 000
Drawings ........................................................................................ 27 000 –
Trade receivables control ............................................................... 18 560 –
Vehicles (at cost)............................................................................ 202 100 –
Accumulated depreciation: Vehicles............................................... – 19 100
Inventory: Trading (1 July 20.14) .................................................... 28 300 –
Bank............................................................................................... 56 520 –
Mortgage........................................................................................ – 105 000
Loan from Africa Bank.................................................................... – 15 000
Sales.............................................................................................. – 272 195
Carriage on purchases ................................................................... 750 –
Import duty on purchases............................................................... 782 –
Insurance on purchases ................................................................. 329 –
Commission income....................................................................... – 18 000
Depreciation................................................................................... 19 100 –
Insurance ....................................................................................... 8 575 –
Packaging materials....................................................................... 4 600 –
Purchases ...................................................................................... 190 800 –
Purchases returns .......................................................................... – 245
41
Debit Credit
R R
Rental income ................................................................................ – 6 500
Sales returns.................................................................................. 1 860 –
Settlement discount granted........................................................... 465 –
Settlement discount received ......................................................... – 225
Telephone expenses ...................................................................... 2 420 –
Carriage on sales ........................................................................... 1 250 –
Repairs……………… . …………………………………………………. 2 160 –
Fuel………………. ……………………………………………………… 3 479 –
Wages............................................................................................ 64 115 –
Water and electricity....................................................................... 5 100 –
638 265 638 265
The following information must still be taken into account for the year ended
30 June 20.15:
1. On 1 July 20.15, trading inventory had a balance of R22 750.

2. Rental income for the year should have been R6 000.
3. Packaging material on hand at 30 June 20.15 amounted to R1 200.
4. Commission income of R3 600 is still outstanding.
5. An account in respect of water and electricity amounting to R500 must still be paid.
6. The mortgage was obtained from XYZ Bank during the previous financial year and bears
interest at a rate of 11,5% per annum. Interest for the current year must still be provided
for.
7. The loan from Africa Bank is unsecured and bears interest at 19,5% per annum. Interest
for the current year must still be provided for.
8. A debtor who owes the business R4 640 was declared insolvent and his account must be
written off as irrecoverable.
9. The insurance amount includes the premiums for the months of July and August 20.15.
REQUIRED
a) Prepare the statement of profit or loss and other comprehensive income of Bojane
Traders for the year ended 30 June 20.15.
b) Prepare the statement of changes in equity of Bojane Traders for the year ended
30 June 20.15.
Please note:
Your answers must comply with the requirements of International Financial Reporting
Standards (IFRS) appropriate to the business of the entity. All calculations must be shown.
42
SOLUTION 2.3
a) BOJANE TRADERS
THE YEAR ENDED 30 JUNE 20.15
R
Revenue R(272 195 – 1 860 – 465) 269 870
Inventory - 1 July 20.14 28 300
Purchases R(190 800 – 245 – 225) 190 330
Carriage on purchases 750
Import duty on purchases 782
Insurance on purchases 329
220 491
Less: Inventory - 30 June 20.15 (22 750)
Gross profit 72 129
Other income 27 600
Rental income R(6 500 – 500) 6 000
Commission income R(18 000 + 3 600) 21 600
99 729
Distribution, administration and other expenses (113 514)
Repairs 2 160
Insurance R(8 575 – (8 575/14 x 2)) 7 350
Wages 64 115
Water and electricity R(5 100 + 500) 5 600
Petrol 3 479
Packing materials R(4 600 – 1 200) 3 400
Depreciation 19 100
Carriage on sales 1 250
Credit losses 4 640
Interest on mortgage (R105 000 x 11,5%) 12 075
Interest on short term loan (R15 000 x 19,5%) 2 925
Loss for the year (28 785)
Total comprehensive loss for the year (28 785)
b) BOJANE TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.15
Capital
R
Balance as at 1 July 20.14 202 000
Comprehensive loss for the year (28 785)
Less: Drawings (27 000)
Balance as at 30 June 20.15 146 215
43
Self-assessment
Yes No
Record applicable adjustments in the financial statements of a sole
proprietorship.
Prepare a statement of profit or loss and other comprehensive income for

a sole proprietorship.
Prepare a statement of changes in equity for a sole proprietorship.
Prepare a statement of financial position for a sole proprietorship.
Prepare the required notes to the financial statements of a sole

proprietorship.
44
LEARNING UNIT 3
3
Establishment and financial statements of a partnership
Key concepts .....................................................................................................................46
3.1 Introduction ...............................................................................................................47
3.2 Reasons for the formation of partnerships ................................................................47
3.3 The legal position of a partner...................................................................................48
3.4 Establishment of a partnership..................................................................................48
3.5 The partnership agreement.......................................................................................48
3.6 Dissolution of a partnership.......................................................................................49
3.7 Accounting procedures and specialised accounts .....................................................49
3.8 Financial statements of a partnership........................................................................52
Self-assessment ................................................................................................................66
45
Learning outcomes
x define a partnership
x explain the reasons why a partnership is formed
x discuss the contents of a partnership agreement
x explain the ways in which a partnership can be established
x explain the factors which can lead to the dissolution of a partnership
x record the transactions of a partnership in the accounting records
x prepare the financial statements of a partnership in accordance with the requirements of
IFRS, appropriate to the business of the partnership
Key concepts
x Partnership
x Partners
x Partnership agreement
x Profit-sharing ratio
x Dissolution
x Legal approach
x Entity approach
x Equity
x Appropriation account
x Financial statement
46
3.1 Introduction
Because a sole trader has only one owner and usually limited capital resources, two or more
entrepreneurs often opt to form a business entity that can accommodate more than one
owner. If their requirement is to establish an entity without the judicial complications
associated with a company or close corporation, the formation of a partnership is an
appropriate choice of business ownership.
Look at the overview of this learning unit in the prescribed textbook and read
paragraph 2.1 in the prescribed textbook. Pay special attention to the definition
of a partnership and the difference between a business entity with and without
legal status.
Activity 3.1
State whether the following statements are true or false:
a) A partnership is a legal entity.
b) The assets and liabilities of a partnership belong to the owners.
c) A partnership agreement must be in writing.
Feedback 3.1
a) False.
A partnership has no legal status. Only the owners have legal status.
b) True.
c) False.
An oral agreement is also binding.
3.2 Reasons for the formation of partnerships

There are many reasons why entrepreneurs enter into a partnership agreement. One of the
reasons is to have access to more capital and expertise.
Read paragraph 2.2 in the prescribed textbook.
Activity 3.2
Name four reasons for the formation of a partnership.
47
Feedback 3.2
x Increased access to capital

x Eliminating competition
x Uniting capital and expertise
x Retaining skills and expertise
3.3 The legal position of a partner
3.4 Establishment of a partnership
Read paragraph 2.4 in the prescribed textbook. Note how a partnership can be
established by action or agreement.
3.5 The partnership agreement
Read paragraph 2.5 in the prescribed textbook. Can you name some essential
matters of a partnership agreement?
Activity 3.3
a) It is advisable that a partnership agreement must be verbal.

True or False?
b) What is the common law principle concerning the ownership and management of a
partnership?
c) What is the common law principle if the partnership agreement does not stipulate a
profit-sharing ratio?
Feedback 3.3
a) False. A written agreement is advisable.

b) Partners share ownership in the same ratio as their profit-sharing ratio and have equal
rights in the management of the entity.
c) Partners will share the profits/losses in the same ration as their capital contribution ratio
to the partnership.
48
3.6 Dissolution of a partnership
Unlike a company or close corporation, a partnership has a limited life span.
Can you name all the factors that lead to the ending of a partnership?
3.7 Accounting procedures and specialised accounts

Just like a sole proprietorship, a partnership is a separate accounting entity (without legal
status). It also keeps record of its accounting transactions in journals, subsidiary journals and
ledgers and must prepare financial statements as an output. Refer to the accounting process
in learning unit 2.
Study paragraph 2.7 in the prescribed textbook. Pay particular attention to

the use of capital, current, drawings, loan and appropriation accounts in
partnerships.
Two approaches can be followed in preparing the accounts of a partnership namely the legal
and the entity approach. Make sure that you understand the difference between the two
approaches. For the sake of simplicity, we follow a legal approach in this module.
The recording of equity of a partnership is through the use of capital, current and drawings
accounts. The sole proprietorship made use of capital and drawings accounts.
Activity 3.4
a) What approached is followed when the partners and partnership are seen as two
different accounting entities?
b) How would interest paid on a capital investment be treated when an entity approach is
followed and how is it treated when the legal approach is followed in the accounting
records of the partnership?
c) In which account is the initial investment of a partner in a partnership captured? How

can a partner increase this account?
d) When is it compulsory to use a drawings account for each partner? And if the drawings
account is not compulsory, which other account can be used to record, for example,
cash drawings of partners?
e) When is a loan account used in the accounting records of a partnership? How is the
interest payable or receivable treated in the statement of profit or loss and other
comprehensive income of the partnership?
f) What is the purpose of an appropriation account?
49
Feedback 3.4
a) The entity approach.
b) According to the entity approach – capital is regarded as finance (from a separate entity
– the partner) and the related interest on capital is treated as finance costs.
According to the legal approach – capital is not regarded as finance from a separate
entity (the partner) and interest on capital is an appropriation/distribution of profit to the
partner and not a finance cost.
c) The initial investment in a partnership is captured in a capital account. The capital

account can only increase with an additional investment into the partnership.
d) It is only compulsory when the partnership agreement states the use of drawings
accounts. The current account can be used.
e) When a partner, in his/her personal capacity, grants a repayable loan to or receives a

repayable loan from the partnership. The interest paid is treated as finance cost whereas
the interest received is treated other income in the statement of profit or loss and other
comprehensive income.
f) The appropriation account is a final account used to appropriate the profit/loss of the
partnership to its partners according to the profit-sharing ratio.
Activity 3.5
Monte and Carlos are partners in Montecarlo Traders. The profit of the partnership for the year
28 February 20.7 amounted to R960 000 before taking the following provisions of the
partnership agreement into account:
1. Partners are entitled to 15% interest on the opening balances of their capital accounts.
2. The partners share equally in a profit/loss.
3. Monte receives a salary of R7 000 per month.
The opening balances of the capital accounts amounted to R350 000 for Monte and R450 000
for Carlos.
REQUIRED
Prepare the appropriation account in the general ledger of Montecarlo Traders on

28 February 20.7.
50
Feedback 3.5
MONTECARLO TRADERS
GENERAL LEDGER
Dr Appropriation account Cr
20.7 R 20.7 R
28 Feb Interest on capital (15% x 120 000 28 Feb
R350 000) + (15% x R450 000) Profit or loss account 960 000
Salary: Monte (12 x R7 000) 84 000
Current account: Monte 50% x 378 000
R(960 000-120 000-84 000)
Current account: Carlos 50% x 378 000
R(960 000-120 000-84 000)
960 000 960 000
You can apply the following steps when recording the sharing of profits or losses:
x Allocate the interest on the partners’ capital and current accounts with credit balances.
The interest payable will reduce the profit available for distribution but is not disclosed in
the statement of profit or loss and other comprehensive income, the reason being that it
forms part of the partnership agreement and do not influence the external parties of the
entity.
x Calculate the interest on drawings (if applicable) and the interest on current accounts with
debit balances. The interest receivable will increase the profit available for distribution
amongst the partners but is not disclosed in the statement of profit or loss and other
comprehensive income.
x Allocate salaries, commissions and bonuses for services rendered by the partners. These
expenses will reduce the profit available for distribution but is not disclosed in the
statement of profit or loss and other comprehensive income.
x Divide the remaining profit/loss according to the agreed profit-sharing ratio.
Activity 3.6
Work through example 2.1 in the prescribed textbook. Pay particular attention to the calculation
of the ratio in which profits/losses are shared in the example.
Activity 3.7
DJ Black and CJ Coffee are partners in Black Coffee Music who contributed R180 000 and
R270 000 respectively. The total profit for the year amounted to R225 000.
51
REQUIRED
Calculate the profit distribution for the following three scenarios:
a) DJ Black and CJ Coffee share profits in their capital contribution ratio.
b) DJ Black and CJ Coffee share profits equally.
c) DJ Black and CJ Coffee share profits in the ratio of 2:1.
Feedback 3.7
a) The capital contribution ratio is calculated as follows:

Capital contribution 180 000:270 000. Find the greatest common denominator.
90 000 can be divided into both and equals 2:3.
DJ Black’s profit = 2/5 x R225 000 = R90 000
CJ Coffee’s profit = 3/5 x R225 000 = R135 000
b) Each partner receives and equal share which is 50:50 or 1:1 which is also equal to
½:½
c) DJ Black receives R2 for every R1 that CJ Coffee receives and is stated as 2:1 or 2/3 : 1/3
3.8 Financial statements of a partnership

By now you are familiar with the different financial statements that can be prepared as well as
their accompanying notes. The cash flow statement of a partnership is dealt with in learning
unit 9.
Activity 3.8
Work through example 2.2, 2.3 and 2.4 of the prescribed textbook which illustrates the different
financial statements that can be prepared for a partnership. Pay specific attention to the
statement of changes in equity which is a summary of the appropriation account. Example 2.2
illustrates the financial statements when a profit is made whilst example 2.3 illustrates the
financial statements when a loss is incurred. Example 2.4 is a comprehensive example.
52
EXERCISE 3.1
The under mentioned information was taken from the accounting records of Bluered Traders,
a partnership with B Blue and R Red as partners, on 30 September 20.15 the financial year
end of the partnership.
BLUERED TRADERS
BALANCES AS AT 30 SEPTEMBER 20.15
R
Capital: B Blue ...................................................................................................... 20 000
Capital: R Red ....................................................................................................... 5 000
Current account: B Blue (1 October 20.14) (Cr) .................................................... 1 060
Current account: R Red (1 October 20.14) (Cr)..................................................... 2 800
Drawings: B Blue.................................................................................................... 9 000
Drawings: R Red .................................................................................................... 3 000
Mortgage ................................................................................................................ 10 000
Trade payables control........................................................................................... 24 150
Bank overdraft........................................................................................................ 6 160
Land and buildings at cost ..................................................................................... 19 500
Equipment at cost .................................................................................................. 19 840
Accumulated depreciation: Equipment (1 October 20.14) ..................................... 5 000
Motor vehicles at cost ............................................................................................ 900
Accumulated depreciation: Motor vehicles (1 October 20.14) ............................... 500
Office furniture at cost ............................................................................................ 350
Accumulated depreciation: Office furniture (1 October 20.14)............................... 50
Inventory (30 September 20.15) ............................................................................ 21 069
Trade receivables control....................................................................................... 16 020
Allowance for credit losses (1 October 20.14) ....................................................... 600
Petty cash .............................................................................................................. 32
Sales ...................................................................................................................... 340 628
Cost of sales .......................................................................................................... 306 000
Advertising costs .................................................................................................... 4 409
Salaries and wages................................................................................................ 12 189
Administrative expenses ........................................................................................ 2 622
Insurance expenses ............................................................................................... 364
Carriage on sales ................................................................................................... 203
Interest on mortgage .............................................................................................. 450
Additional information:
1. Terms of the partnership agreement
1.1 The partners share profits and losses in the ratio of their fixed capital contribution.
1.2 Interest at 5% per annum is to be allowed on the opening balances of the partners’
capital and current accounts.
1.3 Interest is to be charged at 5% per annum on the average monthly amount outstanding
on the partners’ drawings accounts.
1.4 R Red is entitled to a salary of R1 000 per annum plus a management commission of
10% of the comprehensive income for the financial year after his salary and the
adjustments for the interest on the capital, current and drawing account have been
taken into account.
53
2. Year end adjustments
2.1 An outstanding debt of R20 is irrecoverable and must be written off.

2.2 The allowance for credit losses must be adjusted to R800.
2.3 Depreciation is to be provided as follows:
Equipment: 15% per annum according to the diminishing-balance method
A new machine was purchased on 1 April 20.15 for R1 560
Motor vehicles: 20% per annum according to the straight-line method.
Office furniture: 10% per annum according to the diminishing balance method.
2.4 Interest on the mortgage up to 30 September 20.15 amounts to R600.
R4 000 of the loan is repayable during the 20.16 financial year. The loan is secured by
a mortgage over land and buildings. The loan was granted by Corner Bank on
1 October 20.14. The terms of the loan provide for interest on the loan to be charged at
a rate of 6% per annum.
2.5 Salaries to employees of R69 have not been paid or taken into account.
2.6 The following expenses have been prepaid:
Insurance, R62
Advertising, R948
2.7 Interest correctly calculated on the partners’ average monthly drawings accounts
amounted to R320 for B Blue and R80 for R Red.
2.8 In terms of the partnership agreement, the following must still be provided for:
- Interest on the partners’ capital and current account
- R Red’s salary and management commission
REQUIRED
Prepare the following in respect of Bluered Traders to comply with the requirements of IFRS
appropriate to the business of the partnership. Show all calculations but ignore comparatives:
a) Statement of profit or loss and other comprehensive income for the year
ended 30 September 20.15.
b) Statement of changes in equity for the year ended 30 September 20.15.
c) Statement of financial position as at 30 September 20.15.
d) Notes for the year ended 30 September 20.15.
e) Prepare the current accounts of the partners, properly balanced, in the general ledger of
Bluered Traders for the year ended 30 September 20.15. Show the correct contra ledger
accounts.
54
SOLUTION 3.1
a) BLUERED TRADERS
THE YEAR ENDED 30 SEPTEMBER 20.15
Note R
Revenue 2.5 340 628
Gross profit 34 628
Salaries and wages R(12 189 + 69) 12 258
Advertising costs R(4 409 – 948) 3 461
Delivery expenses 203
Administrative expenses 2 622
Insurance expenses R(364 – 62) 302
Credit losses 䙵 220
Depreciation 䙶 2.1 2 319
Finance costs (600)
Interest on mortgage 䙷 600
b) BLUERED TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 SEPTEMBER 20.15
Current
Capital Appro- Total
accounts
priation equity
B Blue R Red B Blue R Red
R R R R R R
Balances at 1 October 20.14 20 000 5 000 1 060 2 800 – 28 860
Total comprehensive income
for the year 12 643 12 643
Salaries to partners 1 000 (1 000)
Interest on capital ߊ 1 000 250 (1 250)
Interest on current accounts ߋ 53 140 (193)
Interest on drawings (320) (80) 400
Commission to partners ߌ 1 060 (1 060)
Drawings (9 000) (3 000) (12 000)
Partners’ share of total compre-
hensive income ߍ 7 632 1 908 (9 540)
Balances at 30 September 20.15 20 000 5 000 425 4 078 – 29 503
55
c) BLUERED TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.15
Note R
ASSETS
Inventories 2.3 21 069
Trade receivables R(16 020 – 20 – 800) 4 15 200
Prepayments R(948 + 62) ߎ 1 010
Total assets 70 032
Total equity 29 503
Capital R(20 000 + 5000) 25 000
Current accounts R(425 + 4 078) 4 503
Long-term borrowings 5 6 000
Trade and other payables 5 24 369
Current portion of long-term borrowings 5 4 000
Bank overdraft 5 6 160
d) BLUERED TRADERS
NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.15
Accounting policy
The financial statements have been prepared in accordance with the requirements of
IFRS appropriate to the business of the entity. The annual financial statements have
been prepared on the historical cost basis, modified by the revaluation of financial
assets and financial liabilities at fair value through profit or loss.
2. Summary of significant accounting policies

The financial statements incorporate the following significant accounting policies which
are consistent with those applied in previous years except where otherwise stated.
written off on land and buildings. Equipment, furniture and vehicles are subsequently
measured at historical cost less accumulated depreciation and accumulated impairment
losses. Depreciation on equipment, furniture and vehicles is written off at a rate deemed
to be sufficient to reduce the carrying amount of the assets over their estimated useful
life to their estimated residual value. The depreciation rates are as follows:
Equipment: 15% per annum according to the diminishing balance method
Motor vehicles: 20% per annum according to the straight-line method
Furniture: 10% per annum according to the diminishing balance method
56
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument. The entity
classification depends on the purpose for which the entity acquired the financial assets.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. Financial instruments are
subsequently measured at fair value unless it is measured at amortised cost as required
by IFRS. Cash and cash equivalents consists of cash in bank and short-term deposits.
Financial instruments that are subsequently measured at amortised cost are done so
using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3 Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost
or net realisable value. Cost is calculated using the first-in-first-out method. Net
realisable value is the estimated selling price in the ordinary course of business less any
costs of completion and disposal.
2.4 Financial liabilities
Financial liabilities are recognised in the entity's statement of financial position when the
entity becomes a party to the contractual provisions of the instrument. The classification
depends on the purpose for which the financial liabilities were obtained.
2.5 Revenue
Revenue is measured at the fair value of the consideration received or receivable.

Revenue represents the transfer of promised goods to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those
goods. Revenue from the sale of inventory consists of the total net invoiced sales,
excluding value-added tax and settlement discount granted. Revenue is recognised
when performance obligations are satisfied.
57

Land and Equip- Motor Office
Total
buildings ment Vehicles Furniture
R R R R R
Carrying amount at
1 October 20.14 19 500 13 280 400 300 33 480
Cost 19 500 18 280 900 350 39 030
Accumulated depreciation – (5 000) (500) (50) (5 550)
Additions – 1 560 – – 1 560
Disposals* – – – – –
Depreciation for the year – (2 109) (180) (30) (2 319)
Carrying amount at
30 September 20.15 19 500 12 731 220 270 32 721
Cost 19 500 19 840 900 350 40 590
Accumulated depreciation – (7 109) (680) (80) (7 869)
*Included for illustrative purposes. In cases where there are no disposals, this item is excluded from the note.
Disposals are disclosed at carrying amount.
The partnership has pledged land and buildings with a carrying amount of R19 500 as
security for the mortgage obtained from Corner Bank.
4. Financial assets
20.15
R
Current financial assets
Trade and other receivables: 15 200
Allowance for credit losses (800)
Cash and cash equivalents: 32
Petty cash 32
5. Financial liabilities
20.15
R
Non-current financial liabilities at amortised cost 6 000
Long-term borrowings: Mortgage 6 000
The mortgage was acquired from Corner Bank on 1 October 20.14 at an
interest rate of 6% per annum. This loan is secured by a first mortgage
over land and buildings (refer to note 3).
Total loan 10 000
Current portion of loan (4 000)
Current financial liabilities 34 529

Trade and other payables: 24 369
Trade payables control 24 150
Accrued expenses:
Salaries payable 69
Interest payable on mortgage 150
Current portion of long-term borrowings at amortised cost 4 000
Bank overdraft 6 160
58
Calculations
߇Credit losses:
Credit losses written off 20
Increase in allowance for credit losses 200
Credit losses 220
R
Allowance for credit losses (30 September 20.15) 800
Allowance for credit losses (1 October 20.14) (600)
Increase in allowance for credit losses 200
߈Depreciation: R
On equipment
Old equipment R(19 840 – 1 560) = R18 280
R(18 280 – 5 000) x 15% 1 992
New equipment R(1 560 x 15% x 6/12 ) 117
On office furniture: R(350 – 50) x 10% 30
On motor vehicles: R900 x 20% 180
2 319
߉Interest payable on mortgage:
R(600 – 450) 150
ߊInterest on capital accounts: R

B Blue – R20 000 x 5% 1 000
R Red – R5 000 x 5% 250
1 250
ߋInterest on current accounts: R

B Blue – R1 060x 5% 53
R Red – R2 800 x 5% 140
193
ߌManagement commission: R Red R

Less: Salary to R Red (1 000)
Interest on capital (1 250)
Interest on current accounts (193)
Add: Interest on drawings 400
Comprehensive income before commission 10 600
? R10 600 x 10% = R1 060
ߍPartners’ share of total comprehensive income R

Total comprehensive income for the year
(before commission to R Red) 10 600
Commission to R Red (1 060)
Comprehensive income available for distributions 9 540
B Blue: R9 540 x (R20 000/R25 000) = R7 632

R Red: R9 540 x (R 5 000/R25 000) = R1 908
ߎPrepayments: R
Advertising costs 948
Insurance expenses 62
1 010
59
e) BLUERED TRADERS
GENERAL LEDGER
Dr Current account: B Blue Cr
20.15 R 20.14 R
Sep 30 Interest on drawings 320 Oct 1 Balance b/d 1 060
Drawings (for the year) 9 000 20.15
Balance c/d 425 Sept 30 Interest on capital 1 000
Interest on current account 53
Appropriation account 7 632
9 745 9 745
20.15
Oct 1 Balance b/d 425
Dr Current account: R Red Cr

20.15 R 20.14 R
Sep 30 Interest on drawings 80 Oct 1 Balance b/d 2 800
Drawings (for the year) 3 000 20.15
Balance c/d 4 078 Sept 30 Salary to partner 1 000
Interest on capital 250
Interest on current account 140
Commission 1 060
Appropriation account 1 908
7 158 7 158
20.15
Oct 1 Balance b/d 4 078
EXERCISE 3.2
The under mentioned information was taken from the accounting records of Toypork Traders,
a partnership with T Toy and P Porky as partners on 28 February 20.15 the financial year end
of the partnership.
TOYPORK TRADERS
BALANCES AS AT 28 FEBRUARY 20.15
R
Sales ................................................................................................................. 97 600
Settlement discount received ............................................................................ 1 450
Purchases returns ............................................................................................. 850
Administrative expenses ................................................................................... 33 750
Sales returns ..................................................................................................... 860
Purchases ......................................................................................................... 44 000
Credit losses ..................................................................................................... 2 440
Drawings: T Toy ................................................................................................ 3 880
Drawings: P Porky............................................................................................. 1 800
Depreciation ...................................................................................................... 3 940
Land and buildings ............................................................................................ 20 000
Motor vehicles at cost ....................................................................................... 36 000
Furniture and fittings at cost.............................................................................. 12 000
Inventory (1 March 20.14) ................................................................................. 21 530
Trade receivables control.................................................................................. 23 520
Allowance for settlement discount received...................................................... 400
Current account: T Toy (1 March 20.14) (Dr) ................................................... 500
Current account: P Porky (1 March 20.14) (Dr) ................................................ 600
Capital: T Toy (1 March 20.14) ......................................................................... 40 000
Capital: P Porky (1 March 20.14) ...................................................................... 20 000
Bank overdraft................................................................................................... 4 922
Accumulated depreciation: Furniture and fittings.............................................. 5 298
Accumulated depreciation: Motor vehicles ....................................................... 14 800
Allowance for settlement discount granted ....................................................... 500
Allowance for credit losses ............................................................................... 2 300
Trade payables control...................................................................................... 17 500
60
1. T Toy and P Porky share profits and losses in the ratio of 2:1 respectively.
2. On 28 February 20.15, salaries for services rendered according to the partnership
agreement were paid to the partners as follows: T Toy: R6 000 and P Porky R4 000.
Both these amounts were recorded as administrative expenses.
3. Interest on the partners’ capital accounts amounted to R2 140 for T Toy and R1 070
for P Porky.
4. Inventory on 28 February 20.15 amounted to R19 100.
5. Depreciation amounted to R940 on furniture and fittings and R3 000 on motor vehicles.
REQUIRED
Prepare the following in respect of Toypork Traders to comply with the requirements of IFRS
appropriate to the business of the partnership. Show all calculations but ignore comparatives:
a) Statement of profit or loss and other comprehensive income for the year ended
28 February 20.15.
b) Statement of changes in equity for the year ended 28 February 20.15.
c) Statement of financial position as at 28 February 20.15.
d) The note pertaining to property, plant and equipment for the year ended
28 February 20.15.
e) Prepare the appropriation account of the partners, properly balanced, in the general
ledger of Toypork Traders for the year ended 28 February 20.15. Show the correct
contra ledger accounts.
SOLUTION 3.2
a) TOYPORK TRADERS
Note R
Revenue R(97 600 – 860) 96 740
Inventory (1 March 20.14) 21 530
Purchases R(44 000 – 850 – 1 450) 41 700
63 230
Inventory (28 February 20.15) (19 100)
Gross profit 52 610
Administrative expenses R(33 750 – 10 000) 23 750
Credit losses 2 440
Depreciation 2 3 940
61
b) TOYPORK TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.15
Current
Capital
accounts Appro- Total
P P priation Equity
T Toy T Toy
Porky Porky
R R R R R R
Balances at 1 March 20.14 40 000 20 000 (500) (600) – 58 900
Total comprehensive income for the year 22 480 22 480
Salaries to partners 6 000 4 000 (10 000)
Interest on capital 2 140 1 070 (3 210)
Drawings (3 880 + 6 000) (1 800 + 4 000) (9 880) (5 800) (15 680)
Partners’ share of total compre-
hensive income ߇ 6 180 3 090 (9 270)
Balances at 28 February 20.15 40 000 20 000 3 940 1 760 – 65 700
c) TOYPORK TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.15
Note R
ASSETS
Property, plant and equipment 3 47 902
Inventories 19 100
Trade receivables R(23 520 – 2 300 – 500) 20 720
Total assets 87 722
Total equity 65 700
Capital R(40 000 + 20 000) 60 000
Current accounts R(3 940 + 1 760) 5 700
Trade payables R(17 500 – 400) 17 100
d) TOYPORK TRADERS
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.15

Furniture
Land and and Motor Total
buildings fittings vehicles
R R R R
Carrying amount at 1 March 20.14 20 000 7 642 24 200 51 842
Cost 20 000 12 000 36 000 68 000
Accumulated depreciation ߈ – (4 358) (11 800) (16 158)
Depreciation for the year – (940) (3 000) (3 940)
Carrying amount at 28 February 20.15 20 000 6 702 21 200 47 902
Cost 20 000 12 000 36 000 68 000
Accumulated depreciation – (5 298) (14 800) ( 20 098)
62
Calculations
߇Partners’ share of total comprehensive income

Remaining total comprehensive income to be shared by partners:
R22 480 – R(10 000 + 3 210) = R9 270
T Toy: R9 270 x 2/3 = R6 180

P Porky: R9 270 x 1/3 = R3 090
߈Accumulated depreciation at 1 March 20.14:

Furniture and Motor
fittings Vehicles
R R
Accumulated depreciation at 28 February 20.15 5 298 14 800
Depreciation for the year (940) (3 000)
4 358 11 800
e) TOYPORK TRADERS
GENERAL LEDGER
Dr Appropriation account Cr
20.15 R 20.15 R
Feb 28 Interest on capital: T Toy 2 140 Feb 28 Profit or loss account 22 480
Interest on capital: P Porky 1 070
Salary: T Toy 6 000
Salary: P Porky 4 000
Current account: T Toy 6 180
Current account: P Porky 3 090
22 480 22 480
EXERCISE 3.3
Shoestring Corner Shop is a partnership with S Shoe and S String as partners. The
information below pertains to the business activities of the partnership for the year ended
28 February 20.15.
SHOESTRING CORNER SHOP

R
Land and buildings ............................................................................................ 100 000
Motor vehicles at cost ....................................................................................... 99 000
Trade receivables control.................................................................................. 82 000
Inventory ........................................................................................................... 135 000
Bank (Dr) ........................................................................................................... 98 000
Accumulated depreciation: Motor vehicles (1 March 20.14)............................. 49 000
Allowance for credit losses (1 March 20.14) ..................................................... 1 000
Capital: S Shoe (fixed) ...................................................................................... 240 000
Capital: S String (fixed) ..................................................................................... 160 000
Current account: S Shoe (Cr: 1 March 20.14) .................................................. 50 000
Current account: S String (Dr: 1 March 20.14) ................................................. 40 000
Drawings: S Shoe ............................................................................................. 55 000
Drawings: S String ............................................................................................ 11 000
Administrative expenses ................................................................................... 80 000
Trading account (gross profit for the year)........................................................ 200 000
63
1. The partnership agreement stipulates the following:

x Interest is to be calculated at 7,5% per annum on the opening balances of the capital
accounts.
x Interest is to be calculated at 10% per annum on the opening balances of the current
accounts.
x S String is entitled to a monthly salary of R1 250.
x Profit/losses are to be shared equally.
2. The following must still be accounted for:

x Depreciation on motor vehicles at 30% per annum, according to the diminishing
balance method
x Credit losses to the amount of R2 000.
x Interest on drawings for the current financial year amounted to R5 000 for S Shoe
and R1 000 for S String.
x An investigation indicated that credit losses could be as much as R4 000 during the
next financial period. The allowance for credit losses must be adjusted accordingly.
REQUIRED
Prepare the following in respect of Shoesting Corner Shop to comply with the requirements
of IFRS appropriate to the business of the partnership. Show all calculations but ignore
comparatives:
a) Statement of profit or loss and other comprehensive income for the year
ended 28 February 20.15.
b) Statement of changes in equity for the year ended 28 February 20.15.
SOLUTION 3.3
a) SHOESTRING CORNER SHOP

Note R
Administrative and other expenses (100 000)
Credit losses ߇ 5 000
Depreciation R(99 000 – 49 000) x 30% 15 000
64
b) SHOESTRING CORNER SHOP

Capital Current accounts Appro- Total
S Shoe S String S Shoe S String priation Equity
R R R R R R
Balances at 1 March 20.14 240 000 160 000 50 000 (40 000) – 410 000
for the year 100 000 100 000
Salaries to partner ߈ 15 000 (15 000)
Interest on capital ߉ 18 000 12 000 (30 000)
Interest on current accounts ߊ 5 000 (4 000) (1 000)
Interest on drawings (5 000) (1 000) 6 000
Drawings (55 000) (11 000) (66 000)
Partners’ share of total
comprehensive income ߋ 30 000 30 000 (60 000)
Balances at
28 February 20.15 240 000 160 000 43 000 1 000 – 444 000
Calculations
߇Credit losses:
R
Credit losses written off 2 000
Increase in allowance for credit losses * 3 000
Credit losses 5 000
R
Allowance for credit losses (28 February 20.15) 4 000
Allowance for credit losses (1 March 20.14) (1 000)
Increase in allowance for credit losses* 3 000
߈Salary to partner: S String

R1 250 x 12 = R15 000
߉Interest on capital:
S Shoe: R240 000 x 7,5% = R18 000
S String: R160 000 x 7,5% = R12 000
ߊInterest on current accounts:

S Shoe: R50 000 (Cr) x 10% = R5 000 (payable)
S String: R40 000 (Dr) x 10% = R4 000 (receivable)
ߋPartners’ share of total comprehensive income:

S Shoe: R60 000 x 50% = R30 000
S String: R60 000 x 50% = R30 000
65
Self-assessment
Yes No
Define a partnership.
Explain the reasons why partnerships are formed.
Discuss the contents of a partnership agreement in general.
Explain the ways in which a partnership can be established.
Explain the factors which can result in the dissolution of a partnership.
Record the transactions of a partnership in its books.
Prepare the financial statements of a partnership to comply with the

requirements of International Financial Reporting Standards (IFRS),
appropriate to the business of the partnership.
66
LEARNING UNIT 4
4
Changes in the ownership structure of partnerships
Key concepts .....................................................................................................................68
4.1 Introduction ...............................................................................................................69
4.2 Valuation adjustments...............................................................................................69
4.3 Goodwill....................................................................................................................70
4.4 The calculation of profit-sharing ratios.......................................................................71
4.5 Recording a change in ownership structure by way of a personal transaction...........72
4.6 Recording a change in ownership structure by way of a transaction with the

partnership................................................................................................................72
Self-assessment ................................................................................................................83
67
Learning outcomes
x briefly describe what a change in the ownership structure of a partnership entails

x mention events that cause a change in the ownership structure of a partnership
x calculate the new profit-sharing ratio of a partnership
x record a change in the ownership structure of a partnership by way of a personal
transaction
x record a change in the ownership structure of a partnership by way of transaction with the
partnership as business entity by applying the accounting procedure which is based on
the legal perspective
x prepare a statement of financial position for a new partnership at the date of its formation
according to the requirements of IFRS appropriate to the business of the partnership,
based on the legal perspective
Key concepts
x
x Change
Ch in ownership structure
x Dissolution
x Valuation adjustment
x Goodwill acquired
x Revaluation surplus
x Adjustment of profit-sharing ratio
x Personal transaction
x Transaction with a partnership as a business entity
x Accounting procedure based on the legal perspective
68
4.1 Introduction
After having studied learning unit 3 you should have a solid foundation about the accounting
procedures and the preparation of financial statements for a partnership. In this learning unit
we focus on the change in the ownership structure of partnerships that changes the
contractual relationship among partners. A change in the ownership structure of the
partnership occurs when a new partner is admitted to a partnership, when an existing partner
retires or dies or when the profit-sharing ratio of a partnership changes. In terms of the South
African common law, a partnership is not a separate legal entity and any change in the
ownership structure of the partnership terminates the existing partnership and creates a new
partnership.
Study paragraph 3.1 in the prescribed textbook. Please note that the going-
concern perspective falls outside the scope of this module.
Activity 4.1
a) Name the two accounting perspectives that can be adopted to record a change in the
ownership structure.
b) Explain in your own words what is meant with the legal perspective to account for a
change in the partnership structure.
Feedback 4.1
a) The legal and going-concern perspective.
b) The old and the new partnership are regarded as separate business entities and their
activities are separately recorded and reported.
4.2 Valuation adjustments
Study paragraph 3.2 in the prescribed textbook.
Note that the selling price of a partnership is determined by the fair value, and not the cost
price of the partnership. Recall that fair value is the amount for which an asset can be
exchanged or a liability can be settled between knowledgeable, willing parties in an arm’s
length transaction. As is indicated in the prescribed textbook, the fair value of a partnership
refers to the fair value of the net assets (including goodwill) of the partnership. Net assets =
Assets – Liabilities.
69
Activity 4.2
Remember that to revalue an asset or liability in lieu of a change in ownership structure, we

make use of a valuation account. The valuation account is closed off to the accounts of the
existing partners according to their existing profit-sharing ratio. Revaluations enable the value
of assets and liabilities to be adjusted to reflect their fair value instead of their cost or carrying
amounts.
In example 3.2 in the prescribed textbook, the revaluation is reversed in the new profit-sharing
ratio because the new partner paid a certain amount based on the fair value of the assets and
liabilities. So any adjustment from fair value back to cost or carrying amount will reduce his
capital investment accordingly and similarly so for the remaining partners. However, the going-
concern perspective is excluded from this module and no further discussion is therefore
needed.
4.3 Goodwill
Activity 4.3
a) Define goodwill in terms of IFRS 3.

b) Goodwill is classified as a non-current asset in the statement of financial position.
True or False?
c) After initial recognition of goodwill at cost how is goodwill subsequently measured?
Feedback 4.3
a) Goodwill is a future economic benefit arising from assets that are not capable of being
individually identified and separately recognised.
b) True. Goodwill is also an intangible asset compared to property, plant and equipment,
which are tangible assets.
c) Goodwill is subsequently measured at cost less impairment.
70
4.4 The calculation of profit-sharing ratios
Make sure that you fully understand the various methods according to which the new profit-
sharing of the partners in a new partnership is calculated. Remember your school maths when
you work with fractions. Anything multiplied by 1 remains the same (unchanged) and any
nominator divided by the same denominator is equal to 1. Thus 5/5 = 1 and so is 125/125 = 1.
You can only work with fractions if they have the same denominator. Thus 2/3 – 1/4 must be
converted to have the same denominator and you do that by multiplying each ratio with a ratio
equal to 1 (to remain unchanged) that will enable them to have the same denominator. In this
case the same denominator will be 12 (3x4).
Thus, each ratio is multiplied with the ratio (1) that will make their denominator 12.
Thus [2/3 x 4/4]= 8/12 – [1/4 x 3/3 ] = 8/12 – 3/12 = 5/12.
x Partners relinquish a share to a new partner according to their previous profit-sharing

ratio.
Activity 4.4
x Partners equally relinquish a share to a new partner.
Activity 4.5
Work through example 3.4 in the prescribed text book.
x Partners relinquish a share according to a ratio other than equally or according to their
previous profit-sharing ratio to the new partner.
Activity 4.6
x New profit-sharing ratio due to a retirement or death of an existing partner.
Activity 4.7
x New profit-sharing ratio due to admission of a new partner and retirement of a partner.
Activity 4.8
71
4.5 Recording a change in ownership structure by way of a
personal transaction
Make sure that you know what is meant by a personal transaction, and that no valuation
adjustments or goodwill acquired are recorded when a change in the ownership structure of
a partnership takes place by way of a personal transaction. Take note of the entries that are
recorded under these circumstances.
Activity 4.9
Work through examples 3.8 and 3.9 in the prescribed textbook.
4.6 Recording a change in ownership structure by way of a

transaction with the partnership
In paragraph 3.6 in the prescribed textbook two accounting procedures according to which a
change in the ownership structure of a partnership can be accomplished, are discussed. The
different procedures are based on two distinct perspectives, namely the legal and the going-
concern perspective. The legal perspective is discussed in paragraph 3.6.1 in the prescribed
textbook and must be studied thoroughly. The going concern perspective discussed in
paragraph 3.6.2, falls outside the scope of this module and can be ignored.
Remember the steps.
Accounting entries to be made in the books of the existing partnership:
x Close of the books of the existing partnership. (This includes doing the necessary year
end adjustments, the closing off of nominal accounts and the closing off of drawings
accounts to current accounts and was dealt with comprehensively in learning unit 3.) All
that remains will be accounts that must be disclosed in the statement of financial position
and if required, a preliminary statement of financial position can be constructed. You will
see that in most questions the closing adjustments have been dealt with and only entries
affecting the change in the degree of control will have to be made.
x Close of the balances of current accounts of the existing partners to their respective
capital accounts.
x If a revaluation surplus existed, it forms part of the equity of the partners and must be
allocated to the capital accounts of the existing partners in their existing profit-sharing
ratio.
x Record any valuation adjustments (refer to section 4.2) of existing assets and liabilities in
a valuation account.
72
x Record goodwill initially acquired (refer to section 4.3). Remember the formula to calculate
if an incoming partner paid for goodwill that must be captured. Example 3.10 – 3.11 will
assist you in this regard.
x Record the dissolution of the partnership. We make use of a transferral account to close
of the accounting records of the existing partnership and open the accounting records of
the new partnership.
Accounting entries to be made in the books of the new partnership:
x Record the formation of the new partnership.

x Adjust the capital account balances if required by the partners in the new partnership.
Example 3.10 and 3.11 deal with these entries.
Activity 4.10
Work through example 3.10 – 3.12 in the prescribed textbook. Make sure you understand
each step and remember how to calculate the new profit-sharing ratio.
Study paragraph 3.8 in the prescribed textbook. Remember that only the legal
perspective has been dealt with and needs to be studied.
73
EXERCISE 4.1 – Recording valuation adjustments in the books of an existing

partnership
Work through the exercise, taking note of how valuation adjustments are recorded in the
books of an existing partnership in preparation of its change in ownership structure.
Stevie and Bob are in a partnership, Wonder Traders, and they share profits and losses in the
ratio of 3:2 respectively. They decided to admit Tina as a partner as from 1 March 20.15 the
profit-sharing ratio for Stevie, Bob and Tina will be 3:2:1 respectively. The following
information appeared in the accounting records of Wonder Traders, immediately prior to the
recording of any valuation adjustments:
WONDER TRADERS
R
Land and buildings .......................................................................................... 30 000
Trade receivables control ................................................................................ 26 000
Inventory ......................................................................................................... 44 000
Bank (Dr)......................................................................................................... 20 000
Capital: Stevie ................................................................................................. 60 000
Capital: Bob..................................................................................................... 40 000
Trade payables control.................................................................................... 20 000
To prepare for the change in the ownership structure of Wonder Traders, the following
agreement was reached on 28 February 20.15:
1. An allowance of R2 600 must be created for credit losses.

2. Inventory must be recorded at R50 000.
3. Land and buildings must be recorded at R50 000.
REQUIRED
Prepare the following accounts, properly balanced or closed off, in the general ledger of
Wonder Traders to record the valuation adjustments on 28 February 20.15:
x Land and buildings

x Inventory
x Trade receivables control and allowance for credit losses
x Valuation account
x Capital: Stevie
x Capital: Bob
74
SOLUTION 4.1
WONDER TRADERS
GENERAL LEDGER
Dr Land and buildings Cr

20.15 R
Feb 28 Balance b/d 30 000
Valuation account 20 000
R(50 000 – 30 000)
50 000
Dr Inventory Cr
20.15 R
R(50 000 – 44 000)
50 000
Dr Trade receivables control Cr

20.15 R
Dr Allowance for credit losses Cr

20.15 R
Feb 28 Valuation account 2 600
Dr Valuation account Cr
20.15 R 20.15 R
Feb 28 Allowance for credit Feb 28 Land and buildings 20 000
losses 2 600 Inventory 6 000
Capital: Stevie (3/5) 14 040
Capital: Bob (2/5) 9 360
26 000 26 000
Dr Capital: Stevie Cr
20.15 R
74 040
Dr Capital: Bob Cr
20.15 R
49 360
75
EXERCISE 4.2 – Recording a change in the ownership structure of a partnership by
applying the accounting procedure which is based on the legal perspective
Mahatma and Lerato were trading as The House Care Specialists and they shared
profits/losses equally. They decided to admit Enoch as a partner from 1 July 20.15 and to
trade as Home Care and Butler Services. Enoch had to deposit a capital sum of R6 500 into
the partnership’s bank account for a 1/3 share in the net assets (equity) of the new partnership.
The partners will share in the profits/losses equally and the capital accounts’ ratio of the
partners must be in the same ratio as their profit-sharing ratio. On 1 July 20.15, Enoch
deposited R6 500 into the bank account of the partnership and in order to ensure that the
capital ratio of the partnership is in the same ratio as his profit-sharing ratio, a cash repayment
to Mahatma and a cash contribution received from Lerato were recorded in their capital
accounts.
On 30 June 20.15 the books of The House Care Specialists were closed off. At that date the
following items appeared in the preliminary statement of financial position of the partnership
and the assets of The House Care Specialists were valued in preparation of the change in its
ownership structure:
Items in the preliminary statement of financial position and valued amounts:

Statement
of Valued
Item
financial amounts
position
R R
Capital: Mahatma ............................................................................. 4 200
Capital: Lerato .................................................................................. 3 200
Current account: Mahatma (Dr) ....................................................... 100
Current account: Lerato (Cr) ............................................................ 200
Revaluation surplus.......................................................................... 1 000
Land and buildings ........................................................................... 4 500 7 500
Goodwill Nil 2 100
Inventory: Cleaning materials .......................................................... 1 500 1 200
Trade receivables control................................................................. 2 000 2 000
Bank (favourable)............................................................................. 500 500
Allowance for credit losses............................................................... Nil 300
REQUIRED
a) Prepare the journal entries on 30 June 20.15 in the general journal of The House Care
Specialists to prepare for the admission of Enoch as a partner and to record the
dissolution of the partnership. (Apply steps 2 to 6 of the accounting procedure based
on the legal perspective.)
b) Prepare the journal entries on 1 July 20.15 in the general journal of Home Care and
Butler Services to record its formation and to give effect to the decisions which pertain
to the accounting policy and/or the partnership agreement. (Apply steps 7 to 9 of the
accounting procedure based on the legal perspective.)
c) Prepare the statement of financial position of Home Care and Butler Services as at
1 July 20.15 according to the requirements of IFRS appropriate to the business of the
partnership. Notes and comparative figures are not required.
76
SOLUTION 4.2
a) THE HOUSE CARE SPECIALISTS

GENERAL JOURNAL
Debit Credit
R R
20.15
June 30 Capital: Mahatma 100
Current account: Lerato 200
Current account: Mahatma 100
Capital account: Lerato 200
Closing off the balances of the current accounts of Mahatma
and Lerato
Revaluation surplus 1 000
Capital: Mahatma (R1 000 x ½) 500
Capital: Lerato 500
Revaluation surplus apportioned to the capital accounts of
Mahatma and Lerato according to their profit-sharing ratio
Land and buildings R(7 500 – 4 500) 3 000
Inventory: Cleaning materials R(1 500 – 1 200) 300
Valuation account (balancing amount) 2 400
Recording the valuation adjustments
Capital: Mahatma (R2 400 x ½) 1 200
Capital: Lerato (R2 400 x ½) 1 200
Closing off the balance amount of the valuation account to the
capital accounts of Mahatma and Lerato according to their
profit-sharing ratio
Goodwill 2 100
Capital: Mahatma (R2 100 x ½) 1 050
Capital: Lerato (R2 100 x ½) 1 050
Recording goodwill in preparation for the admission of Enoch
Transferral account 13 300
Land and buildings 7 500
Goodwill 2 100
Inventory: Cleaning materials 1 200
Trade receivables control 2 000
Bank 500
Closing off the balances of the assets accounts to the
transferral account to record the dissolution of the partnership
Capital: Mahatma 6 850
Capital: Lerato 6 150
Transferral account 13 300
Closing off the balances of the equity and allowance accounts
to the transferral account to record the dissolution
77
Calculation
c Capital account balances of partners

Mahatma: R(4 200 – 100 + 500 + 1 200 + 1 050) = R6 850
Lerato: R(3 200 + 200 + 500 + 1 200 + 1 050) = R6 150
b) HOME CARE AND BUTLER SERVICES

GENERAL JOURNAL
Debit Credit
R R
20.15
July 1 Land and buildings R7 500 x (R6 850 ÷ R13 000) 3 952
Goodwill R2 100 x (R6 850 ÷ R13 000) 1 107
Inventory: Cleaning materials R1 200 x (R6 850 ÷ R13 000) 632
Trade receivables control R2 000 x (R6 850 ÷ R13 000) 1 054
Bank R500 x (R6 850 ÷ R13 000) 263
Allowance for credit losses R300 x (R6 850 ÷ R13 000) 158
Capital: Mahatma c 6 850
Recording the capital contribution of Mahatma
Land and buildings R7 500 x (R6 150 ÷ R13 000) 3 548
Goodwill R2 100 x (R6 150 ÷ R13 000) 993
Inventory: Cleaning materials R1 200 x (R6 150 ÷ R13 000) 568
Trade receivables control R2 000 x (R6 150 ÷ R13 000) 946
Bank R500 x (R6 150 ÷ R13 000) 237
Allowance for credit losses R300 x (R6 150 ÷ R13 000) 142
Capital: Lerato c 6 150
Recording the capital contribution of Lerato
Bank 6 500
Capital: Enoch 6 500
Recording the capital contribution of Enoch
Capital: Mahatma 350
Bank 350
Recording the cash repayment to Mahatma so as to bring the
capital account ratio in the same ratio as the profit-sharing
ratio
Bank 350
Capital: Lerato 350
Recording the cash contribution of Lerato so as to bring the
capital account ratio in the same ratio as the profit-sharing
ratio
78
Calculation
c Adjustment of capital account balances of Mahatma and Lerato

Calculation of capital account balances according to profit-sharing ratio:
Capital: Mahatma R19 500* x 1/3 = R6 500
Capital: Lerato R19 500* x 1/3 = R6 500
Capital: Enoch R19 500* x 1/3 = R6 500
* Total amount of capital in the new partnership
R(6 850 + 6 150 + 6 500) = R19 500
OR
Enoch’s capital contribution multiplied by the inverse of his share in the net assets of
the new partnership (R6 500 x 3) = R19 500
Difference between recorded and calculated capital account balances:

Calculated capital
Recorded capital account balance
Difference
account balance according to profit-
sharing ratio
R R R
Mahatma c 6 850 6 500 350
Lerato c 6 150 6 500 (350)
Enoch c 6 500 6 500 –
The recorded capital account balance of Mahatma is greater than his calculated capital
account balance. Mahatma’s capital account balance must be reduced by R350. The
recorded capital account balance of Lerato is smaller than her calculated capital account
balance; therefore, Lerato has to increase her capital contribution by R350.
c) HOME CARE AND BUTLER SERVICES

STATEMENT OF FINANCIAL PROSITION AS AT 1 JULY 20.15
Note R
ASSETS
Property, plant and equipment R(3 952 + 3 548) 7 500
Goodwill R(1 107 + 993) 2 100
Inventories R(632 + 568) 1 200
Trade receivables R(1 054 + 946 – 158 – 142 ) 1 700
Cash and cash equivalents R(263 + 237 + 6 500 – 350 + 350) 7 000
Total assets 19 500
Total equity 19 500
Capital R(6 850 + 6 150 + 6 500 – 350 + 350) 19 500
79
EXERCISE 4.3 – Preparation of partner’s capital accounts and valuation account in
preparation of the change in the ownership structure of a partnership
Work through the exercise taking note of the following:

x When goodwill is created, it is not recorded in the valuation account,
x When the legal perspective is applied, the valuation and capital accounts are closed
off to the transferral account.
x The retired partner’s capital account is closed-off to a loan account on the last date of
the existing partnership if the capital account was not settled by the partnership.
Kally, Rocky and Mike are in a partnership, trading as Fighting Fists, and share profits or losses
in the ratio of 2:2:1 respectively. Kally decided to retire from the partnership. His last day as a
partner in the partnership will be 31 May 20.15, which is also the financial year end of Fighting
Fists. The new partnership will pay out Kally’s capital in cash on 30 November 20.15. Rocky
and Mike decided to admit Gerrie as a partner as from 1 June 20.15. The new partnership will
trade as Fighting Fit. The profit-sharing ratio between Rocky, Mike and Gerrie will be 3:2:1
respectively. Gerrie will contribute R80 000 in cash for a 1/6 share in the equity (net assets) of
the new partnership.
The following information is taken from the accounting records of Fighting Fists at 31 May
20.15, immediately prior to the recording of valuation adjustments in preparation of the change
in the ownership structure of the partnership:
List of balances as at 31 May 20.15

R
Capital: Kally ................................................................................................ 56 000
Capital: Rocky .............................................................................................. 74 000
Capital: Mike ................................................................................................ 38 000
Land and buildings ....................................................................................... 80 000
Inventory 48 000
Trade receivables control ............................................................................. 36 000
Trade payables control................................................................................. 14 000
Bank (favourable) ......................................................................................... 18 000
1. To prepare for the change in the ownership structure of Fighting Fists, the following
agreement was reached on 31 May 20.15:
1.1 Goodwill must be recorded in the books.
1.2 An allowance for credit losses must be created at R3 600.
1.3 Inventories must be valued at R60 000.
1.4 Land and buildings must be valued at R140 000.
2. The change in the ownership structure of the partnership is viewed from a legal
perspective.
REQUIRED
Prepare the valuation account and the capital accounts of Kally, Rocky and Mike (properly
closed off) in the general ledger of Fighting Fists at 31 May 20.15.
80
SOLUTION 4.3
FIGHTING FISTS
GENERAL LEDGER
Dr Valuation account Cr
20.15 R 20.15 R
May 31 Allowance for credit May 31 Land and buildings 60 000
Losses 3 600 R(140 000 – 80 000)
Capital: Kally ߇ 27 360 Inventory 12 000
Capital: Rocky ߇ 27 360 R(60 000 – 48 000)
Capital: Mike ߇ 13 680
72 000 72 000
Dr Capital: Kally Cr
20.15 R 20.15 R
May 31 Loan: Kally 182 144 May 31 Balance b/d 56 000
Goodwill ߈ 98 784
182 144 182 144
Dr Capital: Rocky Cr
20.15 R 20.15 R
May 31 Transferral account 200 144 May 31 Balance b/d 74 000
Goodwill ߈ 98 784
200 144 200 144
Dr Capital: Mike Cr
20.15 R 20.15 R
May 31 Transferral account 101 072 May 31 Balance b/d 38 000
Goodwill ߈ 49 392
101 072 101 072
Dr Loan: Kally Cr
20.15 20.15 R
May 31 Transferral account 182 144 May 31 Capital: Kally 182 144
182 144 182 144
81
Comment
The loan account of Kally was not required, and is shown for illustration purposes.
Calculations

߇ Apportionment of the balance of the valuation account to the capital account of
the partners of the existing partnership
Balance of valuation account to be apportioned: R(72 000 – 3 600) = R68 400
Kally: R68 400 x 2/5 = R27 360
Rocky: R68 400 x 2/5 = R27 360
Mike: R68 400 x 1/5 = R13 680

߈ Goodwill
Goodwill acquired = (Capital contribution of new partner multiplied by inverse of new
partner’s share in the equity [net assets] of new partnership) – Equity of new partnership
= (R80 000 x 6/1) – R(101 360* + 51 680* + 80 000)
= R(480 000 – 233 040)
= R246 960
* Balances of capital accounts
Rocky = Opening balance + apportionment of profit of valuation account
= R(74 000 + 27 360)
= R101 360
Mike = Opening balance + apportionment of profit of valuation account
= R(38 000 + 13 680)
= R51 680
Note that the capital account balance of Kally is excluded from the calculation of
goodwill, because Kally will not be a partner in the new partnership. A portion of the goodwill
is, however, credited in the capital account of Kally (as he is a partner of the existing
partnership Fighting Fists) and hence attributed to the creation of the goodwill.
Kally: R246 960 x 2/5 = R98 784
Rocky: R246 960 x 2/5 = R98 784
Mike: R246 960 x 1/5 = R49 392
82
Self-assessment
Yes No
Briefly describe what a change in the ownership structure of a partnership

entails.
Mention events that cause a change in the ownership structure of a

partnership.
Calculate the new profit sharing ratio of a partnership.
Record a change in the ownership structure of a partnership by way of

transaction with the partnership as a business entity by applying the
accounting procedure which is based on the legal perspective.
If an accounting procedure is based on the legal perspective, prepare a

statement of financial position of a new partnership at the date of its
formation according to the requirements of IFRS appropriate to the
business of the partnership.
83
84
LEARNING UNIT 5
5
The liquidation of a partnership
Key concepts .....................................................................................................................86
5.1 Introduction ...............................................................................................................87
5.2 Liquidation methods..................................................................................................87
5.3 The liquidation account .............................................................................................88
5.4 Accounting procedures to record the simultaneous liquidation of a partnership ........88
5.5 Accounting procedures to record the piecemeal liquidation of a partnership .............90
Self-assessment ................................................................................................................99
85
Learning outcomes
After studying this learning unit you should be able to:
x describe the meaning of the term “liquidation” from the perspective of this learning unit
x distinguish between a simultaneous liquidation and a piecemeal liquidation
x apply the accounting procedure in the case of a simultaneous liquidation of a partnership
with
- a profit on liquidation
- a loss on liquidation, where all of the partners have sufficient personal funds to
cover the shortage in their capital account
- with a loss on liquidation, where one or more of the partners do not have sufficient
personal funds to cover the shortfalls in their capital accounts and where the capital
deficit must be apportioned to the remaining solvent partners according to their profit-
sharing ratio
x apply the accounting procedure in the case of a piecemeal liquidation of a partnership
and calculate the interim repayment of available cash between partners according to the
loss-absorption-capacity method
Key concepts
x Dissolution
x Liquidation
x Liquidation account
x Simultaneous liquidation
x Piecemeal liquidation
x Loss-absorption-capacity method
86
5.1 Introduction
The liquidation of a partnership is regarded as a form of dissolution which results in the
termination of the business activities of solvent partnerships, whereas a sequestration is
regarded as a form of dissolution of insolvent partnerships. The accounting procedures that
pertain to sequestrations fall beyond the scope of this module. The liquidation of a partnership
basically implies that the assets of the partnership must be converted into cash, the liabilities
must be settled and the remaining cash must be paid to the partners in an attempt to refund
their capital accounts.
Read the overview and paragraph 4.1 in the prescribed textbook.
Activity 5.1
Name the two methods according to which a partnership can be liquidated.
Feedback 5.1
A partnership can be liquidated simultaneously or piecemeal.
5.2 Liquidation methods
Ensure that you can explain the difference between a piecemeal liquidation and a
simultaneous liquidation of a partnership.
Activity 5.2
a) A simultaneous liquidation will ensure that assets are realised at their most
advantageous prices.
True or False?
b) A simultaneous liquidation allows a partnership to continue with its business activities

but on a decreasing scale.
True or False?
Feedback 5.2
a) False.
A piecemeal liquidation will ensure that assets are realised at the best possible selling
price.
b) False.
A piecemeal liquidation allows a partnership to continue with activities.
87
5.3 The liquidation account
With a simultaneous liquidation a single liquidation account is prepared. Can you explain why?
Refer back to paragraph 4.3 if you are unsure of the answer.
In the case of a simultaneous liquidation, realise that both methods explained in paragraph
4.3 are correct and eventually will result in the same net result. For the sake of clarity, method
1 is followed in this learning unit. All assets and contra-assets and all liabilities are transferred
to a liquidation account on the date the liquidation commences. The liquidation of the assets
and the settlement of the liabilities are then recorded in the liquidation account. Any other
expenses or income received on liquidation of the assets and settlement of the liabilities is
also recorded in the liquidation account and the balance of the liquidation account (a profit or
loss on liquidation) is transferred to the partners’ capital accounts in their profit-sharing ratio.
After recording the amounts received/paid in the bank account (the cash received from selling
the assets and cash paid towards settling the liabilities), a positive bank balance can be used
to refund the partners’ capital accounts.
In the case of a piecemeal liquidation, a liquidation account is prepared for each phase of the
liquidation process. Remember the partnership carries on with its activities on a decreasing
scale. Again the profit/loss determined in the liquidation account in each phase is closed off
to the partners’ capital accounts according to their profit-sharing ratio.
5.4 Accounting procedure to record the simultaneous liquidation

of a partnership
As suggested in the textbook, following the mentioned steps will assist you to record the
simultaneous liquidation. The steps are:
x Close off the balances of the drawings and current accounts to the capital accounts on
the date the simultaneous liquidation commences.
x Close off the balances of the goodwill and revaluation surplus account to the partners’
capital accounts according to their profit-sharing ratio.
x Prepare the liquidation account. Make sure that you understand how to prepare a
liquidation account. It is explained in detail in paragraph 4.4 again.
x Record the once-off settlement of the capital accounts of the partners. Note that after
recording the liquidating transactions, the capital accounts of the partners may not
necessarily be in their profit-sharing ratio due to agreed assets/liabilities taken over by
the partners and the current and drawings accounts not being in the profit-sharing ratio
etc.
88
Activity 5.3
Work through example 4.1 in the prescribed textbook which illustrates the accounting process
when a profit is made on a simultaneous liquidation.
Activity 5.4
Work through example 4.2 which illustrates the accounting process when a loss is made on a
simultaneous liquidation and partners with a deficit on their capital accounts are able to refund
the deficit to the partnership.
Please note that the capital account of a partner can in some instances end up with a debit
balance. As long as the partner is technically solvent, he/she will have to refund the debit
balance from his/her personal funds or obtaining a loan in his/her personal capacity. Should
the partner be insolvent, and unable to settle the deficit (debit balance on the capital account),
the remaining solvent partners will have to bear the deficit.
Study paragraph 4.4.2 in the prescribed textbook. Make sure you understand
the Garner versus Murray rule and how this textbook interprets it.
Please note that in this learning unit and chapter of the textbook, the last agreed capitals, are
interpreted as the balances on the capital accounts immediately prior to the liquidation, but
after drawings accounts, current accounts, goodwill and revaluations have been transferred
to the partners’ capital accounts.
Activity 5.5
Work through example 4.3 in the prescribed textbook where the partnership made a loss on
liquidation and some partners do not have sufficient personal funds to cover the deficit on their
capital accounts.
Please note in solution a) how the ratio of the capital accounts of Pascoe and Cannon before
the liquidation is calculated when applying the Garner versus Murray rule.
Pascoe = R73 000 (see the calculation in the prescribed textbook)
Cannon = R49 500 (see the calculation in the prescribed textbook)
Thus R(73 000/122 500) = 60% (rounded) and R(49 500/122 500) = 40% (rounded)
The ratio 60:40 = 3:2
In solution b) the Garner versus Murray rule is not applied and the deficit is borne in the profit-
sharing ratio of the remaining solvent partners, who share profits equally; the remaining bank
balance is used to refund the solvent partners.
89
5.5 Accounting procedure to record the piecemeal liquidation of a
partnership
Study paragraph 4.5 in the prescribed textbook. Take note that the calculation
of interim repayments by applying the surplus capital method does NOT form
part of the syllabus.
As suggested in the textbook, following the mentioned steps will assist you to record a
piecemeal liquidation. The steps are similar to the simultaneous liquidation and are as follows:
x Close off the balances of the drawings and current accounts to the capital accounts on
the date the piecemeal liquidation commences.
x Close off the balances of the goodwill and revaluation surplus account to the partners’
capital accounts according to their profit-sharing ratio.
x Record the payment of expenses, the settlement of debts, the liquidation of assets,
any further income and the interim repayments, as they arise. Note that two methods
can be used to calculate interim repayments, namely the surplus-capital and the loss-
absorption-capacity methods. However, only the latter is prescribed in this learning
unit.
x Record the settlement (final repayment) of the capital accounts of the partners.
Apply the loss-absorption-capacity method (in step 3). Steps A to D in the prescribed textbook
must be applied:
Step A: Determine the general ledger account balances in the partnerships’ books
on the date that cash becomes available for interim payments.
Step B: Debit any contingent/budgeted expenses in the partners’ capital accounts

according to their profit-sharing ratio. Credit Bank.
Step C: Close off all unsold assets to the capital accounts according to the profit-
sharing ratio. We assume the unsold assets have no recoverable amount.
Step D: Close off any anticipated capital deficit to the capital accounts of the partners
who have favourable anticipated capital balances according to their profit-
sharing ratio.
Note that steps B to D are not recorded in the books of the partnership – only the
interim repayments are recorded.
Activity 5.6
Work through example 4.6 in the prescribed textbook which illustrates the calculation of interim
repayments according to the loss-absorption-capacity method.
90
Activity 5.7
Work through example 4.7 which is a comprehensive example that illustrates the piecemeal
liquidation of a partnership. You will benefit most from this example if you follow each step as
illustrated and draw up your own accounts to follow the process. The table just after (m)
illustrates the piecemeal liquidation without physically using general ledger accounts. Make
sure that you understand how to draw up such a table to account for the piecemeal liquidation.
Read paragraph 4.6 which, summarises the chapter. Ignore the section on the
surplus-capital method.

EXERCISE 5.1 – Simultaneous liquidation
Penn and Penzil were in partnership for 38 years, trading as Manual Accounting Services and
shared profits or losses equally. Owing to a steady decline in their clientele and profits, they
decided to liquidate the partnership at a public auction on 30 June 20.15. On this date and
just prior to the auction, the following trial balance for Manual Accounting Services was
prepared:
MANUAL ACCOUNTING SERVICES

TRIAL BALANCE AS AT 30 JUNE 20.15
Debit Credit
R R
Land and buildings at valuation 500 000
Furniture at cost 102 000
Vehicles at cost 215 000
Accumulated depreciation: Furniture 20 000
Accumulated depreciation: Vehicles 15 000
Goodwill 120 000
Inventory 45 000
Allowance for credit losses 7 000
Capital: Penn 150 000
Capital: Penzil 80 000
Current account: Penn 30 000
Current account: Penzil 10 000
Mortgage (in respect of land and buildings) 300 000
1 087 000 1 087 000
91
On 30 June 20.15, the following transactions took place:
1. The land and buildings were sold for R849 500 cash.
2. The furniture was sold for R60 200 cash.
3. The inventory was sold for R50 050 cash.
4. All the debtors (as recorded in the above trial balance) settled their accounts and
received a discount of 20%.
5. A previous client, whose outstanding debtor’s account of R650 was written off as
irrecoverable, paid R500 to the partnership.
6. There were two vehicles in the partnership. Penn took over one of these vehicles at a
fair value of R60 000 and Penzil took over the other at its fair value of R70 000.
7. The liquidation costs amounted to R10 000 and were paid.
8. The mortgage was paid in full.
9. All creditors were paid. A settlement discount of R29 000 was received.
10. Penzil paid R250 for a farewell luncheon out of the funds of the partnership.
REQUIRED
Prepare the liquidation account, the bank account, and the partners’ capital accounts in the
general ledger of Manual Accounting Services in order to record its liquidation on
30 June 20.15.
NB: Show all calculations.
SOLUTION 5.1
Dr Liquidation account Cr
20.15 R 20.15 R
Jun 30 Jun 30
Land and buildings at valuation 500 000 Accumulated depreciation:
Furniture at cost 102 000 Furniture 20 000
Vehicles at cost 215 000 Accumulated depreciation:
Inventory 45 000 Vehicles 15 000
Trade receivables control 75 000 Mortgage 300 000
Bank (Liquidation costs) 10 000 Trade payables control 145 000
Bank (Mortgage) 300 000 Allowance for credit losses 7 000
Bank (Trade payables control) 116 000 Bank (land and buildings) 849 500
R(145 000 – 29 000) Bank (Furniture) 60 200
Bank (Luncheon) 250 Bank (Inventory) 50 050
Capital: Penn ߈ 137 000 Bank(Trade receivables
Capital: Penzil ߈ 137 000 control)߇ 60 000
Bank (Credit losses recovered) 500
Capital: Penn (Vehicle) 60 000
Capital: Penzil (Vehicle) 70 000
1 637 250 1 637 250
92
Calculations

߇ Cash received from debtors
Discount = R75 000 x 20% = R15 000
Cash received = R(75 000 – 15 000) = R60 000
߈ Apportioned of profit made on liquidation

R(1 637 250ᬚ - 1 363 250ᬛ) = R274 000ᬜ
Penn: R274 000 x ½ = R137 000
Penzil: R274 000 x ½ = R137 000
ᬚ The total of the credit side.
ᬛ The total of the debit side before the apportionment of the profit.
ᬜ The balancing amount that must be apportioned to the partners according to their
profit-sharing ratio.
Dr Bank Cr
20.15 R 20.15 R
Jun 30 Liquidation account: 849 500 Jun 30 Balance b/d 90 000
(Land and buildings) Liquidation account: 10 000
Liquidation account: 60 200 (Liquidation costs)
(Furniture) Liquidation account: 300 000
Liquidation account: 50 050 (Mortgage)
(Inventory) Liquidation account: 116 000
Liquidation account: 60 000 (Trade payables control)
(Trade receivables Liquidation account: 250
control) (Luncheon)
Liquidation account: 500 Capital: Penn* 272 000
(Credit losses recovered) Capital: Penzil* 232 000
1 020 250 1 020 250
* The settlement of the outstanding balances on the capital accounts of Penn and Penzil. The capital accounts
must first be prepared in order to determine these balances. Note how the balance of the bank account (prior
to this settlement) is equal to the sum of the outstanding capital account balances (R272 000 + R232 000 =
R504 000).
Dr Capital: Penn Cr
20.15 R 20.15 R
Jun 30 Current account: Penn 30 000 Jun 30 Balance b/d 150 000
Liquidation account: 60 000 Revaluation surplus 135 000
(Vehicles) (R270 000 x ½)
Goodwill (R120 000 x ½) 60 000 Liquidation account 137 000
Bank* 272 000
422 000 422 000
* Balancing amount (outstanding balance)
93
Dr Capital: Cr
20.15 20.15 R
Jun 30 Liquidation account: 70 000 Jun 30 Balance b/d 80 000
(Vehicles) Current account: Penzil 10 000
Goodwill (R120 000 x ½) 60 000 Revaluation surplus 135 000
Bank* 232 000 (R270 000 x ½)
Liquidation account 137 000
362 000 362 000
* Balancing amount (outstanding balance)
Note that the remaining cash after liquidation is not apportioned to the capital accounts of the
partners according to their profit-sharing ratio but according to their outstanding capital
account balances.
EXERCISE 5.2 - Piecemeal liquidation: Calculation of interim repayment according to

the loss-absorption-capacity method
Sauce, Age and Roll are in a partnership, sharing the profits or losses in the ratio of 5:3:2
respectively. The following information is taken from the accounting records of the partnership
at 31 December 20.14:
R
Capital: Sauce.......................................................................................... 7 000
Capital: Age ............................................................................................. 14 000
Capital: Roll.............................................................................................. 18 000
Equipment at carrying amount.................................................................. 42 000
Goodwill ................................................................................................... 3 000
Bank......................................................................................................... 5 000
The partners decided to liquidate the partnership piecemeal as from 1 January 20.15. The
net proceeds will be apportioned amongst the partners in such a way that no partner will find
it necessary to repay any amount, which was previously received.
Liquidation of assets Carrying amount Proceeds

R R
1 February 20.15 13 000 9 000
2 July 20.15 29 000 33 000
REQUIRED
a) Calculate the amount of cash that is available for an interim repayment after the first
liquidation of the assets and the settlement of the liabilities on 1 February 20.15.
b) Calculate how the cash as determined in (a) must be repaid to the partners by applying
the loss-absorption-capacity method. Show all calculations in a columnar format.
94
SOLUTION 5.2
a) Cash available for interim repayment

Bank = Opening balance + Cash sales – Payment of liabilities
Bank = R(5 000 + 9 000 – 11 000)
Bank = R3 000
b) Interim cash repayment (loss-absorption-capacity method)

Equip- Capital: Capital: Capital:
Step* Bank
ment Sauce Age Roll
R R R R R
A 3 000 29 000 (3 500) (11 900) (16 600)
C (29 000) ߉14 500 ߉8 700 ߉5 800
3 000 – 11 000 (3 200) (10 800)
D (11 000) ߊ6 600 ߊ4 400
3 000 – – 3 400 (6 400)
D (3 400) 3 400
3 000 – (3 000)
* The steps, as discussed in paragraph 4.5.2 in the prescribed textbook, are shown for illustrative
purposes only.
Comment
Since the anticipated capital accounts of Sauce and Age show deficits, the amount of
available cash (namely R3 000) must be paid solely to Roll. Note that the amount of available
cash is equal to the amount that must be paid to Roll.
Calculations
Balances immediately prior to first interim repayment

SAUCE, AGE AND ROLL
GENERAL LEDGER (SUMMARISED IN COLUMNAR FORMAT)
Equip- Trade Capital: Capital: Capital:
Bank
Transactions ment payables Sauce Age Roll
R R R R R R
Balances at 31 Dec 20.14 5 000 42 000 (11 000) ߇ (5 500) ߇ (13 100) ߇(17 400)
Sale of assets and
allocation of loss
(1 February 20.15) 9 000 (13 000) ߈2 000 ߈1 200 ߈800
Payment of creditors (11 000) 11 000
3 000 29 000 – (3 500) (11 900) (16 600)

߇ Capital account balances after apportionment of the goodwill:
Sauce: R 7 000 – R(3 000 x 5/10) = R 5 500
Age: R14 000 – R(3 000 x 3/10) = R13 100
Roll: R18 000 – R(3 000 x 2/10) = R17 400

߈ Allocation of loss on first liquidation
R
Proceeds (selling price) 9 000
Carrying amount (13 000)
Loss on liquidation (4 000)
95
Sauce: R(4 000 x 5/10) = R2 000

Age: R(4 000 x 3/10) = R1 200
Roll: R(4 000 x 2/10) = R 800
߉ Apportionment of the anticipated loss as result of the remaining equipment

being assumed as worthless
Sauce: R(29 000 x 5/10) = R14 500
Age: R(29 000 x 3/10) = R 8 700
Roll: R(29 000 x 2/10) = R 5 800

ߊ Apportionment of the anticipated capital deficit of Sauce, who must be assumed
insolvent, to Age and Roll
Age: R(11 000 x 3/5) = R 6 600
Roll: R(11 000 x 2/5) = R 4 400
EXERCISE 5.3- Recording piecemeal liquidation transactions in columnar format (loss-

absorption-capacity method)
Patrys, Pine and Promise are in partnership, trading as African Timber and sharing in the
profits or losses in the ratio of 5:3:2 respectively. The following information regarding the
statement of financial position in respect of the partnership was prepared at 30 June 20.15:
AFRICAN TIMBER
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.15
R
Property, plant and equipment 18 000
Capital: Patrys 8 000
Capital: Pine 5 000
Capital: Promise 2 000
Due to increasing liquidity problems the partners decided to liquidate the partnership
piecemeal as from 1 July 20.15. As soon cash becomes available from the liquidation of
assets, it must be paid to the partners in such a manner that no partner will have to refund
money to the partnership at a later stage.
96
The property, plant and equipment were liquidated as follows:
Carrying amount Cash received
R R
First liquidation 2 500 2 500
Second liquidation 5 600 5 000
Third liquidation 6 000 6 000
Fourth liquidation 3 900 4 000
REQUIRED
Record the liquidation of African Timber in columnar format. Use the format as outlined
below. Disclose the credit balances and the credit entries in brackets. Apply the loss-
absorption-capacity method to calculate the interim repayments to the partners.
REQUIRED FORMAT
Property,
Trade Capital: Capital: Capital:
Transaction Bank plant and
payables Patrys Pine Promise
equipment
R R R R R R
SOLUTION 5.3
AFRICAN TIMBER
GENERAL LEDGER (SUMMARISED IN COLUMNAR FORMAT)
Property,
Trade Capital: Capital: Capital:
Transaction Bank plant and
payables Patrys Pine Promise
equipment
R R R R R R
Balances at 1 July 20.15 – (3 000) 18 000 (8 000) (5 000) (2 000)
Sale of assets
(1st liquidation) 2 500 (2 500)
Payment of creditors (2 500) 2 500
Sale of assets
(2nd liquidation) 5 000 (5 600) ߇300 ߇180 ߇120
Payment of creditors (500) 500
4 500 – 9 900 (7 700) (4 820) (1 880)
1st Interim repayment (4 500) ߇2 688 ߇1 812
– 9 900 (5 012) (3 008) (1 880)
Sale of assets
(3rd liquidation) 6 000 (6 000)
6 000 3 900 (5 012) (3 008) (1 880)
2nd Interim repayment (6 000) ߉3 062 ߉1 838 ߉1 100
– – 3 900 ߊ (1 950) ߊ (1 170) ߊ (780)
Sale of assets
(4th liquidation) 4 000 (3 900) ߋ (50) ߋ (30) ߋ (20)
4 000 – – (2 000) (1 200) (800)
Settlement of capital
accounts (4 000) 2 000 1 200 800
97
Calculations

߇ Allocation of loss (R600)
Patrys: R600 x 5/10 = R300
Pine: R600 x 3/10 = R180
Promise: R600 x 2/10 = R120
Interim cash repayment (loss-absorption-capacity method)

Property,
Capital: Capital: Capital:
Step* Bank plant and
Patrys Pine Promise
equipment
R R R R R
A 4 500 9 900 (7 700) (4 820) (1 880)
C (9 900) ߈4 950 ߈2 970 ߈1 980
4 500 – (2 750) (1 850) 100
D ߉62 ߉38 (100)
4 500 – (2 688) (1 812) –
* The steps, as discussed in paragraph 4.5.2 in the prescribed textbook, are shown for
illustrative purposes only.
߈ Allocation of the loss as a result of the remaining property, plant and equipment
being assumed worthless
Patrys: R9 900 x 5/10 = R4 950
Pine: R9 900 x 3/10 = R2 970
Promise: R9 900 x 2/10 = R1 980
߉ Allocation of the anticipated capital deficit of Promise, who must be assumed to

be insolvent, to Patrys and Pine
Patrys: R100 x 5/8 = R62 (Rounded off to the nearest lower “rand”)
Pine: R100 x 3/8 = R38 (Rounded off to the nearest lower “rand”)
Interim cash repayment (loss-absorption-capacity method)

Property,
Capital: Capital: Capital:
Step* Bank plant and
Patrys Pine Promise
equipment
R R R R R
A 6 000 3 900 (5 012) (3 008) (1 880)
C (3 900) ߊ 1 950 ߊ 1 170 ߊ 780
6 000 – (3 062) (1 838) (1 100)
* The steps, as discussed in paragraph 4.5.2 in the prescribed textbook, are shown for illustrative
purposes only.
ߊ Allocation of the loss as a result of the remaining property, plant and equipment
being assumed worthless
Patrys: R3 900 x 5/10 = R1 950
Pine: R3 900 x 3/10 = R1 170
Promise: R3 900 x 2/10 = R 780
ߋAllocation of profit (R100)

Patrys: R100 x 5/10 = R50
Pine: R100 x 3/10 = R30
Promise: R100 x 2/10 = R20
98
Self-assessment
Yes No
Describe the meaning the term “liquidation” from the perspective of this
learning unit.
Distinguish between a simultaneous and a piecemeal liquidation.
Apply the accounting procedure in the case of a simultaneous liquidation of

a partnership with a profit or loss on liquidation.
Apply the accounting procedure in the case of a piecemeal liquidation of a

partnership, and to calculate the interim repayments of available cash
between partners according to the loss-absorption-capacity method.
99
100
LEARNING UNIT 6
6
Close corporations
Learning outcomes ..........................................................................................................102
Key concepts ...................................................................................................................102
6.1 Introduction .............................................................................................................103
6.2 Attributes of a close corporation..............................................................................103
6.3 Advantages of a close corporation ..........................................................................104
6.4 Disadvantages of a close corporation .....................................................................104
6.5 Prescribed forms of a close corporation ..................................................................104
6.6 Name and registration number of a close corporation .............................................104
6.7 Membership of a close corporation .........................................................................105
6.8 Internal relations .....................................................................................................105
6.9 External relations ....................................................................................................105
6.10 Joint liability of members and others for the debts of a close corporation................106
6.11 The tax position of a close corporation and its members.........................................106
6.12 Accounting records and financial reporting..............................................................107
6.13 Deregistration .........................................................................................................109
6.14 Exercises and solutions ..........................................................................................110
Self-Assessment ..............................................................................................................142
101
Learning outcomes
x briefly discuss the Close Corporations Act 69 of 1984 (Close Corporations Act) in
respect of matters concerning the attributes, registration, internal and external relations,
accounting records and annual financial statements, joint liability of members and others
for certain debts, the tax position of the close corporation and its members, and the
deregistration of a close corporation
x prepare the financial statements (with the exception of a statement of cash flows) of a
close corporation according to IFRS or IFRS for SMEs
Key concepts
x Close Corporations Act 69 of 1984

x Juristic person
x Unlimited existence
x Limited liability
x Member's contribution
x Member's interest
x Accounting officer
x Financial statements
x Profit distribution
x Loan to members
x Loan from members
x Retained earnings
x South African Revenue Service (SARS)
x Profit before tax
102
6.1 Introduction
Learning unit 5 concluded with the partnership as an entity form and you should now have a
clear understanding of the disadvantages of using this form of entity to conduct business.
Because of the disadvantages such as dependent corporate status and restricted capital
resources, the close corporation as a form of business entity was introduced when the Close
Corporations Act 69 of 1984 was legislated. In terms of this Act a business entity registered
as a close corporation is allowed to acquire independent corporate status and unlimited
existence (among other things).
When the Companies Act 71 of 2008 came into effect on 1 May 2011, it introduced certain
amendments that impacted on the existence of close corporations. These amendments
included amongst other things, the discontinuation of the registration of new close
corporations. Existing close corporations will however continue to exist under the Close
Corporation Act, as amended, until such time that their members decide to convert to another
form of business entity or discontinue its operations. Conversion of a private company into a
close corporation is also prohibited from 1 May 2011.
Read the overview of close corporations and paragraph 5.1 in the prescribed
textbook.
6.2 Attributes of a close corporation
Activity 6.1
Summarise the main characteristics of a close corporation as an entity form.
Feedback 6.1
x A close corporation is a legal entity which implies that it is liable to pay for obligations
and acquire assets in its own name.
x It was fairly simple to register a close corporation before the changes in the Companies
Act were introduced. You can now obtain a close corporation by buying an existing CC
which is less cumbersome than having to register a company.
x A close corporation is taxed separately from its members (as the owners of a CC are
called).
x A close corporation can have up to ten natural persons as members.
x A close corporation can enter into contracts and can be sued as a legal personality in
its own right.
103
x A close corporation continues to exist under its registered name irrespective of a
change in its membership.
x It provides its members with limited liability.
x The financial statements of a close corporation are not subject to an annual audit
(under certain conditions – see paragraph 5.12.2).
x A close corporation may give financial assistance to a person to acquire an interest in
the close corporation.
x No transfer duties are payable on the transfer of an interest of a member.
6.3 Advantages of a close corporation

Many of the advantages of a close corporation are embedded in its characteristics as
summarised in feedback 6.1.
6.4 Disadvantages of a close corporation

The disadvantages of a close corporation are discussed in detail in the prescribed textbook.
Make sure that you can name a few.
6.5 Prescribed forms of a close corporation

Prior to the implementation of the Companies Act, a close corporation was formed when the
founder member(s) filed a founding statement (CK1) with the Registrar of Close Corporations.
The use of a CK1 has since been terminated and no new close corporations can be registered.
All changes to existing close corporations are now managed by the Companies Intellectual
Property Commission (CIPC). The Commissioner, appointed in terms of section 189 of the
Companies Act, is tasked with managing all the administrative matters previously handled by
the Registrar of Close Corporations.
Read paragraph 5.5 in the prescribed textbook for a more detailed discussion.
6.6 Name and registration number of a close corporation
104
6.7 Membership of a close corporation
The Close Corporations Act sets specific requirements in respect of the number of members
that a close corporation may have and the qualifications for membership. A close corporation
may have one or more members, but at no time may the number of members exceed ten.
With certain exceptions, only a natural person can become a member of a close corporation.
Read more about the legal requirements pertaining to membership in paragraph

5.7 in the prescribed textbook.
Activity 6.2
Work through example 5.1 in the prescribed textbook. Note that in the case of a partnership,
capital is credited when a partner makes a contribution, but in the case of a close corporation,
a member’s contribution is credited.
6.8 Internal relations

The rules governing the internal relations of a close corporation pertain mainly to the fiduciary
relationship of members and their liability in the case of negligent conduct. Minimum legislative
requirements exist in respect of the managerial duties of members. The members may decide
to manage the close corporation within a more formal framework by means of a written
association agreement, which they may enter into at any time. Another important aspect that
must be taken note of is the fact that a close corporation may grant loans and provide security
to members and others only when certain legislative requirements have been met.
6.9 External relations
The rules governing the external relations of a close corporation pertain mainly to the carrying
on of its business. Each member of a close corporation has an equal right to take part in the
business of the close corporation and is considered an agent of the close corporation in
dealings with non-members.
105
6.10 Joint liability of members and others for the debts of a close
corporation
The liability of a member for the obligations of the close corporation is limited to the extent of
the member’s contribution to the close corporation.
Read paragraph 5.10 in the prescribed textbook for a more detailed discussion
on the joint liability of members and others for the debts of a close corporation.
6.11 The tax position of a close corporation and its members
Please note that we will not require you to calculate the provisional tax or the taxable income
for a financial year of a close corporation. You only have to know how provisional tax payments
are recorded and how tax matters are disclosed in the financial statements of a close
corporation. These are illustrated in the detailed examples in the study guide as well as in the
prescribed textbook. What you have to know is that if we provide you with the taxable income
and the tax rate, the current tax for the year is calculated as taxable income x tax rate.
Activity 6.3
a) Name the debit and credit entries in the accounting records of a close corporation to
account for the payment of provisional tax.
b) Name the debit and credit entriesin the accounting records of a close corporation to
account for the current tax payable by the entity.
Feedback 6.3
a) Debit SARS (income tax) and credit Bank
b) Debit Income tax expense and credit SARS (income tax).
Comment
Because the close corporation owes the South African Revenue Service (SARS) tax on
taxable profits, SARS is a creditor for the payment of current tax. Provisional tax is tax that is
paid twice a year on an estimation of what the tax liability for the year would be and therefore
reduces the creditor SARS. Also read about a voluntary third provisional tax payment that can
be made in paragraph 5.11. Once the actual tax payable is calculated at the end of the
financial period, the current tax expense is debited and the creditor SARS credited. SARS can
have a debit or credit balance at this point and it is disclosed in the statement of financial
position of the close corporation under current assets/liabilities as either current tax receivable
(debit balance) or current tax payable (credit balance).
106
6.12 Accounting records and financial reporting
As you can predict by now, the keeping of accounting records and the financial reporting in
respect of close corporations are important.
Read paragraph 5.12.1 and 5.12.2 in the prescribed textbook.
Note that the close corporations act stipulated the reports that must be prepared for a close
corporation. Make sure that you can recall those or read paragraph 5.12.1.2 again.
You should recall that for a sole proprietorship and for partnerships a statement of changes in
equity was required. In the case of a close corporation a statement disclosing the contributions
by members, the undrawn profits (retained earnings), revaluation surplus, loans from
members and loans to members (debit balance) is required. We refer to this statement as a
statement of changes in the net investment of members.
Pay specific attention to the section on the accounting officer, as many of you may in future
become the accounting officer of a close corporation.
Also note that the Companies Act Regulations applicable to close corporations state that IFRS
or IFRS for SMEs apply to every close corporation with a financial year end starting on or after
the effective date of the Act. Therefore, close corporations with a year end after 1 May 2011
(year end of 30 April 2012 and later) are required to prepare annual financial statements in
line with IFRS or IFRS for SMEs in accordance with their Public Interest Score (PIS). The
calculation of the PIS, however falls outside the scope of this learning unit. The information is
outlined in paragraph 5.12.2 in the prescribed textbook. Please take note of these important
changes. The table in section 5.12.2.6 should be a handy reference to establish which
reporting framework to apply and whether the financial statements of a close corporation must
be audited or not. In closing, note that for the purposes of this module, we assume close
corporations have a PIS of less than 100; however, the financial statements have to be
prepared in accordance with IFRS owing to the fact that this is the reporting framework that is
most widely used.
Study paragraph 5.12.3 in the prescribed textbook which deals with the
recording of a distribution of total comprehensive income as well as the
preparation of financial statements.
Make sure that you can account for a distribution of comprehensive income which is either
paid to members or is capitalised as a loan account.
Activity 6.4
S San and X Xai established a close corporation Khoi CC in 20.1 trading in gem stones mined
in the Karoo. The following balances were extracted from the financial records of Khoi close
corporation on 1 July 20.16:
R
Members contributions 500 000
Retained earnings – 1 July 20.16 341 800
Loan to S San 10 000
Loan from X Xai 24 000
Profit and loss account 49 200
107
1. On 15 August 20.16 S San and X Xai each paid R50 000 of their personal funds into the
close corporation’s bank account to increase their contribution and to assist with the
cash flow position of the close corporation.
2. A cash distribution of profit of R10 000 to each member was agreed upon on
30 June 20.17. The distribution is payable to the members on 3 July 20.17.
3. Khoi CC borrowed an additional R4 000 from X Xai on 15 June 20.17 which was lent to
S San to pay towards funeral costs of a close relative.
4. The provision of current tax to the amount of R13 776 must still be taken into account.
5. Khoi CC repaid the first annual instalment of R 6 000 of the loan from X Xai on
2 January 20.17. The loan to S San is repayable in full on 1 July 20.20.
REQUIRED
Prepare the statement of changes in net investment of members of Khoi CC for the year ended
30 June 20.17 according to the requirements of IFRS appropriate to the business of the close
corporation.
Feedback 6.4
KHOI CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 30 JUNE 20.17
Members Revaluation Retained Loan Loan Total net

contributions surplus earnings from a to a investment
R R R member member R
R R
Balances at
1 July 20.16 500 000 30 000 341 800 24 000 (10 000) 885 800
Additional
contributions c 100 000 100 000
Total
comprehensive
income for the
year d 35 424 35 424
Distribution to
members e (20 000) (20 000)
Increase/Decrease
in loans f (2 000) (4 000) (6 000)
Balance at
30 June 20.17 600 000 30 000 357 224 22 000 (14 000) 995 224
Non-current
liability 16 000
Current liability 6 000
c㻌 R(50 000 + 50 000) = R100 000

d R(49 200 – 13 776) = R35 424
e R(10 000 + 10 000) = R 20 000
f R(4 000 increase less 6 000 repayment) = R2000 repayment
108
Activity 6.5
First work through comprehensive example 5.3 in the prescribed textbook.

Then work through comprehensive example 5.2 in the prescribed textbook.
Take note of the following:

x A close corporation discloses its normal income tax expense in the statement of profit
or loss and other comprehensive income.
x The statement of changes in equity, which you studied in the section dealing with the
preparation of the financial statements of partnerships, is replaced by a similar
statement (namely the statement of changes in net investment of members). Take note
of how the format of the statement of changes in net investment of members differs
from the format of the statement of changes in equity. Note also how the profits of a
close corporation can be retained in a retained earnings account, and that in the
statement of changes in net investment no distinction is made between the members
as is done between the partners in the statement of changes in equity.
x Note how the total equity section of the statement of financial position of a close
corporation differs from that of a partnership. The reason for the above differences in
disclosure between a partnership and a close corporation is that a partnership is not a
legal entity whereas a close corporation is.
x Study the notes to the financial statements of a close corporation. Notes are a
component of financial statements and they form an important part of financial
reporting in the FAC1601 syllabus.
6.13 Deregistration
Read about the deregistration of a close corporation in paragraph 5.13 in the

prescribed textbook as well as the summary of the chapter in paragraph 5.14.
Work through the following exercises, taking special note of how to make year end
adjustments and how to prepare the financial statements of a close corporation by applying
your knowledge of FAC1502, the Conceptual Framework, IAS 1, IFRS, the Close Corporations
Act, the Guide on Close Corporations and the Companies Act regulations concerning close
corporations.
109
EXERCISE 6.1
Mr L Left and Mr R Right are the only two members of Centre CC with an equal interest of
50% each. On 30 June 20.15, the end of the financial year, the bookkeeper presented the
following trial balance, together with additional information, to you as the accounting officer:
CENTRE CC
TRIAL BALANCE AS AT 30 JUNE 20.15
Debit Credit
R R
Member's contribution: Mr L Left 10 000
Member's contribution: Mr R Right 10 000
Loan to member: Mr L Left 18 000
Loan to member: Mr R Right (1 July 20.14) 6 000
Machinery at cost price 51 000
Accumulated depreciation: Machinery (1 July 20.14) 7 000
Mortgage (1 July 20.14) 40 000
Land and buildings 200 000
Improvements to buildings (31 January 20.15) 55 000
Stationery consumed 380
Petrol 4 000
Services rendered 382 000
Salary: Mr L Left (paid) 24 000
Salary: Mr R Right (paid) 36 000
Remuneration: Accounting officer 12 000
Deposit: Petrol 1 500
Retained earnings (1 July 20.14) 9 200
Bank 6 260
SARS (income tax) 21 000
458 200 458 200
1. Provision must still be made for depreciation on the machinery at 10% per
annum calculated according to the straight-line method. Machinery with a cost price of
R16 000 was purchased on 30 September 20.14 and recorded in the books.
2. The members decided to capitalise the improvements to the buildings. Land
and buildings consist of Plot 166, Laudia, purchased on 1 August 20.13 for R200 000.
No depreciation is provided for on land and buildings.
3. Interest on the mortgage (from T Bank) at 20% per annum must still be taken
into account. The interest is payable on 1 July 20.15. The loan was obtained on
1 July 20.14 and is secured by a first mortgage over land and buildings. The loan is
repayable on 1 July 20.22.
4. The following accounts were received and were payable at 30 June 20.15 but must still
be accounted for:
Telkom, for telephone expenses, R150
Pen & Pencil Stationery, for stationery, R120
110
5. Mr D Down, a debtor of the close corporation, had a balance of R2 500 on his account
on 30 June 20.15. This amount must be written off as irrecoverable.
6. The members decided that as from 1 July 20.14 interest at a rate of 18% per annum will
be taken into account on their loan accounts. A new loan of R10 000 was granted to
Mr Left at 31 January 20.15. Interest on these loans is capitalised. Both loans are
unsecured and immediately callable.
7. The actual current income tax for the year amounted to R83 044 and must still be
recorded.
8. The members decided to distribute R60 000 of the total comprehensive income of the
close corporation for the year ended 30 June 20.15 equally between them. These
amounts will not be paid out in cash but will be left in the close corporation as loans to
the corporation. These loans are unsecured and an interest rate of 20% per annum is
applicable. It was further decided that 50% of these loans must be repaid on
31 March 20.16. The balances on these accounts are repayable on 31 December 20.22.
9. The members' contributions were paid in full and no additional contributions were made
during the year.
REQUIRED
With regard to Centre CC:

a) Prepare the statement of profit or loss and other comprehensive income for the year
ended 30 June 20.15.
b) Prepare the statement of changes in net investment of members for the year ended
30 June 20.15.
c) Prepare the statement of financial position as at 30 June 20.15.
d) Prepare the notes for the year ended 30 June 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984 and
the requirements of IFRS. Comparative figures are not required.
111
SOLUTION 6.1
a) CENTRE CC
THE YEAR ENDED 30 JUNE 20.15
Notes R
Revenue 2.3 382 000
Other income 3 270
Interest income c 4 3 270
385 270
Administrative and other expenses (90 910)
Depreciation 2.1, 3 4 700
Telephone expenses R(1 260 + 150) 1 410
Stationery consumed R(380 + 120) 500
Petrol 4 000
Salaries to members 8 60 000
Credit losses 2 500
Interest on mortgage c 5 8 000
Profit before tax 286 360
Income tax expense (83 044)
Comment
Because there is no cost of sales, there can be no gross profit or any distribution
expenses. Remember that this is a service entity and not a retail entity.
b) CENTRE CC
ENDED 30 JUNE 20.15
Members' Loans
Retained Loans to
contribu- from Total
earnings members
tions members
R R R R R
Balances at 1 July 20.14 20 000 9 200 (14 000) 15 200
for the year 203 316 203 316
Distribution to members (60 000) 60 000
Loans to members (13 270) (13 270)
Balances at 30 June 20.15 20 000 152 516 60 000 (27 270) 205 246
Non-current liability 30 000
112
c) CENTRE CC
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.15
Note R
ASSETS
Trade receivables e 4 13 500
Loans to members 4, 6 27 270
Cash and cash equivalents 4 7 760
Total equity 172 516
Members' contributions 20 000
Retained earnings 152 516
Non-current liabilities 5, 7 70 000
Trade and other payables f 5 8 270
Current portion of long-term borrowings 5, 7 30 000
Current tax payable g 62 044
d) CENTRE CC
NOTES FOR THE YEAR ENDED 30 JUNE 20.15
International Financial Reporting Standards (IFRS) appropriate to the business of the entity.
The annual financial statements have been prepared on the historical cost basis, modified by
the revaluation of financial assets and financial liabilities at fair value through profit or loss.
The financial statements incorporate the following significant accounting policies which are
consistent with those applied in previous years except where otherwise stated.
written off on land and buildings. Machinery is subsequently measured at historical cost
less accumulated depreciation and accumulated impairment losses.
113
Depreciation on machinery is written off at a rate deemed to be sufficient to reduce the

carrying amount of the assets over their estimated useful life to their estimated residual
value. The depreciation rate is as follows:
x Machinery: 10% per annum according to the straight-line method
Depreciation is charged to profit or loss for the year. Gains or losses on disposal are
determined by comparing the proceeds with the carrying amount of the asset. The net
amount is included in profit or loss for the year.
the entity becomes a party to the contractual provisions of an instrument.
plus transaction costs, except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. The entity classification
depends on the purpose for which the entity acquired the financial assets. Financial
instruments are subsequently measured at fair value unless they are measured at
amortised cost as required by IFRS.
2.3 Revenue

Revenue represents the delivery of services to customers of an amount that reflects the
consideration to which the entity expects to be entitled in exchange for the services and
is recognised when performance obligations are satisfied.

Land and Equip-
Total
buildings ment
R R R
Carrying amount at 1 July 20.14 200 000 28 000 228 000
Cost 200 000 35 000 235 000
Accumulated depreciation – (7 000) (7 000)
Additions 55 000 16 000 71 000
Depreciation for the year d – (4 700) (4 700)
Carrying amount at 30 June 20.15 255 000 39 300 294 300
Cost 255 000 51 000 306 000
114
The land and buildings consist of offices on Plot 166, Laudia, and were purchased on
1 August 20.13. The CC has pledged land and buildings with a carrying amount of
R255 000 as security for the mortgage obtained from T Bank.
4. Financial assets
20.15
R
Trade and other receivables:
Loans to members 27 270
The loans are unsecured and carry interest at 18% per annum. The loans
are immediately callable.
Cash and cash equivalents: 7 760
Bank 6 260
Short-term deposit: Petrol 1 500
20.15
R
The mortgage was acquired from T Bank on 1 July 20.14 at an interest
rate of 20% per annum. The loan repayable on 1July 20.22. The loan is
secured by a first mortgage over land and buildings (refer to note 3).
Loans from members: 30 000
The loans from members are unsecured and carry interest at a rate of
20% per annum. Fifty percent of the loans are repayable on 31 March
20.16, and the remainder on 31 December 20.22.
Total loans from members 60 000
Current portion of loans from members (30 000)
Trade and other payables: –
Accrued expenses: 8 270
Telephone expenses 150
Stationery 120
Current portion of loans from members at amortised cost 30 000
6. Loans to members
Mr L Left Mr R Right Total
R R R
Balance at 1 July 20.14 8 000 6 000 14 000
Advances during the year 10 000 – 10 000
Repayments during the year – – –
Interest capitalised 2 190 1 080 3 270
Balance at 30 June 20.15 20 190 7 080 27 270
115
7. Loans from members

R R R
Balance at 1 July 20.14
Advances during the year 30 000 30 000 60 000
Balance at 30 June 20.15 30 000 30 000 60 000
Current portion (15 000) (15 000) (30 000)
Non-current portion 15 000 15 000 30 000
8. Transactions with members

R R R
Salaries 24 000 36 000 60 000
Interest earned on loans to members (2 190) (1 080) (3 270)
21 810 34 920 56 730
Calculations
c Interest on loans
Loans to members
Interest on loans Mortgage
Mr L Left Mr R Right
R R R
Balance (1 July 20.14) 40 000 8 000 6 000
Interest
(R40 000 x 20%) 8 000
(R 6 000 x 18%) 1 080
(R 8 000 x 18%) 1 440
(R10 000 x 5/12 x 18%) 750
Interest expense 8 000
Interest income 2 190 1 080
116
d Depreciation
Old New
Machinery Machinery
R R
Cost price 35 000 16 000
Depreciation (3 500) (1 200)
(R35 000 x 10%)
(R16 000 x 10% x 9/12)
Accumulated depreciation (1 July 20.14) (7 000)
Carrying amount (30 June 20.15) 24 500 14 800
e Trade and other receivables R

Trade receivables control: 30 June 20.15 16 000
Credit losses written off (2 500)
13 500
f Trade and other payables R

The amount on the statement of financial position was calculated as
follows:
Interest in arrears on long-term loan 8 000
Telephone expenses in arrears 150
Stationery in arrears 120
8 270
g Current tax payable R

Income tax expense for the year 83 044
Current tax paid during the year (21 000)
Current tax payable 62 044
117
EXERCISE 6.2
The bookkeeper presented you with the following information relating to Note Book CC for the
financial year ended 31 December 20.15:
NOTE BOOK CC
BALANCES AS AT 31 DECEMBER 20.15
R
Member’s contribution: N Note (60%) 120 000
Member’s contribution: B Book (40%) 80 000
Land and buildings at cost 560 000
Equipment at cost 40 000
Accumulated depreciation on equipment (1 January 20.15) 12 000
Accumulated depreciation on vehicles (1 January 20.15) 72 000
Bank (Dr) 14 000
Fixed deposit 80 000
Mortgage 320 000
Retained earnings (31 December 20.14) 18 000
SARS (income tax) (Dr) 52 000
Loan to N Note 40 000
Loan from B Book 60 000
Sales 668 300
Purchases 210 000
Inventory (1 January 20.15) 30 000
Salaries and wages 96 000
Stationery consumed 2 900
Carriage on purchases 6 500
Telephone and fax expenses 8 200
Insurance expenses 4 000
Maintenance of vehicles 4 400
Credit losses 800
1. The inventory on 31 December 20.15 amounted to R42 000.

2. An additional amount of R2 000 must be written off as irrecoverable. The allowance
for credit losses must be adjusted to R1 650.
3. The land and buildings consist of a shop and offices on Plot No 157, situated in
Mainland, and were purchased on 8 January 20.13 for R560 000. It is the policy of the
close corporation not to depreciate land and buildings.
4. Depreciation must be provided for as follows:
Vehicles: 20% per annum according to the diminishing balance method
Equipment: 10% per annum according to the straight-line method.
5. On 31 December 20.15, a trade debtor who owes R1 600 will be entitled to a
10% discount if he settles his account before 15 January 20.16. The bookkeeper
recorded the sale transaction correctly but forgot to account for the allowance for
settlement discount granted.
6. Provision must still be made for interest on the fixed deposit at 14% per annum
receivable on 1 January of each year. The fixed deposit was made on 1 January 20.15
at Fair Bank for a period of three years.
118
7. During the financial year, an amount of R15 000 was paid to member N Note
as remuneration for specialised services rendered to the corporation. This amount was
included in salaries and wages.
8. Interest on the mortgage from CT Bank at 12% per annum must still be taken into
account. The interest is payable on 2 January 20.16. The loan was obtained on
2 January 20.13 and is secured by a mortgage over land and buildings. The loan is
repayable in total on 2 January 20.22.
9. The loan to member N Note was granted on 1 April 20.13. Interest is calculated at
12% per annum and is payable by the member in January 20.16. The loan is unsecured
and immediately callable.
10. On 1 July 20.15 an amount of R60 000 was borrowed from member B Book. The first
repayment of R20 000 will be made on 30 June 20.16 and the remainder on
30 June 20.19. Interest is calculated on 31 December at a rate of 10% per annum and
is paid in January of every year. The loan is unsecured.
11. Provision must be made for a distribution of 80% of the total comprehensive income for
the financial year to the members.
12. The actual current income tax for the financial year amounted to R79 515 and must
still be recorded.
REQUIRED
With regard to Note Book CC:

ended 31 December 20.15.
31 December 20.15.
c) Prepare the statement of financial position as at 31 December 20.15.
d) Prepare the notes for the year ended 31 December 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984, as
well as the requirements of International Financial Reporting Standards (IFRS). Comparative
figures are not required.
119
SOLUTION 6.2
a) NOTE BOOK CC
Notes R
Revenue R(668 300 – 160߇) 2.4 668 140
Cost of Sales (204 500)
Purchases 210 000
Carriage on purchases 6 500
246 500
Inventory (31 December 20.15) (42 000)
Other income 16 000
Interest income R(4 800 + 11 200) ߈ 4 16 000
479 640
Salaries R(96 000 – 15 000) 81 000
Salaries to members 8 15 000
Credit losses ߉ 2 950
Depreciation ߊ 2.1, 3 29 600
Stationery consumed 2 900
Telephone and fax expenses 8 200
Maintenance of vehicles 4 400
Insurance expenses 4 000
Finance costs ߋ (41 400)
Interest on mortgage 38 400
Interest on loan from members 8 3 000
120
b) NOTE BOOK CC
ENDED 31 DECEMBER 20.15
Members' Loans
Retained Loans to
Contribu- from Total
earnings members
tions members
R R R R R
Balances at 1 January 20.15 200 000 18 000 (40 000) 178 000
Distribution to members ߍ (155 740) (155 740)
Loans from/to members 60 000 60 000
Balances at 31 December 20.15 200 000 56 935 60 000 (40 000) 276 935
Non-current liability 40 000

c) NOTE BOOK CC
Note R
ASSETS
Fixed deposit 2.2, 4 80 000
Trade and other receivables ߏ 4 47 190
Loans to members 4, 6 40 000
Long-term borrowings ߌ 5, 7 360 000
Trade and other payables 5 89 400
Current portion of long-term borrowings 5, 7 20 000
Distribution to members payable 5 155 740
Current tax payable ߎ 27 515
121
d) NOTEBOOK CC
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.15
International Financial Reporting Standards (IFRS) appropriate to the business of the
entity. The financial statements have been prepared on the historical cost basis,
modified by the revaluation of financial assets and financial liabilities at fair value through
profit or loss.
The annual financial statements incorporate the following significant accounting policies
which are consistent with those applied in previous years except where otherwise stated.
written off on land and buildings. Equipment and vehicles are subsequently measured
at historical cost less accumulated depreciation and accumulated impairment losses.
Depreciation on equipment and vehicles is written off at a rate deemed to be sufficient

to reduce the carrying amount of the assets over their estimated useful life to their
estimated residual value. The depreciation rates are as follows:
x Equipment: 10% per annum according to the straight-line method
x Vehicles: 20% per annum according to the diminishing balance method
122
2.3 Inventories
2.4 Revenue

goods. Revenue from the sale of goods consists of the total net invoiced sales excluding
settlement discount granted. The entity is not registered as a VAT-vendor. Revenue
from sales is recognised when performance obligations are satisfied.

. Land and
Vehicles Equipment Total
buildings
R R R R
Carrying amount at 1 January 20.15 560 000 128 000 28 000 716 000
Cost 560 000 200 000 40 000 800 000
Depreciation for the year – (25 600) (4 000) (29 600)
Carrying amount at
31 December 20.15 560 000 102 400 24 000 686 400
Cost 560 000 200 000 40 000 800 000
The land and buildings consist of a shop and offices on Plot No 157, Mainland, and were
purchased on 8 January 20.13. The CC has pledged land and buildings with a carrying
amount of R560 000 as security for the mortgage from CT Bank.
123
SOLUTION 6.2 (continue)
4. Financial assets
20.15
R
Non-current financial assets 80 000
Fixed deposit: 80 000
The fixed deposit was made on 1 January 20.15 for a period of three
years at Fair Bank at 14% interest per annum. The deposit is callable at
31 December 20.17.

Trade receivables control ߏ 32 840
Allowance for credit losses (1 650)
Accrued income:
Interest on loan to members 4 800
Interest on fixed deposit 11 200
Loans to members: 40 000
The loans are unsecured and carry interest at 12% per annum. The
loans are immediately callable.
Bank 14 000
20.15
R
The mortgage was acquired from CT Bank on 2 January 20.13 at an
interest rate of 12% per annum. This loan is secured by a first mortgage
over land and buildings (refer to note 3) and is repayable on
2·January 20.22.
The loans are unsecured and carry interest at 10% per annum. R20 000
of the loans are repayable on 30 June 20.16 and the remainder on
30 June 20.19.
Total loans from members 60 000
Current portion of loans to members (20 000)

Trade and other payables: 89 400
Accrued expenses:
Interest on mortgage 38 400
Interest on loan from members 3 000
Current portion of loans from members at amortised cost 20 000
Distribution to members payable 155 740
124
6. Loans to members
N Note B Book Total
R R R
Balance at 1 January 20.15 40 000 – 40 000
Advances during the year – – –
Balance at 31 December 20.15 40 000 – 40 000

N Note B Book Total
R R R
Balance at 1 January 20.15 – – –
Advances during the year – 60 000 60 000
Balance at 31 December 20.15 – 60 000 60 000
Current portion – (20 000) (20 000)
Non-current portion – 40 000 40 000

N Note B Book Total
R R R
Salaries 15 000 – 15 000
Interest incurred on loan from members – 3 000 3 000
Interest earned on loan to members (4 800) – (4 800)
10 200 3 000 13 200
Calculations
߇ Allowance for settlement discount granted

R1 600 x 10/100 = R160

߈ Interest income
Interest on loan to members
R40 000 x 12/100 = R4 800
Interest on fixed deposit
R80 000 x 14/100 = R11 200

125

߉ Credit losses
R
Original amount written off 800
Additional amount written off 2 000
Increase in allowance for credit losses * 150
2 950
* New allowance 1 650

Old allowance (1 500)
Increase in allowance 150
ߊ Depreciation
Vehicles = R(200 000 – 72 000)
= R128 000 x 20/100
= R25 600
Equipment = R40 000 x 10/100
= R4 000
Total = R(25 600 + 4 000)
= R29 600
ߋ Finance costs
Interest on mortgage
R320 000 x 12/100 = R38 400
Interest on loan from members
R60 000 x 10/100 x 6/12 = R3 000

ߌ Long-term borrowings
R
Mortgage 320 000
Loan from B Book 60 000
Portion to be repaid in 20.16 financial year (20 000) 40 000
360 000
Current portion of loans from members
The current portion of loans from members represents that portion of the loan of R60 000
that will be repaid in the 20.16 financial year (refer to calculation).

ߍ Distribution to members payable
R194 675 x 80/100 = R155 740
ߎ Current tax payable

R
Income tax for the year 79 515
SARS (income tax) (52 000)
ߏ Trade receivables
R(35 000 – 2 000 – 160) = R32 840
126
EXERCISE 6.3
After the bookkeeper had recorded the transactions during the year, he handed you the
following trial balance and additional information with regard to Trade Acc CC:
TRADE ACC CC
TRIAL BALANCE AS AT 31 DECEMBER 20.15
Debit Credit
R R
Land and buildings at cost 95 000
Furniture and equipment at cost 33 000
Accumulated depreciation: Furniture and equipment (1 January 20.15) 6 700
Accumulated depreciation: Vehicles (1 January 20.15) 8 400
Mortgage 50 000
Allowance for credit losses (1 January 20.15) 955
Bank 24 000
Sales 319 950
Purchases 224 700
Import duty on purchases 1 550
Railage on purchases 2 500
Repairs and maintenance 1 315
Commission on sales 1 500
Credit losses 460
Loss on sale of equipment 220
Dividends received 450
Settlement discount received 1 000
Investment 10 000
Loan from member: A Adam 10 000
Loan from member: C Charles 8 000
Interest expenses (in respect of loans) 9 660
Member's contribution: A Adam 40 000
Member's contribution: B Ben 35 000
Member's contribution: C Charles 25 000
Retained earnings (1 January 20.15) 6 220
Allowance for settlement discount granted (1 January 20.15) 200
548 975 548 975
127
1. The interest of the members in the CC is in the same ratio as their contributions.
2. The land and buildings consist of a shop and offices on Plot No 32, situated in Clarence,
and were purchased on 15 March 20.14 for R95 000. It is the policy of the close
corporation not to depreciate land and buildings.
3. The investment in Vicks limited consists of 10 000 ordinary shares of R1 each and was
acquired in 20.14. On 31 December 20.14 the fair value of the investment was
determined at R10 000. On 31 December 20.15 the fair value was determined at
R11 000 and is still to be recorded.
4. Included in salaries and wages is an amount of R10 000 which was paid to member
B Ben as remuneration for his special contribution to the management of the enterprise.
5. Provision for depreciation of R1 650 on furniture and equipment and R2 100 on vehicles
must still be made. Depreciation is written off according to the straight-line method on
furniture and equipment and vehicles and no sales or purchases of furniture and
equipment or vehicles occurred in the year.
6. The interest paid includes R2 160, which represents 12% interest paid to A Adam and
C Charles in respect of the loans they made to the close corporation. The loans are
unsecured and are repayable on 31 December 20.19.
7. The mortgage was acquired on 2 January 20.15 from Bug Bank at 15% interest per
annum. Interest is payable on 31 December. The loan is secured by a first mortgage
over land and buildings and is repayable in five equal annual instalments as from
2 January 20.18.
8. The allowance for credit losses must be adjusted to R1 025.
9. On 31 December 20.15 the inventory on hand amounted to R58 300.
10. The actual current income tax in respect of the financial year amounted to R11 166 and
must still be recorded.
11. A distribution of income of R20 000 must be made to the members.
12. The allowance for settlement discount granted on 1 January 20.15 must be written back
since the debtor did not settle his account on time. On 31 December 20.15 a trade debtor
who owes R1 500 is entitled to a 5% discount provided he settles his account before
10 January 20.16. The bookkeeper recorded the sales transaction correctly but forgot
to account for the allowance for settlement discount granted.
13. Trade Acc CC was offered a discount of 6% on an amount of R 1 200 owing to a supplier
provided the supplier is paid before 15 January 20.16. The close corporation intends
taking advantage of the discount offered.
14. On 31 December 20.15 the land and buildings were revalued to R150 000 by Mr Sono,
an independent sworn appraiser. This information must still be recorded in the
accounting records of Trade Acc CC.
REQUIRED
With regard to Trade Acc CC:
a) Prepare the statement of profit or loss and other comprehensive income for the
year ended 31 December 20.15.
31 December 20.15.
c) Prepare the statement of financial position as at 31 December 20.15.
128
d) Prepare the notes for the year ended 31 December 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984,
as well as the requirements of International Financial Reporting Standards (IFRS).
Comparative figures are not required.
SOLUTION 6.3
a) TRADE ACC CC
Note R
Revenue R(319 950 – 75 ߇ + 200) 2.4 320 075
Purchases R(224 700 – 1 072 ߈) 223 628
Import duty 1 550
Railage on purchases 2 500
282 278
Gross profit 96 097
Other income 1 450
Dividend income: Listed shares 450
Fair value adjustment: Listed shares 1 000
97 547
Repairs and maintenance 1 315
Commission on sales 1 500
Salaries and wages R(36 615 – 10 000) 26 615
Salary to member 7 10 000
Credit losses ߉ 530
Loss on sale of equipment 220
Depreciation ߊ 2.1, 3 3 750
Interest on mortgage 5 7 500
Interest on loan from members 7 2 160
Other comprehensive income for the year 55 000
129
b) TRADE ACC CC
Members' Revalua- Loans
Retained
contri- tion from Total
earnings
butions surplus members
R R R R R
Balances at 1 January 20.15 100 000 6 220 – 18 000 124 220
Profit for the year 27 336 27 336
Revaluation surplus 55 000 55 000
Distribution to members (20 000) (20 000)
Balances at 31 December 20.15 100 000 13 556 55 000 18 000 186 556
c) TRADE ACC CC
Notes R
ASSETS
Trade receivables ߋ 4 19 400
Listed investment 2.2, 4 11 000
Long-term borrowings 5, 6 68 000
Trade payables ߌ 5 37 028
Current tax payable ߍ 4 266
130
d) TRADE ACC CC
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.15
entity. The financial statements have been prepared on the historical cost basis, modified
by the revaluation of land and buildings and of financial assets and financial liabilities at
fair value through profit or loss.
are consistent with those applied in previous years except where otherwise stated.
written off on land and buildings which is revalued at regular intervals by an independent
sworn appraiser. Vehicles and furniture and equipment are subsequently measured at
historical cost less accumulated depreciation and accumulated impairment losses.
Depreciation on vehicles and furniture and equipment is written off at a rate deemed to
be sufficient to reduce the carrying amount of the assets over their estimated useful life
to their estimated residual value. Depreciation is written off as follows:
x Vehicles: 10%* per annum according to the straight-line method
x Furniture and equipment: 5%** per annum according to the straight-line method
determined by comparing the process with the carrying amount of the asset. The net
* R(2 100/21 000) x 100%

** R(1 650/33 000) x 100%
131
2.3 Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost or
net realisable value. Cost is calculated using the first-in-first-out method. Net realisable
value is the estimated selling price in the ordinary course of business less any costs of
completion and disposal.
2.4 Revenue

settlement discount granted. The entity is not registered as a VAT vendor. The revenue
from sales is recognised when the performance obligations are satisfied.

Furniture
Land and
and equip- Vehicles Total
buildings
ment
R R R R
Carrying amount at 31 January 20.15 95 000 26 300 12 600 133 900
Cost 95 000 33 000 21 000 149 000
Carrying amount at 31 December 20.15 150 000 24 650 10 500 185 150
Cost/Valuation 150 000 33 000 21 000 204 000
The land and buildings consist of a shop and offices on Plot No 32, Clarence, and were
purchased on 15 March 20.14. The CC has pledged land and buildings with a carrying
amount of R95 000 as security for the mortgage from Bug Bank. The land and buildings
were revalued by R55 000 on 31 December 20.15 by an independent sworn appraiser.
4. Financial assets
20.15
R
Listed investment: 11 000
Listed investments held for trading at fair value through profit or loss:
10 000 R1 ordinary shares in Vicks Limited
Bank 24 000
132
20.15
R
The mortgage was acquired from Bug Bank on 2 January 20.15 at an
interest rate of 15% per annum. The loan is repayable in five equal
payments from 2 January 20.18. The loan is secured by a first mortgage
over land and buildings.
The loans are unsecured and carry interest at 12% per annum. R20 000
of the loans are repayable on 31 December 20.19.

Trade payables: 37 028

A Adam B Ben C Charles Total
R R R R
Balance at 1 January 20.15 10 000 – 8 000 18 000
Advances during the year – – – –
Repayments during the year – – – –
Balance at 31 December 20.15 10 000 – 8 000 18 000
The loans are unsecured and an interest rate of 12% per annum is applicable. The loans
are repayable on 31 December 20.19.

A Adam B Ben C Charles Total
R R R R
Interest on loans from members 1 200 – 960 2 160
Salaries – 10 000 – 10 000
1 200 10 000 960 12 160
Calculations
߇ Allowance for settlement discount granted

R1 500 x 5/100 = R75
߈ Settlement discount received R

Settlement discount received for the period 1 000
* Allowance for settlement discount received 72
1 072
Allowance for settlement discount received
R1 200 x 6/100 = R72
133
߉Credit losses
R[460 + (1 025 – 955)]
= R(460 + 70)
= R530

ߊ Depreciation
R(1 650 + 2100) = R3 750
ߋ Trade and other receivables

R
Allowance for settlement discount granted (75)
20 425
19 400
ߌ Trade and other payables

R
Allowance for settlement discount received (72)
37 028

ߍ Current tax payable
R
Current tax paid during the year (6 900)
134
EXERCISE 6.4
The bookkeeper has provided you with the following trial balance and additional information
with regard to Loga CC for the year ended 28 February 20.15:
LOGA CC
TRIAL BALANCE AS AT 28 FEBRUARY 20.15
Debit Credit
R R
Member's contribution: L Lock 252 000
Member's contribution: G Gate 245 000
Land and buildings at valuation 500 000
Equipment at cost 18 000
Inventory 172 080
Loan to G Gate 12 000
Investment (fixed deposit at ABC bank) 25 000
Bank 6 956
Accumulated depreciation: Equipment (1 March 20.14) 3 600
Sales 1 168 236
Cost of Sales 778 812
Retained earnings (1 March 20.14) 6 420
Rental expenses 14 400
Advertising expense 4 800
Income from investment 1 500
Credit losses 540
Interim profit distribution to members 48 000
Interest income 720
1 900 780 1 900 780
135
1. A debtor cannot be traced and his debt of R184 must be written off as irrecoverable. At
year end the members decided to create an allowance for credit losses of R1 000.
2. The electricity account for February, R785, was received on 20 March 20.15.
3. On 1 June 20.14 an insurance contract was entered into. The premium of R800, payable
annually on 1 June, is included in administrative expenses.
4. The loan to G Gate was made on 1 March 20.14 at 12% interest per annum, payable
every six months. The loan is unsecured and immediately callable.
5. Included in salaries and wages is an amount of R20 000, paid to L Lock as remuneration
for his special contribution to the management of the entity.
6. The investment at ABC Bank was made on 1 May 20.14 for 60 months at 12% interest
per annum, which is receivable every six months on 31 October and 30 April.
7. The land and buildings were acquired on 31 March 20.13 for R300 000 and consist of
shops and offices situated at number 23 Rhavi Road, Dealsville. Additions to buildings
were completed at a cost of R60 000 on 31 July 20.14.
8. On 28 February 20.14, the land and buildings were revalued for the first time to
R340 000. The land and buildings are not depreciated.
9. Provision must still be made for the following:
x Depreciation on the vehicle and equipment at 20% per annum on the diminishing
balance. The vehicle was acquired on 1 September 20.14.
x Actual current income tax for the financial year amounted to R51 494.
x An additional distribution to members of R36 000. Members share profits equally.
REQUIRED
With regard to Loga CC:

ended 28 February 20.15.
28 February 20.15.
c) Prepare the statement of financial position as at 28 February 20.15.
d) Prepare only the following notes for the year ended 28 February 20.15:
x accounting policy
x property, plant and equipment
x transactions with members
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984, as
well as the requirements of International Financial Reporting Standards (IFRS). Comparative
figures are not required.
136
SOLUTION 6.4
a) LOGA CC
STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME FOR THE
Notes R
Revenue 2.4 1 168 236
Other income 3 940
Interest income R(1 440 + 2 500) ߇ 3 940
393 364
Rental expenses 14 400
Advertising expense 4 800
Salaries and wages R(168 020 – 20 000) 148 020
Salary to member 4 20 000
Water and electricity ߈ 9 425
Credit losses ߉ 1 724
Administrative expenses ߊ 2 068
Insurance expense ߋ 600
Depreciation ߌ 2.1, 3 8 280
Other comprehensive income for the year 100 000
b) LOGA CC
ENDED 28 FEBRUARY 20.15
Members' Revalua-
contri- Retained tion Loans to
butions Earnings surplus Members Total
R R R R R
Balances at 1 March 20.14 497 000 6 420 40 000 – 543 420
Total comprehensive income for the year 126 073 100 000 226 073
Profit for the year 126 073 126 073
Loan to a member (12 000) (12 000)
Balances at 28 February 20.15 497 000 48 493 140 000 (12 000) 673 493
137
c) LOGA CC
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.15
Notes R
ASSETS
Fixed deposit 2.2 25 000
Trade and other receivables ߎ 50 720
Prepayments ߏ 200
Loan to a member 12 000
Trade and other payables ᬎ 84 089
Distribution to members payable ߍ 36 000
Current tax payable ᬏ 21 494
d) LOGA CC
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.15
entity. The financial statements have been prepared on the historical cost basis,
modified by the revaluation of land and buildings as well as financial assets and financial
liabilities at fair value through profit or loss.
are consistent with those applied in previous years, except where otherwise stated.
written off on land and buildings which is revalued at regular intervals by an independent
appraiser. Equipment and vehicles are subsequently measured at historical cost less
accumulated depreciation and accumulated impairment losses.
138
Depreciation on equipment and vehicles is written off at a rate deemed to be sufficient

to reduce the carrying amount of the assets over their estimated useful life to their
estimated residual value. The depreciation rates are as follows:
x Equipment: 20% per annum according to the diminishing balance method
x Vehicles: 20% per annum according to the diminishing balance method
.
2.3 Inventories
2.4 Revenue

value added tax and settlement discount granted. The revenue from sales is recognised
when the performance obligations are satisfied.
139

Land and Furniture
buildings and Vehicles Total
equipment
R R R R
Carrying amount at 1 March 20.14 340 000 14 400 – 354 400
Cost/Valuation 340 000 18 000 – 358 000
Accumulated depreciation – (3 600) – (3 600)
Revaluation surplus for the year 100 000 – – 100 000
Additions 60 000 – 54 000 114 000
Carrying amount at 28 February 20.15 500 000 11 520 48 600 560 120
Cost 500 000 18 000 54 000 572 000
Land and buildings consists of shops and offices at 23 Rhavi Road, Dealsville. Land and
buildings are revalued annually by an independent sworn appraiser.

L Lock G Gate Total
R R R
Salary 20 000 – 20 000
Interest on loan to member – (1 440) (1 440)
20 000 (1 440) 18 560
Calculations
߇ Interest on loan to member

R12 000 x 12% = R1 440
Interest on investment
R25 000 x 12% x 10/12 = R2 500
߈ Water and electricity

R(8 640 + 785) = R9 425
߉ Credit losses

R
Original amount written off 540
Further amount written off 184
1 724
ߊ Administrative expenses

R(2 868 – 800) (R800 = insurance premium) = R2 068
ߋ Insurance
The R800 was paid for a period of one year starting on 1 June 20.14. Only 9 months
of this period falls within the current financial year. Therefore, only R800 x 9/12 =
R600 of the expense was incurred during the current financial year. The R200 that
falls outside this financial period must be shown in the statement of financial position
as a prepayment for the next financial period.
140
ߌ Depreciation
Equipment:
R
Equipment 18 000
Accumulated depreciation (3 600)
Diminished balance (carrying amount) 14 400
R14 400 x 20% = R2 880
Vehicle:
R54 000 x 20% x 6/12 = R5 400
Total depreciation:
= R(2 880 + 5 400) = R8 280
ߍ Distribution to members and distribution to members payable

R
Distribution to members R(48 000 + 36 000) 84 000
Interim distribution paid to members (48 000)
ߎ Trade receivables
R
49 000
Accrued interest on loan to member R(1 440 – 720) 720
Accrued interest on investment R(2 500 – 1 500) 1 000
50 720
ߏ Prepayments
R
Prepayments represent insurance prepaid (refer to Insurance) 200
ᬎ Trade payables
R
Accrued expenses (water and electricity) 785
84 089
ᬏ Current tax payable

R
SARS: Income tax paid during the year (30 000)
141
Self-assessment
Yes No
Briefly discuss the Close Corporations Act in respect of matters concerning
the attributes, registration, internal and external relations, accounting
records and annual financial statement, joint liability of members and others
for certain debts of a close corporation, tax position of a close corporation
and its members, as well as the deregistration of a close corporation.
Prepare the financial statements (except for a statement of cash flows) of a

close corporation according to the provisions of the Close Corporations Act
and the requirements of IFRS and, where applicable, the guidelines as
presented in the Guide on Close Corporations and Companies Act No. 71
of 2008 Regulations (as issued by SAICA, December 2001).
If you answered "yes" to all of the above assessment criteria, you have completed
your studies on close corporations and can move on to learning unit 7. If you answered
"no" to any of the above criteria, you must revise those sections before progressing
to learning unit 7.
Food for thought:

Do you think that you would prefer to establish a partnership if you had the opportunity
or would you have preferred to establish a close corporation instead?
142
LEARNING UNIT 7
7
Introduction to companies
Key concepts ...................................................................................................................144
7.1 Introduction .............................................................................................................145
7.2 Characteristics of a profit company .........................................................................146
7.3 Formation (incorporation) of a profit company.........................................................146
7.4 Types of companies................................................................................................147
7.5 Shareholders ..........................................................................................................148
7.6 Rights of shareholders ............................................................................................148
7.7 Share transactions ..................................................................................................149
7.8 Dividends ................................................................................................................151
7.9 Debenture transactions ...........................................................................................151
7.10 Annual financial statements of companies ..............................................................152
Self-assessment ..............................................................................................................162
143
L
Learning outcomes
x distinguish between authorised share capital and issued share capital

x distinguish between ordinary shares and preference shares
x record transactions pertaining to the issue of shares
x record the issue of capitalisation shares
x record the underwriting of shares
x explain the term “dividends” and the calculation thereof
x record dividend transactions
x record transactions pertaining to the issue of debentures
x calculate and record interest on debentures
Key concepts
x Companies Act 71 of 2008

x Public company
x Private company
x Shareholders
x Authorised share capital
x Issued share capital
x Share capital account
x Ordinary shares
x Preference shares
x Capitalisation shares
x Underwriting share issues
x Interim dividends
x Final dividends
x Debenture issue
x Debenture interest
144
7.1 Introduction
The previous learning units introduced you to some entity forms that can be used to conduct
business. From the discussions, you should realise that providing entrepreneurs with limited
liability and continued existence as well as affording them access to funding are major
considerations when decisions are made on the business form. Sole traders, partners of
partnerships and members of close corporations mainly have to provide their own capital or
borrow money from financial institutions to finance their businesses. Because such financing
options are expensive, subject to guarantees and limited, entities that need large sums of
money (such as mines) form public companies which enable them to issue shares (shares will
be described later in the learning unit) to the public to increase their financing resources.
Companies came into existence during the Industrial Revolution to meet the following needs:
x to acquire more capital
x to ensure the continued existence of the entity
x to limit the financial liability of the owners.
In general, a company can be described as an association of persons who work together with
the aim of making a profit. A company is a legal entity, incorporated in terms of extensive
legislation and independent from its owners. The owners of a company are called
shareholders. Can you remember what the owners of a close corporation and a partnership
are called?
The aim of this chapter is to introduce you to the company as an entity form and to familiarise
you with the terminology used in company reporting pertaining to the capital structure of a
company. Companies are widely used as an entity form and because of the extensive
legislation governing the formation, administration and reporting for companies, this entity
form will be covered in detail in further accounting studies. This learning unit is merely an
introduction to this important entity form and consists mainly of how to account for the issue
of shares, different types of shares, the issue of debentures and the declaration of dividends.
Read through paragraph 6.1 in the prescribed textbook and the overview of the
introduction to companies.
Activity 7.1
a) Define a company in your own words.
b) What is the name of the Act that governs companies in South Africa?
c) When was the effective date of the above Act?
d) What is the name of the governing body responsible for registering companies in South
Africa?
145
Feedback 7.1
a) A company can be defined as a collection of natural and/or legal persons incorporated

to achieve certain business objectives. A company is a legal entity and is governed by
law.
b) The Companies Act 71 of 2008.
c) The Companies Act 71 of 2008 came into effect on 1 May 2011 and replaced the
previous Companies Act 61 of 1973.
d) The Companies and Intellectual Property Commission (CIPC).
Study Table 6.1 in the prescribed textbook which is a comparison of the

company as a business form compared with the other business forms you have
encountered in earlier learning units.
7.2 Characteristics of a profit company

Two main types of companies can be established namely:
x Profit companies which are incorporated for the financial gain of the shareholders
without restricting the transfer of ownership and
x Non-profit companies which are incorporated for public benefit. All assets and
liabilities must be applied to advance this objective.
Read paragraph 6.2 in the prescribed textbook which lists the characteristics of
profit companies.
A profit company is established by complying with specific legal requirements. Usually, the
main reason behind the formation of a profit company determines the type of company that
will be established. Types of profit companies that can be formed are private, public, state-
owned or personal liability companies (refer to 7.4 for a detailed discussion).
7.3 Formation (incorporation) of a profit company

The first step in the process of establishing a profit company is to apply for the registration of
its proposed name with the Companies and Intellectual Property Commission (Commission).
Once the name has been approved, the company is incorporated by adopting a single
document, namely the Memorandum of Incorporation (MoI). The MoI serves to protect the
interests of the shareholders and it includes information particular to each company and binds
the company and shareholders to rules under the Companies Act.
146
Read paragraph 6.3 in the prescribed textbook and acquaint yourself with the
procedure that must be followed to register a profit company and the information
that must be disclosed in the required documents.
7.4 Types of companies

In terms of Section 8 of the Companies Act, there are two types of companies that can be
formed, namely profit companies and non-profit companies.
Study paragraph 6.4 in the prescribed textbook. Make sure that you can define
the different types in your own words.
Activity 7.2
a) Pair the type of company to be formed with its correct abbreviation.
Type of company Ranking Abbreviation

1. Private company A NPC
2. State-owned company B (Pty) Ltd
3. Public company C SOE Ltd
4. Personal liability company D Ltd
5. Non-profit company E Inc
b) Company types 1-4 are collectively referred to as …
Feedback 7.2
a) 1. B
2. C
3. D
4. E
5. A
b) Profit companies.
Please note
The remainder of the learning unit deals with companies that are allowed to trade their shares.
147
7.5 Shareholders
To enable members of the public (who generally have limited financial resources available for
investment) to invest in a large business entity such as a public company, the capital of a profit
company is divided into more affordable units that are called “shares”. When an investor buys
shares in a company, a securities certificate (share certificate) is issued that provides proof
that an investor owns a certain number of shares in a company. The ownership is a percentage
of the number of shares acquired in relation to the total number of issued shares and the
investment made is called share capital. Shares of listed companies are traded on securities
(stock) exchanges. Share prices fluctuate according to supply and demand. The supply and
demand of shares are determined by various factors, such as the financial performance of a
company, future prospects in the marketplace and legislation.
7.6 Rights of shareholders
Since a company is regarded as a legal person, the trading of shares (which changes the
ownership of a company) does not influence the continued existence of the company as is the
case with a sole trader or a partnership.
The shareholders of a company may share in the profits of the company, and under certain
circumstances they have voting rights in relation to the number of shares that they have
purchased. The shareholders appoint the directors of a company in terms of the Companies
Act and the directors are responsible for the management of the company. Directors can be
executive or non-executive depending on their responsibilities towards managing the
company. They will appoint and delegate responsibilities to the Chief Executive Officer (CEO)
and top management who in turn will manage the day-to-day activities of the company.
Now that you are familiar with the incorporation of a company, the key players, and the working
of a company, we come to the recording and accounting that are required from you as
accounting I students. These can be summarised as the recording and accounting for share
transactions (section 7.7 of the learning unit), dividends (section 7.8 of the study guide) and
debentures (section 7.9 of the study guide) in the financial statements of companies.
148
7.7 Share transactions
Read paragraphs 6.7.1 to 6.7.3 and paragraph 6.7.5.1 in the

The first issue of shares will be to the incorporators of the company. The remaining unissued
shares can be offered to the public to raise capital. To attract the public as investors, the
company issues a prospectus. A prospectus must contain a reasonable representation of the
affairs of the company and it must comply with certain requirements prescribed by the
Companies Act. The following diagram pictures the procedure of how a company that is
allowed to trade shares, raises share capital:
Differentt classes
l off shares
h b issued.
can be i d
Study paragraph 6.7.4 in the prescribed textbook. This knowledge is very

important and forms the building blocks in future accounting studies. Make
sure that you can define ordinary and preference shares and the different
classes of preference shares, and that you understand the shareholders’ rights
in respect of profits of the company declared as dividends for the different
classes of shares.
Once you grasped that different classes of shares can be issued and know the rights of the
different classes in respect of dividends declared by the company, the recording of the issue
of shares follows.
149
When the company receives applications and money from the public to acquire shares (refer
to the diagram in section 7.7), the bank account must be debited and a temporary “application
and allotment account” is credited. Such entries can occur at any time between the prospectus
date and the closing date for applications. Because a company cannot control the number of
applications received from the public, it can supersede the available unissued shares or even
the available number of authorised shares. After the closing date for applications, the
allocation of shares is done and the oversubscribed applicants are refunded.
Activity 7.3
x Work through example 6.1 in the prescribed textbook.

x Work through example 6.2 in the prescribed textbook, which illustrates an over-application
of shares.
The use of an allotment schedule is handy when a company has a large share issue and
expects a large number of applications.
Activity 7.4
Work through example 6.3 in the prescribed textbook where an allotment schedule is used.
Make sure that you can account for the share issue when you are provided with an allotment
schedule.
Shares can also be issued at no consideration for various reasons and this is referred to as a
capitalisation of shares.
Activity 7.5
Work through example 6.4 in the prescribed textbook, which illustrates a capitalisation of
shares.
The administration of a share issue can be very costly. To ensure that a share issue is fully
subscribed and the company receives the number of applications it needs to satisfy the
demand for capital, companies make use of underwriters.
Study paragraph 6.7.8 in of the prescribed textbook.
150
Activity 7.6
Work through example 6.5 in the prescribed textbook which illustrates the underwriting of a
share issue.
7.8 Dividends
One of the reasons why shareholders invest money in a company is to share in the company’s
growth and profits. Dividends are the returns (the distribution of profit) on a shareholder
investment in a company. Depending on the classes of issued shares of a company, two
dividend types can be declared namely ordinary dividends and preference dividends
(paragraph 6.7.4).
Dividends can be declared if a company has adequate cash resources (verified by the
solvency and liquidity test). Preference shareholders have a preferential right to dividends
above the right of ordinary shareholders and cumulative preference shareholders maintain the
right to dividends even if a dividend is not declared in a financial period. The dividends on
ordinary shares are calculated per share, whereas dividends on preference shares are
calculated as a fixed percentage of the nominal value of the preference shares.
Study paragraph 6.8 in the prescribed textbook. The calculation of dividends is

another building block for future accounting studies.
Activity 7.7
7.9 Debenture transactions

Apart from acquiring capital from the public, a company can borrow money from the public by
issuing debentures. Debentures, like shares are divided into affordable units that enable the
public to lend money to a company at a fixed interest rate. Debentures do not form part of the
equity of a company, but are classified as non-current liabilities if repayable after the end of
the next 12-month period, or as a current liability if repayable within or up to the end of the
following 12-month period. The interest on debentures is a financing expense and must be
paid, irrespective of whether a company is making a profit or not.
It is important to understand the influence of interest rates on the issue of debentures. You
need to distinguish (define in your own words) between the market interest rate and the
nominal interest rate at which the debentures are issued and the effect of issuing debentures
at a higher or lower nominal rate than the current market interest rate.
151
Activity 7.8
Work through example 6.7 in the prescribed textbook. The example illustrates an issue of
debentures where the nominal interest rate and the market interest rate are equal.
Work through examples 6.8 and 6.9 which illustrates the issue of debentures at a nominal
interest rate higher and lower than the market interest rate. Make sure that you understand
the comments made about the two examples.
Once you are sure you understand the accounting principles illustrated in this chapter, tackle
the comprehensive example in the prescribed textbook.
Activity 7.9
7.10 Annual financial statements of companies
The financial statements that a company prepares can be divided into two categories, namely,
internal statements and published/external statements.
x Internal statements
Internal statements are detailed financial and cost statements that pertain to a company
and that are intended for managerial (internal) use in the company.
x Published statements (or external) statements
These statements are not as detailed as internal statements. IAS1 requires that these
statements be prepared at least once a year and presented to shareholders. The
statements must include the minimum information as specified in IAS1.
The fact that IAS1 requires companies to disclose certain minimum information serves the
interests of the external users of financial statements of a company such as its shareholders,
investors, creditors and bankers. IAS1 ensures that companies disclose their latest financial
statements (and preliminary financial statements) and interim reports to external parties.
Companies have to send copies of their financial statements to their shareholders, the holders
of their debentures and the Companies and Intellectual Property Commission (CIPC). They
also have to discuss their financial statements at the annual general meeting of their
shareholders.
152
EXERCISE 7.1 – The issue of shares
Molo Ltd was registered on 1 February 20.15 with an authorised share capital consisting of
the following:
x 200 000 ordinary shares
x 100 000 9% preference shares
On 1 February 20.15 the company offered 20 000 ordinary shares at a consideration of

R200 000 and 10 000 preference shares at a consideration of R150 000 to the incorporators
of the company and received payment for them. All the shares were taken up on
5 February 20.15.
On 9 February the company offered 100 000 ordinary shares at a consideration of R1 000 000
and 50 000 preference shares at a consideration of R750 000 for subscription to the public.
By close of business on the closing date, namely 1 May 20.15, applications had been received
for the full number of shares that was offered. On 8 May 20.15 all the shares were allotted.
On 31 May 20.15 the company paid R15 000 towards share issue expenses.
REQUIRED
Record the application and allotment of the ordinary and preference shares in the general
journal of Molo Ltd for the period 1 February 20.15 to 8 May 20.15. Record the payment of the
share issue expenses in the general journal of Molo Ltd. Post the journal entries to the relevant
accounts in the general ledger. Assume that the public applied for the shares on 1 May 20.15.
Balance/close off all the ledger accounts.
153
SOLUTION 7.1
MOLO LTD
GENERAL JOURNAL
Debit Credit
R R
20.15
Feb 1 Bank 350 000
Incorporators: Ordinary shares 200 000
Incorporators: 9% Preference shares 150 000
Receipt of application money from the incorporators of
the company
5 Incorporators: Ordinary shares 200 000
Incorporators: 9% Preference shares 150 000
Share capital: Ordinary shares 200 000
Share capital: 9% Preference shares 150 000
Allotment of 20 000 ordinary shares and 10 000 9%
f
shares to the incorporators of the company
May 1 Bank 1 750 000
Application and allotment: Ordinary shares 1 000 000
Application and allotment: 9% Preference shares 750 000
Receipt of application money from the public
8 Application and allotment: Ordinary shares 1 000 000
Application and allotment: 9% Preference shares 750 000
Share capital: Ordinary shares 1 000 000
Share capital: 9% Preference shares 750 000
Allotment of 100 000 ordinary shares and 50 000
9% preference shares
31 Share-issue expenses 15 000
Bank 15 000
Share-issue expenses paid
MOLO LTD
GENERAL LEDGER
Dr Bank Cr
20.15 R 20.15 R
Feb 1 Incorporators: Ordinary shares 200 000 May 31 Share-issue expenses 15 000
Incorporators: 9% Preference 150 000 Balance b/d 2 085 000
May 1 Application and allotment:
Ordinary shares 1 000 000
Application and allotment:
9% Preference shares 750 000
2 100 000 2 100 000
Jun 1 Balance b/d 2 085 000
154
Dr Incorporators: Ordinary shares Cr

20.15 R 20.15 R
Feb 5 Share capital: Ordinary shares 200 000 Feb 1 Bank 200 000
Dr Incorporators: 9% Preference shares Cr

20.15 R 20.15 R
Feb 5 Share capital: 9% Preference 150 000 Feb 1 Bank 150 000
h
Dr Application and allotment: Ordinary shares Cr

20.15 R 20.15 R
May 8 Share capital: Ordinary shares 1 000 000 May 1 Bank 1 000 000
Dr Application and allotment: 9% Preference shares Cr

20.15 R 20.15 R
May 8 Share capital: 9% Preference 750 000 May 1 Bank 750 000
h
Dr Share capital: Ordinary shares Cr

20.15 R
Feb 5 Incorporators: Ordinary shares 200 000
1 200 000
Dr Share capital: 9% Preference shares Cr

20.15 R
Feb 5 Incorporators: 9% Preference
shares 150 000
9% Preference shares 750 000
900 000
Dr Share-issue expenses Cr
20.15 R
May 31 Bank 15 000
Comment
The incorporators and application and allotment accounts are temporary accounts that are
closed off once the shares have been allotted.
155
EXERCISE 7.2 – The issue of capitalisation shares
The following balances appeared, inter alia, in the books of Zodiac Ltd on 30 November 20.15:
R
Share capital: Ordinary shares (200 000 shares) 400 000
On 1 December 20.15, the directors decided to issue capitalisation shares in the ratio of one
ordinary share for every four ordinary shares held by the shareholders as on
30 November 20.15. The board of the company deemed that a fair consideration for the
ordinary shares would be R100 000.
REQUIRED
Record the issue of the capitalisation shares in the general journal of Zodiac Ltd on
30 November 20.15.
SOLUTION 7.2
ZODIAC LTD
GENERAL JOURNAL
Debit Credit
R R
20.15
Dec 1 Retained earnings 100 000
Capitalisation issue of one share for every four shares held
Calculation of the number of shares to be issued
Number of capitalisation shares to be issued = 200 000/4 = 50 000 shares
156
EXERCISE 7.3 – Allotment and issue of shares
SA Cement Ltd is a company which was registered on 1 January 20.13 with an authorised
share capital of 200 000 ordinary shares.
The company offered 20 000 of the shares at a consideration of R200 000 to the incorporators
of the company, all of which were taken up and paid for on 15 January 20.13.
On 16 January 20.13, the company applied to the JSE for a listing and appointed General
Merchant Bank as the underwriters of the share issue at a commission of 2%. On the basis of
favourable prospecting reports, the directors decided to offer 100 000 of the shares to the
public at a consideration of R1 200 000.
By 1 March 20.13, applications were received for 180 000 shares. The JSE granted the listing
and during the first week the price of SA Cement Ltd stood at R13 per share. The shares were
received as follows between 15 January 20.13 and 1 March 20.13:
Number of shares per Number of applications Number of shares

application received applied for
100 400 40 000
200 100 20 000
500 20 10 000
1 000 30 30 000
2 000 20 40 000
4 000 10 40 000
Total 580 180 000
In order to retain control and to ensure an active market for the shares, the following allotment
schedule was approved and ratified on 10 March 20.13 at a meeting of the board of directors:
Group A: Applications for 100 to 200 shares will be granted in full.

Group B: Applications for 500 to 1 000 shares will be granted at 50% of the shares
applied for.
Group C: Applications for 1 000 and more will be granted at 25% of the shares applied
for.
At the beginning of 20.15, owing to the boom in the building industry, additional capital was
urgently needed to expand the business. On 20 March 20.15 the board of directors decided
to offer the 80 000 unissued shares at a consideration of R2 000 000 to the public.
Underwriting was arranged with General Merchant Bank at a commission of 4% which had to
be settled by 31 May 20.15.
Applications were received for 75 000 shares on 30 April 20.15, the closing date for
applications. All the transactions were finalised by 31 May 20.15.
REQUIRED
a) Record the issue of shares and the related transactions in the general journal of
SA Cement Ltd for the period 1 January 20.13 to 31 May 20.15.
b) Post the journal entries in (a) to the relevant general ledger accounts of SA Cement Ltd
for the period 1 January 20.13 to 31 May 20.15. The financial year of the company ends
on 31 December.
157
SOLUTION 7.3
a) SA CEMENT LTD
GENERAL JOURNAL
Debit Credit
R R
20.13
Jan 15 Bank 200 000
Receipt of application money from the incorporators of the
company
Allotment of 20 000 ordinary shares to the incorporators
of the company
16 Underwriter's commission (R1 200 000 x 2%) 24 000
General Merchant Bank 24 000
2% underwriter's commission due on R1 200 000 in terms
of the underwriting agreement
Mar 1 Bank c 2 160 000
10 Application and allotment: Ordinary shares 1 200 000
Allotment of 100 000 ordinary shares
Application and allotment: Ordinary shares 960 000
Bank 960 000
Cash refund to unsuccessful applicants
Bank 24 000
Underwriter's commission paid
Dec 31 Profit and loss 24 000
Underwriter’s commission 24 000
Closing entry at year end
20.15
Mar 20 Underwriter's commission (R2 000 000 x 4%) 80 000
4% underwriter's commission payable on R2 000 000 in
terms of the underwriting agreement
Apr 30 Bank d 1 875 000
General Merchant Bank e 125 000
Allotment of 80 000 ordinary shares
May 1 Bank R(125 000 – 80 000) 45 000
Settlement by the underwriters
158
Calculations
c 1 March 20.13: Applications received

1 200 000/100 000 x 180 000 = 2 160 000
d 30 April 20.15: Applications received
2 000 000/80 000 x 75 000 = 1 875 000
e㻌㻌 Ordinary shares taken up by underwriter
2 000 000/80 000 x 5 000 = 125 000
b) SA CEMENT LTD
GENERAL LEDGER
Dr Bank Cr
20.13 R 20.13 R
Jan 15 Incorporators: Ordinary Mar 10 Application and allotment:
Shares 20 000 Ordinary shares 960 000
Mar 1 Application and allotment: General Merchant Bank 24 000
20.15
Apr 30 Application and allotment:
May 31 General Merchant Bank 45 000
Dr Incorporators: Ordinary shares Cr

20.13 R 20.13 R
Jan 15 Share capital: Ordinary Jan 15 Bank 200 000
shares 200 000
Dr Application and allotment: Ordinary shares Cr

20.13 R 20.13 R
Mar 1 Share capital: Ordinary Mar 1 Bank 2 160 000
1
shares 1 200 000
10 Bank 960 000
2 160 000 2 160 000
20.15 20.15
Apr 30 Share capital: Ordinary 1 875 000 Apr 30 Bank 1 875 000
shares
159
Dr Share capital: Ordinary shares Cr

20.13 R
Jan 15 Incorporators:
Ordinary shares 200 000
Mar 1 Application and allotment:
1 400 000
20.15
Apr 30 Application and allotment:
3 400 000
Dr General Merchant Bank Cr

20.13 R 20.13 R
Mar 10 Bank 24 000 Jan 16 Underwriter's commission 24 000
20.15 20.15
Apr 30 Share capital: Ordinary May 31 Underwriter's commission
shares 125 000 commission 80 000
Bank 45 000
125 000 125 000
Dr Underwriter's commission Cr
20.13 R 20.13 R
Jan 16 General Merchant Bank 24 000 Dec 31 Profit and loss 24 000
20.15
May 31 General Merchant Bank 80 000
Comment
Only the transactions relating to the issue of the shares for the two periods were
recorded in the general journal and the general ledger.
160
EXERCISE 7.4 – The issue of debentures
Zee Ltd issued 100 8% debentures of R1000 each at a discount of 4% on 5 January 20.16.
The debentures are redeemable at par on 31 December 20.19 and interest is payable annually
on year end which is 31 December. Land and buildings with a historical cost of R300 000
serve as security for the debenture issue.
REQUIRED
Journalise the transactions in the accounting records of Zee Ltd for the year ending
31 December 20.16 and disclose the note on debentures in the financial statements of Zee Ltd
on 31 December 20.16.
SOLUTION 7.4
ZEE LTD
GENERAL JOURNAL
Debit Credit
R R
20.16
Jan 5 Bank (100 x R1000 x 96%) 96 000
Discount on debentures 4 000
8%Debentures 100 000
Issue of debentures at a discount
Dec 31 Interest on debentures (8% x R100 000) 8 000
Bank 8 000
Interest paid to debenture holders
Dec 31 Interest on debentures (R4 000/4) 1 000
Discount on debentures 1 000
Matching discount with interest paid over the period of the
debenture issue
ZEE LTD
31 DECEMBER 20.16
R
5. Non-current liability
Secured
100 8% Debentures of R1 000 each 100 000
Discount on debentures (3 000)
Discount amount 4 000
Discount amortised for the year (1 000)
97 000
Land and buildings with a cost of R300 000 serve as security for the debenture issue. The
debentures are repayable in total on 31 December 20.19 and bears interest at 8% per annum.
Comment
The discount of R4 000 is spread evenly over the four-year debenture issue period. In this
example the effective interest rate is higher than the nominal interest rate payable on the
debentures. The investor in the debentures paid less than par for the debenture although the
investor receives interest on the full par value (R1 000).
161
Self-assessment
Yes No
Distinguish between authorised and issued share capital.
Distinguish between ordinary and preference shares.
Record transactions pertaining to the issues of shares.
Prepare an allotment schedule.
Record the issue of capitalisation shares.
Record the underwriting of shares.
Explain dividends and the calculation thereof.
Calculate dividends.
Record dividend transactions.
Record transactions pertaining to the issue of debentures.
Calculate and record interest and discount or premium on

debentures.
If you answered "yes" to all of the above assessment criteria, you have completed your
studies on companies and can move on to learning unit 8. If you answered "no" to any
of the above criteria, you must revise those sections before progressing to learning
unit 8.
162
LEARNING UNIT 8
8
Branches
Key concepts ...................................................................................................................164
8.1 Introduction .............................................................................................................165
8.2 Accounting for dependent branches........................................................................165
8.3 Recording of transactions where inventory sent to the branch is invoiced at

cost price ................................................................................................................165
8.4 Recording of transactions where inventory sent to the branch is invoiced at

selling price.............................................................................................................169
Self-assessment ..............................................................................................................184
163
L
Learning outcomes
x explain the concept of branches

x briefly explain the differences between dependent and independent branches
x identify the information to be included in the reports submitted by a dependent branch to
the head office
x record the transactions between a head office and a dependent branch in the books of
the head office where inventory sent to the branch is invoiced at cost price
x record the transactions between a head office and a dependent branch in the books of
the head office where inventory sent to the branch is invoiced at selling price
x record the transactions of a dependent branch pertaining to the following where inventory
is invoiced at cost price or at selling price:
Purchases of inventory by the branch
Sales of inventory by the branch
Inventory damaged or stolen at the branch
Inventory sold by the branch at a discount
Inter-branch inventory transactions
Settlement discount granted to debtors of the branch
Donations made by the branch
Cash embezzled at the branch
Inventory in transit between the branch and the head office
x identify and record a shortage or surplus in the inventory of a branch where inventory is
invoiced by the branch at selling price
Key concepts
x Head office
x Dependent branches
x Branch inventory
x Inventory to branch
x Branch adjustments
x Branch gross profit (or loss)
x Branch profit (or loss)
x Inventory transactions
x Other branch transactions
164
8.1 Introduction
A business entity can establish a branch (or branches) which is geographically separated from
but still forms part of the main entity. One of the reasons why business entities establish
branches is to broaden their markets to increase their potential revenues in order to maximise
their profitability. Branches can be managed as dependent or independent units, each with its
own distinct accounting requirements. In this module, only dependent branches are
addressed.
Read the overview and paragraph 9.1 in the prescribed textbook.
8.2 Accounting for dependent branches

The head office of a dependent branch is responsible for supplying inventory to the branch
and for recording all of the accounting transactions of the branch in the accounting records of
the head office. The head office can invoice inventory to the branch at either cost or selling
price. Each method of invoicing requires a unique set of accounts and recording procedure.
Usually, the head office of a dependent branch is responsible for the payment of the major
expenses of the branch. The head office may also decide to provide the branch with petty
cash for the payment of minor expenses that are incurred by the branch. A branch may also
purchase inventory from other suppliers.
Since the activities of a dependent branch are recorded in the books of its head office, a
dependent branch is usually required to submit a report to the head office in respect of the
transactions that have occurred at the branch over a given financial period.
8.3 Recording of transactions where inventory sent to the branch is

invoiced at cost price
When this method of bookkeeping is followed, two accounts must be opened in the accounting
records of the head office:
(1) a branch inventory account
(2) an inventory to branch account
These accounts are specifically for the recording of transactions that pertain to the inventory
of the branch. The other business activities of a branch are recorded in other accounts in the
accounting records of the head office, for example a branch trade receivables control account,
a branch asset account or a branch expenses account.
Paragraph 9.3 in the prescribed textbook discusses the recording of transactions where
inventory is invoiced at cost price. Each example in this paragraph builds on the concepts
explained in the previous example so make sure that you follow and understand each new
entry in the examples in paragraph 9.3.
165
Activity 8.1
a) In the accounting records of the head office when inventory is invoiced to the branch
at cost price the branch inventory account serves the same purpose as which other
account that you have already encountered and why?
b) Explain what is meant with “the gross profit/loss of the branch”. A gross profit/loss
will be transferred to which account in the accounting records of the head office?
Feedback 8.1
a) The branch inventory account serves the same purpose as the trading account. When
balanced at the end of the accounting period the balance on the account represents
the gross profit/loss that the branch made.
b) The gross profit/loss is the result of the difference between the price at which inventory
is received (from head office) and the price at which inventory is sold by the branch.
This profit/loss is transferred to the branch expense account.
Activity 8.2
Work through example 9.1 in the prescribed textbook where inventory is sent to the branch
and the branch is allowed to purchase inventory from other suppliers as well.
Comment
Remember that we are dealing with a dependent branch and the accounting functions of the
branch are performed by the main entity (head office).
Journal entry to record the inventory sent to the branch at cost:

Dr Branch inventory
Cr Inventory to branch
Do you know the journal entry to account for purchases of inventory from other suppliers
(cash or credit)?
166
Activity 8.3
Work through example 9.2 in the prescribed textbook where inventory is returned to the head
office.
Journal entry to record the inventory returned to head office:

Dr Inventory to branch
Cr Branch inventory
Activity 8.4
Work through example 9.3 in the prescribed textbook where inventory is sold by the branch.
Journal entry to record the cash/credit sale of inventory by the branch:

Dr Bank (cash sale) or Branch trade receivables control (sale on credit)
Cr Branch inventory
Activity 8.5
Work through example 9.4 in the prescribed textbook where branch debtors settle their
accounts at a discount.
Journal entry to record the settlement of a branch debtor’s account at a discount:

Dr Settlement discount granted
Cr Branch trade receivables control
Comment
At the end of the accounting period the settlement discount granted is closed off to the branch
inventory account (where the sale was recorded). This ensures the similar treatment of
discounts granted in the accounting records of an entity without a branch (settlement discount
granted reduces sales).
Read paragraphs 9.3.6 and 9.3.7 in the prescribed textbook.
When inventory is sold by the branch at a marked down price (below the normal selling price
of the branch), the entries remain the same as in paragraph 9.3.4 of the textbook (refer to
Activity 8.4). Please make sure that you follow what will happen if the inventory is sold below
cost price.
167
Activity 8.6
Work through example 9.5 in the prescribed textbook where cash is embezzled or stolen at
the branch.
Journal entry to record the embezzlement of cash at the branch from either a cash or
a credit sale:
Cash sale:
Dr Bank (with the actual money banked)
Dr Branch expenses (with the embezzled amount)
Cr Branch inventory account (with the cost of the inventory sold which includes the money
banked and the embezzled cash)
Credit sale:
Dr Bank (with the actual amount banked)
Cr Branch trade receivables control (with the total amount that the debtor paid, which consists
of the banked amount and the embezzled cash).
Activity 8.7
Work through example 9.6 in the prescribed textbook where inter-branch inventory
transactions are recorded.
Journal entry to record the inter-branch inventory transactions:

Dr Branch inventory (of the branch that receives the inventory – the receiving branch)
Cr Branch inventory (of the branch that sells the inventory – the transferring branch)
Activity 8.8
Work through example 9.7 in the prescribed textbook where the branch incurs expenses that
are paid by head office and pays for minor expenses from its petty cash.
168
Journal entry to record the expenses paid for by head office and expenses paid for
from petty cash:
Paid by head office:
Dr Branch expenses
Cr Bank
Paid from petty cash:
Dr Branch expenses
Cr Petty cash
Read paragraphs 9.3.10 to 9.3.12 in the prescribed textbook.
Activity 8.9
Work through example 9.8 in the prescribed textbook where inventory in transit, inventory on
hand as well as the closing off, of the accounts in the records of head office are illustrated.
Make sure that you understand how to account for inventory in transit from head office to the
branch and inventory in transit from the branch to head office and also how to account for
inventory on hand. The branch inventory account (which is similar to the trading account and
contains the gross profit of the branch) is closed off to the branch expense account (which is
similar to a profit or loss account and contains the branch profit or loss for the period). The
branch expense account is closed off to the profit or loss account of the head office.
Activity 8.10
Work through example 9.9 in the prescribed textbook which is a comprehensive example
illustrating inventory send to the branch invoiced at cost price.
8.4 Recording of transactions where inventory sent to the branch is

invoiced at selling price
Paragraph 9.4 in the prescribed textbook discusses the recording of transactions where
inventory is invoiced at selling price. Each example in this paragraph builds on the concepts
explained in the previous example, so make sure that you follow and understand each new
entry in the examples in paragraph 9.4.
When inventory is invoiced to the branch at selling price, the branch inventory account will
not reflect the gross profit of the branch (as is the case when the inventory is invoiced to
the branch at cost price). An additional account, namely a “branch adjustment account”, is
required to reflect the gross profit and to serve the function of a “trading account”. The branch
inventory account (at selling price) functions as an inventory control account.
169
The recording of all inventory transactions in the branch inventory account is done at selling
price. Each selling price is divided into two amounts, namely the cost price and the profit
markup of the inventory. These two amounts are disclosed separately in the branch inventory
account (at selling price), and must add up to the selling price. The reason for this separate
disclosure in the branch inventory account is that the entries pertaining to the cost price and
the entries pertaining to the profit markup have different contra accounts. For example, when
inventory that is sent to the branch is recorded (assume a cost of R100 and a markup of R50),
the branch inventory account is debited (separately) with the cost price (R100) and the profit
markup thereof (R50) against different contra accounts: the inventory to branch account
(R100) and the branch adjustment account (R50) respectively. The inventory to branch
account is credited with the cost price (R100) and the branch adjustment account is credited
with the profit markup (R50).
The calculation of the profit markup in branch inventory is discussed in paragraph 9.4.2 of the
prescribed textbook. Make sure that you can calculate the profit markup and the selling price
when given the cost price, and that you can calculate the profit markup and the cost price
when given the selling price.
Activity 8.11
a) D Pelser Ltd trades in watercoolers. Calculate the profit that D Pelser Ltd must add to
send two watercoolers with a total cost of R6 000 to its branch.
b) D Pelser Ltd invoices inventory to its branch at cost plus 50%. Inventory with a cost
price of R50 000 will have a selling price of …
c) Damaged inventory with a selling price of R12 000 was returned by the branch to
D Pelser Ltd. What is the cost of the inventory returned?
d) D Pelser Ltd sells inventory to its customers at an additional 20% markup on the selling
price to its branch. How much will a customer pay for a watercooler with a cost of R2 500
bought from D Pelser Ltd?
Feedback 8.11
a) %
Cost assumed to be 100
Profit 50
Selling price 150
R6 000 x 50/100 = R3 000
170
b) R50 000 x 150/100 = R75 000
c) R12 000 x 100/150 = R8 000
d) R2 500 x 180/100 = R4 500
%
Cost assumed to be 100
Profit 50
Selling price to branch 150
Additional profit 20% x 150% 30
Selling price to customers 180
Activity 8.12
Work through example 9.10 in the prescribed textbook which illustrates inventory sent to the
branch invoiced at selling price and purchases by the branch.
Comment
Remember that we are dealing with a dependent branch and the accounting functions of the
branch are performed by the main entity (head office).
Journal entry to record the inventory sent to the branch at selling price:
Dr Branch inventory (with the cost)
Cr Inventory to branch (with the cost)
Dr Branch inventory (with the profit markup)
Cr Branch adjustment account (with the profit markup)
Do you know the journal entry when inventory is purchased from other suppliers and the
branch adds the profit markup before selling to customers?
Activity 8.13
Work through example 9.11 in the prescribed textbook where inventory is returned to the
head office.
Journal entry to record the inventory returned to head office:

Dr Inventory to branch (with the cost)
Cr Branch inventory (with the cost)
Dr Branch adjustment account (with the profit markup)
Cr Branch inventory (with the profit markup)
171
Activity 8.14
Work through example 9.12 in the prescribed textbook where inventory is sold by the branch.
Journal entry to record the cash/credit sale of inventory by the branch:

Dr Bank (cash sale) at selling price or Branch trade receivables control (sale on credit) at
selling price
Cr Branch inventory (at selling price)
Study paragraph 9.4.6 in the prescribed textbook
Journal entry to record the settlement of a branch debtor’s account at a discount:

Dr Settlement discount granted
Cr Branch trade receivables control
Comment
At the end of the accounting period the settlement discount granted is closed off to the branch
adjustment account.
When inventory is sold by the branch at a marked down price (below the normal selling price
of the branch), the entries remain the same as in paragraph 9.4.5 in the textbook (refer to
Activity 8.14).
Activity 8.15
Work through example 9.13 in the prescribed textbook where inventory is sold at a marked
down price that is still above or equal to cost and example 9.14 where inventory is sold below
cost.
Journal entry to record the embezzlement of cash at the branch from either a cash or
a credit sale:
Cash sale:
Dr Bank (with the actual money banked)
Cr Branch inventory account (with the price of the inventory sold which includes the money
banked and the embezzled cash)
172
Credit sale:
Dr Bank (with the actual amount banked)
Cr Branch trade receivables control (with the total amount that the debtor paid, which consists
of the banked amount and the embezzled cash)
Activity 8.16
Work through example 9.15 in the prescribed textbook where inter-branch inventory
transactions are recorded.
Journal entry to record the inter-branch inventory transactions:

Dr Branch inventory (receiving branch) with the cost of the transferring branch
Dr Branch inventory (receiving branch) with the markup
Cr Branch adjustment account (receiving branch) with the markup
Cr Branch inventory (transferring branch) with the cost to the receiving branch
Cr Branch inventory (transferring branch) with the markup
Dr Branch adjustment account (transferring branch) with the markup
Study paragraph 9.4.10 to 9.4.14 in the prescribed textbook.
Activity 8.17
Work through example 9.16 in the prescribed textbook which illustrates the closing inventory,
inventory in transit and inventory shortage.
Activity 8.18
Work through example 9.17 in the prescribed textbook which is a comprehensive example of
inventory sent by head office to its branch invoiced at selling price
Read paragraph 9.5 in the prescribed textbook which summarises branch

transactions.
173
EXERCISE 8.1 – Inventory is invoiced to the branch at cost price
The following information pertains to the head office and branch of Boom CC for the year
ended 31 December 20.15:
R
Inventory sent to branch 4 800
Inventory returned to head office by the branch 80
Sales by branch for the year: Cash 2 000
Credit 3 290
Cash received from branch debtors and paid into the head office bank account 2 890
Sundry expenses paid by head office 600
1. The branch began trading on 2 January 20.15 and inventory is invoiced to the branch at
cost price.
2. An amount of R50 must be written off as a credit loss.
3. Discount on selling prices for cash sales granted to customers amounted to R30.
4. Inventory at 31 December 20.15 amounted to R480.
REQUIRED
Prepare the following accounts properly balanced/closed off, in the general ledger of the head
office for the year ended 31 December 20.15:
a) Branch inventory account
b) Inventory to branch account
c) Branch trade receivables control account
d) Branch expenses account
e) Bank account (partly)
SOLUTION 8.1
BOOM CC (HEAD OFFICE)

GENERAL LEDGER
a) Dr Branch inventory (at cost price) Cr
20.15 R 20.15 R
Dec 31 Inventory to branch 4 800 Dec 31 Inventory to branch 80
(Delivery at cost) (Returns at cost)
Branch expenses 1 050 Bank (Cash sales) 2 000
(Branch gross profit for Branch trade receivables
year)* control (Credit sales) 3 290
Balance c/d 480
(Closing inventory)
5 850 5 850
20.16
Jan 1 Balance b/d 480
(Opening inventory)
* Balancing figure
174
b) Dr Inventory to branch (at cost price) Cr

20.15 R 20.15 R
Dec 31 Branch inventory 80 Dec 31 Branch inventory 4 800
(Returns at cost) (Deliveries at cost)
Head office: Trading
account* 4 720
4 800 4 800
* Balancing figure
c) Dr Branch trade receivables control Cr

20.15 R 20.15 R
Dec 31 Branch inventory 3 290 Dec 31Bank (Collections de- 2 890
(Credit sales) posited by branch)
Branch expenses 50
(Credit losses)
Balance c/d 350
3 290 3 290
20.16
d) Dr Branch expenses Cr
20.15 R 20.15 R
Dec 31 Bank (Sundry expenses) 600 Dec 31Branch inventory 1 050
Branch trade receivables (Branch gross profit for
control (Credit losses) 50 the year)
Head office: Profit or loss 400
(Branch profit for the year)*
1 050 1 050
* Balancing figure
e) Dr Bank (extract) Cr
20.15 R 20.15 R
Dec 31 Branch trade receivables Dec 31 Branch expenses 600
control 2 890
(Collections deposited by
branch)
Branch inventory 2 000
(Cash sales)
Comments
x The cash discount on sales of R30 will not be recorded because the cash sales of
R2 000 already excludes this amount.
x Only cash transactions with the branch are shown in the bank account. In practice the
bank account will contain the cash transactions of the branch as well as those of the
head office.
x In the above solution we see that the branch inventory is brought down as a balance in
the branch inventory account at the end of the financial period. The balances of the
branch trade receivables control and the branch asset accounts are added to the head
office balances and disclosed as a total amount in the statement of financial position.
175
EXERCISE 8.2 – Inventory is invoiced to the branch at selling price.
The following information pertains to the head office and the branch of Pama CC for the year
ended 31 December 20.15:
R
Inventory sent to branch (selling price) 18 750
Cash sales (deposited in bank) 17 918
Returns to head office (selling price) 186
Sundry expenses paid by head office 4 760
1. All purchases are made by head office and all goods required by the branch are supplied
by head office at selling price, which is cost price plus 50%.
2. A burglary took place during the year and R55 in cash (cash sales) and inventory to the
value of R36 (selling price) were stolen. No entries have been made in the records yet.
3. The net proceeds of the annual sales amounted to R360. Inventory was sold at selling
price less 10% and no entries were made in the records concerning this price reduction.
4. Inventory invoiced to the branch at R75 (included in the amount of R18 750 above) was
still in transit at 31 December 20.15 and was therefore not included in the branch’s
inventory at 31 December 20.15.
5. Inventory at selling price:
31 December 20.14 R1 500
31 December 20.15 R1 950
REQUIRED
Prepare the following accounts, properly balanced/closed-off, in the general ledger of the head
office for the year ended 31 December 20.15:
b) Inventory to branch account
c) Branch adjustment account
d) Branch expenses account
176
SOLUTION 8.2
PAMA CC (HEAD OFFICE)

GENERAL LEDGER
a) Dr Branch inventory (at selling price) Cr

20.15 R 20.15 R
Jan 1 Balance b/d 1 500 Dec 31 Bank (Sales) 17 918
Inventory to branch c 12 500 Inventory to branch e 124
(Deliveries at cost) (Returns at cost)
Branch adjustment d 6 250 Branch adjustment 62
(Markup on deliveries) (Markup on returns)
Branch adjustment 10 Branch expenses 55
(Inventory surplus)* (Cash stolen)
Branch expenses f 24
(Inventory stolen at cost)
Branch adjustment g 12
(Markup on inventory
stolen)
Branch adjustment h 40
(Discount on sales)
Balance c/d 75
(Inventory in transit)
Balance c/d 1 950
(Closing inventory)
20 260 20 260
20.16
(Inventory in transit)
Balance b/d 1 950
(Opening inventory)
* Balancing figure
b) Dr Inventory to branch (at cost price) Cr

20.15 R 20.15 R
Dec 31 Branch inventory 124 Dec 31 Branch inventory 12 500
(Returns at cost) (Deliveries at cost)
Head office: Trading
account* 12 376
12 500 12 500
* Balancing figure
177
c) Dr Branch adjustment (mark-up at 50% on cost) Cr

20.15 R 20.15 R
Dec 31 Branch inventory 62 Jan 1 Balance i (Markup b/d 500
(Markup on returns) (on opening inventory)
Branch inventory g 12 Branch inventory 6 250
(Markup on inventory (Markup on deliveries)
stolen) Branch inventory 10
Branch inventory 40 (Inventory surplus)
(Discount on sales)
Balance ‫( ڡ‬Markup c/d 25
on inventory in transit)
Balance k (Markup c/d 650
on closing inventory)
Branch expenses 5 971
(Branch gross profit for
the year)*
6 760 6 760
20.16
Jan 1 Balance (Markup b/d 25
on inventory in transit)
Balance (Markup b/d 650
on opening inventory)
* Balancing figure
d) Dr Branch expenses Cr
20.15 R 20.15 R
Dec 31 Bank (Sundry expenses) 4 760 Dec 31 Branch adjustment 5 971
Branch inventory 55 (Branch gross profit for
(Cash stolen) the year)
Branch inventory 24
(Inventory stolen)
Head office: Profit or loss 1 132
(Branch profit for the
year)*
5 971 5 971
* Balancing figure
Calculations
c Cost of inventory sent to branch

%
Cost 100
Profit markup 50
Selling price 150
Inventory sent to branch at cost = R18 750 x 100/150 = R12 500
d Profit markup on deliveries

R18 750 x 50/150 = R6 250
e Cost of returns to head office

R186 x 100/150 = R124
178
f Cost of inventory stolen

R36 x 100/150 = R24
g Profit markup on inventory stolen

R36 x 50/150 = R12
h Discount on sale
R360 = 90% of original selling price
Original selling price = R360 ÷ 90%
= R400
? Discount = R(400 – 360) = R40
or
%
Cost 100
Profit markup 50
Original selling price 1 50
Markdown (10% x 150) (15)
Sold at 135
Original selling price

R360 x 150/135 = R400
Mark-down on the original selling price
R(400 – 360) = R40
or
R400 x 15/150 = R40
i Profit markup on opening inventory

R1 500 x 50/150 = R 500
‫ڡ‬ Profit markup on closing inventory in transit

R75 x 50/150 = R25
k Profit markup on closing inventory

R1 950 x 50/150 = R650
179
EXERCISE 8.3 – Inventory is invoiced to the branch at selling price
The following information pertains to the head office and branch of Sucro Confectionary CC
for the year ended 28 February 20.15:
R
Inventory to branch at selling price 64 500
Inventory returned to head office at selling price 1 800
Cash sales of branch embezzled by cashier 375
Administrative expenses of branch paid by head office 5 000
Discount granted to branch debtors for early settlement 150
Cash sales by branch (after deducting local purchases) – cost 41 500
price R500
Credit sales of branch 20 000
Rent expense of branch paid by head office 1 800
Inventory damaged – selling price 300
Credit losses of branch written off 50
1. Inventory was supplied to the branch by head office at selling price, that is, cost plus
50%.
2. Inventory at selling price at:
28 February 20.14 R4 500
28 February 20.15 R4 800
3. It is estimated that theft of inventory amounting to R360 (selling price) occurred during
the year. This amount must be taken into account during inventory reconciliations.
4. During the year the branch donated inventory (cost R60) towards a local charity fund
raising campaign.
5. Inventory purchased locally was also sold at cost price plus 50%.
REQUIRED
Prepare the following accounts properly balanced/closed-off, in the general ledger of the head
office for the year ended 28 February 20.15:
b) Branch adjustment account
c) Branch expenses account
180
SOLUTION 8.3
SUCRO CONFECTIONERY CC (HEAD OFFICE)

GENERAL LEDGER
a) Dr Branch inventory (at selling price) Cr
20.14 R 20.15 R
Mar 1 Balance b/d 4 500 Feb 28 Inventory to branch f 1 200
Inventory to branch c 43 000 (Returns at cost)
(Deliveries at cost) Branch adjustment g 600
Branch adjustment d 21 500 (Markup on returns)
(Markup on deliveries) Branch expenses 375
Bank (Local purchases) 500 (Cash embezzled)
Branch adjustment e 167 Bank (Cash sales) h 42 000
(Markup on local Branch trade receivables
Purchases) control (Credit sales) 20 000
Branch expenses i 200
(Cost of inventory
damaged)
Branch adjustment j 100
damaged)
Branch expenses k 240
(Cost of inventory
stolen)
Branch adjustment l 120
stolen)
Branch expenses 60
(Cost of inventory
donated)
Branch adjustment 20
donated)
Branch adjustment 25
(Inventory shortage)*
Balance c/d 4 727
(Closing inventory)
69 667 69 667
20.15
Mar 1 Balance b/d 4 727
(Opening Inventory)
* Balancing figure
181
b) Dr Branch adjustment (mark-up at 50% on cost) Cr

20.15 R 20.14 R
Feb 28 Branch inventory 600 Mar 1 Balance ᬐ b/d 1 500
(Markup on returns) (Markup on opening
inventory)
Branch inventory 100 Branch inventory d 21 500
(Markup on inventory (Markup on deliveries)
damaged) Branch inventory 167
Branch inventory 120 (Markup on local
(Markup on inventory purchases)
stolen)
Branch inventory ᬏ 20
donated)
Branch inventory 25
(Inventory shortage)
Balance ᬑ c/d 1 600
(Markup on closing
inventory)
Branch expenses 20 702
(Branch gross profit for
the year)*
23 167 23 167
20.15
(Markup on opening
inventory)
* Balancing figure
c) Dr Branch expenses Cr
20.15 R 20.15 R
Feb 28 Branch inventory 375 Feb 28 Branch adjustment 20 702
(Cash embezzled) (Branch gross profit for
Bank (Admin expenses) 5 000 the year)
Bank (Rent expenses) 1 800
Branch inventory 200
(Inventory damaged)
Branch debtors control 50
(Credit losses)
Branch inventory 240
(Inventory stolen)
Branch inventory 60
(Inventory donated)
Head office: Profit or loss 12 977
(Branch profit for the
year)*
20 702 20 702
* Balancing figure
182
Calculations
ᬅ Cost of inventory sent to branch

%
Cost 100
Profit markup 50
Selling price 150
Inventory sent to branch at cost = R64 500 x 100/150 = R43 000
ᬆ Profit markup on inventory sent to branch

R64 500 x 50/150 = R21 500
ᬇ Profit markup on local purchases

R500 x 50/150 = R167
ᬈ Cost of returns to head office

R1 800 x 100/150 = R1 200
ᬉ Profit markup on returns to head office

R1 800 x 50/150 = R600
ᬊ Bank (Cash sales)

R
Cash sales (after deduction of R500) 41 500
Cash used for local purchases 500
Total cash sales 42 000
ᬋ Cost of inventory damaged

R300 x 100/150 = R200
ᬌ Profit markup on inventory damaged

R300 x 50/150 = R100
ᬍ Cost of inventory stolen

R360 x 100/150 = R240
ᬎ Profit markup on inventory stolen

R360 x 50/150 = R120
ᬏ Profit markup on inventory donated

R60 x 50/150 = R20
ᬐ Profit markup on opening inventory

R4 500 x 50/150 = R1 500
ᬑ Profit markup on closing inventory

R4 800 x 50/150 = R1 600
183
Self-assessment
Yes No
Briefly discuss the concept of branches.
Briefly explain the difference between dependent and independent

branches.
Briefly discuss the information to be included in the reports submitted by a

dependent branch to a head office.
Record the transactions between a head office and a dependent branch in

the books of the head office where inventory sent to the branch is invoiced
at cost price.
Record the transactions between a head office and a dependent branch in
the books of the head office where inventory sent to the branch is invoiced
at selling price.
Record the transactions of a dependent branch pertaining to the following

where inventory is invoiced at cost price or at selling price:
Purchases of inventory by the branch
Sales of inventory by the branch
Inventory sold by the branch at a discount
Inventory damaged or stolen at the branch
Inter-branch inventory transactions
Settlement discount granted to debtors of the branch
Donations made by the branch
Cash embezzled at the branch
Inventory in transit from the branch to the head office and from the
head office to the branch
Identify and record a shortage or surplus in the inventory of a branch where

inventory is invoiced by the head office at selling price.
If you answered "yes" to all of the above assessment criteria, you have completed your
studies on branches and can move on to learning unit 9. If you answered "no" to any
of the above criteria, you must revise those sections before progressing to learning
unit 9.
184
LEARNING UNIT 9
9
Statement of cash flows
Key concepts ...................................................................................................................186
9.1 Introduction .............................................................................................................187
9.2 Main objective and advantages of a statement of cash flows ..................................188
9.3 Format of a statement of cash flows........................................................................188
9.4 Relationship between a statement of cash flows and other financial statements.....189
9.5 Identification of non-cash entries in financial statements prepared on the accrual

basis of accounting .................................................................................................189
9.6 Preparation of a statement of cash flows from financial statements prepared on

the accrual basis of accounting ..............................................................................190
Self-assessment ..............................................................................................................212
185
L
Learning outcomes
x discuss, in general terms, the purpose and importance of a statement of cash flows
x explain the relationship between a statement of cash flows and the other financial
statements
x prepare a statement of cash flows and the note in respect of non-cash transactions
pertaining to investing activities and financing activities of a sole proprietor, partnership
and close corporation according to the requirements of IAS 7 by utilising information
which is mainly obtained from the other financial statements and relevant notes thereto
Key concepts
x Cash and cash equivalents

x Non-cash transactions
x Operating activities
x Direct and indirect methods
x Investing activities
x Financing activities
186
9.1 Introduction
According to IAS 1, which was covered in learning unit 1, the objective of financial statements
is to provide information about the financial position, financial performance and cash flows of
an entity that is useful to a wide range of users in making economic decisions. The information
reported on in a statement of profit or loss and other comprehensive income, a statement of
financial position and a statement of changes in equity (in respect of a close corporation)
cannot meet all the informational needs of the users. More so in respect of the liquidity of a
business entity. A liquidity analysis of a business entity, inter alia, indicates how a business is
managing its cash flows. Such information is of great importance, since it shows, for example,
from which resources the transactions of a business entity are financed.
Making a profit is one side of the coin for a successful business, but cash management is
essential to be able to keep on trading. Cash flow and profit are not necessarily the same -
the crucial difference between the two concepts is timing. For example, when an entity sells
to a customer on credit, the sale is immediately accounted for in the statement of profit or loss
and other comprehensive income (referred to as the accrual accounting concept) and will
result in a profit if the sale was above the cost of the inventory. However, the entity does not
receive the cash immediately and a statement of cash flows will include this credit transaction
only when the actual cash is received. Furthermore, the sustainability of a business, for
example, will be questioned when its operating activities are predominantly financed with
external funds (such as long-term borrowings). The purpose of a statement of cash flows (as
prescribed by IAS 7) is to provide information on the cash position of the entity with regard to
the inflow and outflow of cash during the year.
You will encounter the statement of cash flows throughout your accounting studies. It is
therefore very important that your foundational knowledge of cash flows is good. Although
cash flows are dealt with early in the prescribed textbook, we decided to include this as the
last learning unit after you have dealt with the different types of entities (which include branch
accounting). You may have to spend a lot more time to understand cash flows and we
recommend that you do.
Read the overview of a statement of cash flows and paragraph 7.1 in the
prescribed textbook. The paragraph illustrates how the financial performance of
an illustrious American company was misinterpreted with catastrophic results
for the entity – all due to a lack of cash flow information.
187
9.2 Main objective and advantages of a statement of cash flows
The statement of cash flows provides the users with the following valuable information:
x The cash that was generated through operating activities

x Cash used to acquire non-current assets and cash obtained from the disposal of non-
current assets
x The amount of money invested during the year or money received from the maturity of
investments previously made
x Any amounts borrowed and repaid during the financial year
x The extent to which the entity used borrowed funds or obtained equity in the period under
review.
9.3 Format of a statement of cash flows
Please make sure that you can define cash, cash equivalents, cash flows and the three
sections of a statement of cash flows.
IAS 7 prescribes two methods for the preparation of a statement of cash flows, namely the
direct or the indirect method. Both are discussed in detail further on in this learning unit. Note
that the format presented in paragraph 7.3 is a comprehensive illustration of entries that can
be included in a statement of cash flows for different types of entities. Further references to
the format of a statement of cash flows pertain to this format.
The “Cash flows from operating activities” section can be disclosed according to either the
direct or the indirect method.
188
9.4 Relationship between a statement of cash flows and other
financial statements
Apart from a statement of cash flows, financial statements consist of:
x Statement of profit or loss and other comprehensive income

x Statement of financial position
x Statement of changes in equity
x Notes to the financial statements.
The statement of cash flows is complementary to other statements and can be prepared from
information in the various statements and notes. Because statements of cash flows contain
only cash flow entries, it is very important to be able to distinguish between cash and non-
cash entries.
9.5 Identification of non-cash entries in financial statements

prepared on the accrual basis of accounting
This paragraph must be read attentively. Attempt to do the table provided on the identification
of non-cash transactions before you look at the solution. Carefully work through the
explanation and journal entries to understand why the mentioned entries are non-cash entries.
Activity 9.1
Make a list of seven or eight non-cash transactions.
Feedback 9.1
x Depreciation
x Allowance for credit losses/increases or decreases in the allowance
x Impairment losses or amortisation
x Profit or loss on sale of assets
x Losses with the writing off of inventory
x Revaluation of assets and fair value adjustments
x Credit losses written off
x Certain adjustments such as expenses in arears or income in arrears
x Credit sales and credit purchases.
189
9.6 Preparation of a statement of cash flows from financial
statements prepared on the accrual basis of accounting
9.6.1 Cash flows from operating activities
The “cash flows from operating activities” section of a statement of cash flows can be reported
on according to either the direct or the indirect method. You must be able to apply both
methods in FAC1601.
Cash generated from or used in operations according to the direct method
Read paragraph 7.6.1.1 in the prescribed textbook and study the layout of the
cash flows from operating activities according to the direct method.
Remember that outflows of cash are always indicated in brackets, whereas cash inflows are
indicated without brackets.
The calculation of cash receipts from customers and cash paid to suppliers and employees is
explained in detail in subparagraphs 7.6.1.1(a) and (b) in the prescribed textbook. Take note
that the financial period during which an accrued or prepaid amount was recorded, plays an
important role when the cash receipts and cash payments are calculated.
Activity 9.2
Work through examples 7.1 and 7.2 in the prescribed textbook, which illustrate the calculation
of cash receipts and cash paid to suppliers and employees, respectively.
The use of t-accounts to establish the cash paid or received is illustrated in example 7.3.
Activity 9.3
190
Cash generated from or used in operations according to the indirect method
When the indirect method is used to report on cash generated from or used in operations, the
first figure that is needed for disclosure is the profit (or loss) for the financial year (in the case
of a sole proprietorship/partnership) or the profit (or loss) before tax (in the case of a close
corporation). This figure is then adjusted on the face of the statement of cash flows to omit
x any non-cash entries
x any items that must be disclosed on the face of the statement of cash flows after the cash
generated from or used in operations section has been prepared.
Thereafter, the changes in the working capital (that is the changes in the current assets and
current liabilities that pertain to the operating activities of the business entity) are disclosed.
Read paragraph 7.6.1.2 in the prescribed textbook and study the layout of the
cash flows from operating activities according to the indirect method.
Activity 9.4
Operating activity items disclosed after cash generated from or used in operations
Activity 9.5

Make sure that you understand when a purchase or disposal of an investment is treated as
an operating activity and when it is treated as an investing activity as explained in paragraph
7.6.1.3 and the information in example 7.3 pertaining to investments.
Comment
Cash flows can only be mastered by doing as many examples as you can and doing so on
your own before looking at the solution so that you can see where you made a mistake. The
use of T-accounts to calculate the cash amount pertaining to a specific account may also be
more “user-friendly” than using tables 7.1 and 7.2 in the prescribed textbook and will be
particularly useful in the next section.
9.6.2 Cash flows from investing activities

IAS 7 requires an entity to disclose the classes of gross cash receipts and gross cash
payments made to acquire assets and/or investments. This is collectively referred to as the
investing activities of an entity.
The cash flows from investing activities are calculated by using information given in the
statement of financial position for the current and preceding financial years. If there is a
191
difference between the amounts of an entry from year to year, it is possible that a cash flow
took place. The difference must be analysed further to determine whether a cash flow occurred
or not and the use of T-accounts is very helpful.
Make sure that you understand the effect of depreciation in the t-account when assets are
presented at carrying amount. Take note of the implications of a revaluation surplus in an
asset T-account and remember to consider those when you calculate the actual cash flow that
occurred in the particular T-account.
Activity 9.6
9.6.3 Cash flows from financing activities
Cash flows from financing activities disclose future claims on cash and how activities and
investments were financed.
The cash flows from financing activities can be determined by comparing the statements of
financial position of the current year and of the preceding year and/or by using the information
given in the statement of the changes in equity (or the statement of changes in net investment
of members for CCs).
Activity 9.7
9.6.4 Cash and cash equivalents
Once the cash flows from the operating activities, investing activities and financing activities
sections have been prepared, the net cash increase/(decrease) in cash and cash equivalents
is calculated by adding/subtracting the net cash flows of the operating, investing and financing
activities sections. The cash and cash equivalents at the beginning of the financial period are
added to this net increase/(decrease). The answer of this calculation is equal to the cash and
cash equivalents at the end of the financial period. This amount must be equal to the cash
and cash equivalents as disclosed in the statement of financial position for that period (so you
know your statement of cash flows has balanced).
192
Activity 9.8
9.6.5 Notes pertaining to a statement of cash flows
You only need to be able to prepare only the note in respect of a non-cash transaction
pertaining to an investing or financing activity. Examples of such a note are supplied in
Example 7.9 and 7.10 in the prescribed textbook.
You are now ready to do the two comprehensive examples in the prescribed textbook.
Example 7.9 deals with the preparation of a statement of cash flows for a partnership prepared
according to the direct as well as the indirect method.
Activity 9.9
Work through comprehensive example 7.9 in the prescribed textbook.
Example 7.10 deals with the preparation of a statement of cash flows for a close corporation
prepared according to the indirect method only. By now you should be able to prepare the
statement of cash flows for a close corporation according to the direct method as well and you
can attempt that on your own.
Activity 9.10
Work through comprehensive example 7.10 in the prescribed textbook.
Study paragraph 7.7 in the prescribed textbook which is a summary of the

chapter.
193
EXERCISE 9.1 – Preparation of a statement of cash flows in respect of a sole trader
The following information pertains to L Leyds, a general dealer:
EXTRACTED INFORMATION FROM THE STATEMENT OF FINANCIAL POSITION AS AT

28 FEBRUARY
20.15 20.14
R R
Land and buildings at cost 100 000 90 000
Equipment at cost 72 000 60 000
Inventory at cost 20 000 16 000
Trade receivables control 17 000 19 000
Bank (Dr) 2 000 –
Trade payables control 19 000 20 000
Bank overdraft – 6 000
Capital – L Leyds 84 200 58 400
Long-term loan 80 000 75 000
Accumulated depreciation: Equipment 12 000 9 800
1. The total comprehensive income for the year amounted to R26 000 and has already
been closed off against the capital account of L Leyds. There were no items pertaining
to other comprehensive income.
2. No property, plant and equipment were sold or scrapped during the year ended
28 February 20.15. Equipment with a cost price of R7 000 was purchased on credit
during the year. This amount is included in the trade payables control figure. By the end
of the year, no payments in respect of the equipment were made. Assume the amount
of this purchase to be significant. All of the other additions to property, plant and
equipment were obtained from third parties and paid for in cash.
3. The interest expense on the long-term loan during the year amounted to R12 000.
Interest is not capitalised.
4. The creditors in respect of 28 February 20.15 pertain to trade payables control and the
creditor referred to in additional information 2.
5. Cash withdrawals (closed off against the capital account) by L Leyds during the year
ended 28 February 20.15 amounted to R10 200.
6. Capital contributions by L Leyds are made in cash.
REQUIRED
Prepare the statement of cash flows of L Leyds for the year ended 28 February 20.15 to
comply with the requirements of International Financial Reporting Standards (IFRS)
appropriate to the business of the sole trader. Comparative figures are not required. The cash
generated from/(used in) operations must be disclosed according to the indirect method. Only
the note in respect of the non-cash transaction pertaining to the investing activity must be
disclosed.
194
SOLUTION 9.1
L LEYDS
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.15
R R
Cash flows from operating activities
Adjustments for:
Depreciation R(12 000 – 9 800) 2 200
40 200
Increase in inventories R(20 000 – 16 000) (4 000)
Decrease in trade receivables(19 000 – 17 000) 2 000
Decrease in trade payables
R[20 000 – (19 000 – 7 000*)] (8 000)
Cash generated from operations 30 200
Interest paid (12 000)
Drawings (10 200)
Net cash from operating activities 8 000
Cash flows from investing activities
Investments in property, plant and equipment to expand operating
Capacity (15 000)
Additions to land and buildings c (10 000)
Additions to equipment d (5 000)
Net cash used in investing activities (15 000)
Cash flows from financing activities

Proceeds from capital contribution e 10 000
Proceeds from long-term borrowing f 5 000
Net cash increase from financing activities 15 000
Net increase in cash and cash equivalents 8 000
Cash and cash equivalents at beginning of year (6 000)
Cash and cash equivalents at end of year 2 000
L LEYDS
NOTE FOR THE YEAR ENDED 28 FEBRUARY 20.15
1. Non-cash transaction pertaining to the investing activity

Equipment with a cost price of R7 000 was purchased on credit during the year. No
payments were made in this regard.
Comment
Since the above credit purchase is regarded as significant (refer to additional information 2),
the transaction is disclosed in a note to the statement of cash flows.
Take special note of the:

x Calculation of a decrease in the trade payables control when trade creditors include a
creditor pertaining to purchases of assets.
x Disclosure of the purchase of equipment on credit, in respect of which no payment was
made.
195
Calculations
ᬅ Additions to land and buildings
Step 1: Determine the difference between the opening and closing balances of the land
and buildings at cost account.
R
Land and buildings at cost (closing balance) 100 000
Subtract: Land and buildings at cost (opening balance) (90 000)
Increase in (purchase of) land and buildings 10 000
Step 2: Determine whether the increase pertains to a cash flow.
Additional information 2 states that all property, plant and equipment with the exception
of the purchase of equipment from a creditor, were purchased from third parties and paid
for. Therefore, we know that the additions to the land and buildings were paid for in cash.
ᬆ Additions to equipment
Step 1: Determine the difference between the opening and closing balances of
equipment at cost account.
R
Equipment at cost (closing balance) 72 000
Subtract: Equipment at cost (opening balance) (60 000)
Increase in (purchase of) equipment 12 000
Additional information 2 states that all property, plant and equipment, with the exception
of the purchase of equipment with a cost price of R7 000 from a creditor, were paid for.
Therefore, for calculation purposes, the accounting entry that pertains to this transaction
must be “reversed” (added back). (That is, the creditor’s account is “debited” and the
equipment at cost account is “credited”. In other words, the closing balances of these
accounts must each be reduced by this amount. Note that this reversal is not an actual
accounting entry. It pertains solely to a calculation to prepare the statement of cash flows.)
The effect of the reversal is that the increase in the equipment is reduced to
R5 000 (R12 000 – R7 000), which is the value of the equipment that was purchased for
cash.
ᬇ Proceeds from capital contribution
Step 1: Determine the difference between the opening and closing balances of the
capital account.
R
Capital (closing balance) 84 200
Add: Drawings (Additional information 5) 10 200
Subtract: Capital (Opening balance) (58 400)
Total comprehensive income for the year (Additional information 1) (26 000)
Increase in capital 10 000
196
Additional information 6 states that all capital contributions by Leyds are made in cash.
Reconstructing the capital account of Leyds will result in the same calculated amount of
R10 000
Capital: L Leyds
Dr (reconstructed for calculation purposes) Cr
20.15 R 20.14 R
Feb 28 Drawings 10 200 Mar 1 Balance b/d 58 400
Balance c/d 84 200 Profit or loss account 26 000
Bank* 10 000
94 400 94 400
20.15
* Balancing entry
ᬈ Proceeds from capital contribution
long-term loan (shown as long-term borrowing in the statement of financial
position).
R
Long-term loan (closing balance) 80 000
Subtract: Long-term loan (Opening balance) (75 000)
Increase in long-term loan 5 000
Since there was an increase of R5 000 and the interest expense on the borrowing is not
capitalised, the R5 000 must have been received by the business in cash.
197
EXERCISE 9.2 – Preparation of a statement of cash flows in respect of a partnership
The following information pertains to the partnership, Bluemax:
BLUEMAX
R
Revenue 500 600
Inventory (1 March 20.14) 100 400
Purchases 191 960
292 360
Inventory (28 February 20.15) (96 000)
Other income 14 800
Profit on sale of non-current asset (Land and buildings) 10 000
Rental income 4 800
319 040
Administrative expenses (Salaries and wages included) 70 000
Depreciation 1 200
BLUEMAX
Capital Current accounts Appro- Total
B Blue M Max B Blue M Max priation equity
R R R R R R
Balances at 1 March 20.14 193 800 193 800 50 400 (400) – 437 600
Capital contributions 26 200 26 200 52 400
for the year 247 840 247 840
Interest on capital 13 200 13 200 (26 400)
Interest on current accounts 5 040 (40) (5 000)
Interest on drawings (13 440) (11 720) 25 160
Partners’ share of total
comprehensive income 120 800 120 800 (241 600)
Drawings (134 400) (117 200) (251 600)
Balances at 28 Feb 20.15 220 000 220 000 41 600 4 640 – 486 240
198
BLUEMAX
28 FEBRUARY
20.15 20.14
R R
Capital: B Blue 220 000 193 800
Capital: M Max 220 000 193 800
Current account: B Blue 41 600 Cr 50 400 Cr
Current account: M Max 4 640 Cr 400 Dr
Furniture and equipment at cost 12 800 12 000
Accumulated depreciation: Furniture and equipment 3 200 2 000
Inventory 96 000 100 400
Bank 67 240 Dr 10 000 Cr
Accrued income (Rent receivable) 400 800
Accrued expenses (Salaries and wages) 1 200 400
Fixed deposit 40 000 –
1. The fixed deposit was made on 28 February 20.15.

2. No land and buildings were purchased during the year. Fifty percent of the selling price
of the land and buildings was received in cash, whereas the outstanding amount was
on credit.
3. No furniture or equipment was sold or scrapped during the year. All purchases were
paid for in cash.
4. All purchases of inventory were on credit. All of the other expenses, except the accrued
expenses, were paid in full.
5. The drawings of the partners were made in cash.
6. Inventory is disclosed at cost.
7. There were only trade debtors at 28 February 20.14. The debtors at 28 February 20.15
pertain to trade debtors and the debtor in respect of the sale of land and buildings.
8. All capital contributions were made in cash.
REQUIRED
Prepare the statement of cash flows of Bluemax for the year ended 28 February 20.15 to
comply with the requirements of IFRS appropriate to the business of the partnership. The cash
generated from/(use in) operations must be disclosed according to the direct method.
Comparative figures are not required. Disclose only the note in respect of the non-cash
transaction pertaining to the investing activity.
199
SOLUTION 9.2
BLUEMAX
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.15
Note R R
Cash receipts from customers c 498 200
Cash paid to suppliers and employees d (245 960)
Drawings R(134 400 + 117 200) (251 600)
Net cash from operating activities 640
Investments in property, plant and equipment to expand
operating capacity (800)
Additions to furniture and equipment R(12 800 – 12 000) (800)
Proceeds from the sale of land and buildings 1 65 000
Acquisition: Fixed deposit R(40 000 – 0) (40 000)
Net cash from investing activities 24 200

Proceeds from capital contribution R[(220 000 – 193 800) x 2] 52 400
Net cash from financing activities 52 400
Net decrease in cash and cash equivalents 77 240
BLUEMAX
NOTE FOR THE YEAR ENDED 28 FEBRUARY 20.15
1. Non-cash transaction pertaining to the investing activity

Land and buildings with a cost price of R120 000 were sold for R130 000. An amount of
R65 000 is receivable in the next financial year.
Comment
Take note of how to calculate and disclose a non-cash transaction in respect of an investing
activity.
200
Calculations
ᬅ Cash receipts from customers

20.14 20.15
+ Accrued - Accrued Cash received
Items in statement of profit or loss and other income – income + from
comprehensive income income Income customers
received in received in during 20.15
advance advance
R R R R
Revenue 500 600 + 74 000 - 81 600 n = 493 000
Rental income 4 800 + 800 - 400 = 5 200
498 200
n Trade receivables (closing balance)
A debtor included in the amount of R146 600 does not pertain to trade receivables, but to
a debtor who purchased land and buildings from the entity (refer to additional information
7). The closing balance of this debtor’s account must be excluded from the R146 600.
The closing balance is calculated as follows:
x The selling price of the sold land and buildings:

Carrying amount + Profit on sale
R(360 000 – 240 000) + R10 000
= R130 000
x According to additional information 2, 50% of R130 000 is still outstanding at the end
of 20.15:
? R130 000 ÷ 2 = R65 000 = Closing balance.
Therefore, R65 000 must be excluded from R146 600:
R(146 600 – 65 000) = R81 600 = Closing balance of trade receivables
ᬆ Cash paid to suppliers and employees

20.14 20.15 Cash to
Items in statement of profit or loss and + Accrued - Accrued suppliers and
other comprehensive income expenses – expenses + employees
Prepayments Prepayments during 20.15
R R R R
Purchases 191 960 + 97 200 - 112 400 = 176 760
Administrative expenses 70 000 + 400 - 1 200 = 69 200
245 960
201
EXERCISE 9.3 – Preparation of a statement of cash flows in respect of a close
corporation
The following information pertains to Cash CC:
CASH CC
YEAR ENDED 31 DECEMBER 20.15
R
Revenue 490 000
Purchases 301 500
332 500
Other income 28 000
Dividend income: Listed investment 13 000
Fair value adjustment: Held for trading: Listed investment 15 000
235 500
Depreciation 19 000
Salaries to members 24 000
Wages 36 000
CASH CC
Members’ Retained
Total
contributions earnings
R R R
Balances at 1 January 20.15 355 000 8 000 363 000
Members’ contributions 20 000 20 000
Balances at 31 December 20.15 375 000 47 000 422 000
202
CASH CC
Note 20.15 20.14
R R
ASSETS
Non-current assets 448 500 394 000
Property, plant and equipment 1 448 500 394 000
Current assets 151 000 103 000
Inventories 50 000 31 000
Trade receivables 35 000 30 000
Prepayments 2 000 –
Listed investment 50 000 35 000
Cash and cash equivalents 14 000 7 000
Total assets 599 500 497 000
Total equity 422 000 363 000
Members' contributions 375 000 355 000
Retained earnings 47 000 8 000
Total liabilities 177 500 134 000
Non-current liabilities 100 000 70 000
Long-term borrowings 100 000 70 000
Current liabilities 77 500 64 000
Trade payables 31 000 38 000
Distribution to members payable 37 500 15 000
Current tax payable 9 000 11 000
Total equity and liabilities 599 500 497 000
CASH CC
ABSTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR

Machinery
Land and
and Total
buildings
equipment
R R R
Carrying amount at 1 January 20.15 260 000 134 000 394 000
Cost 260 000 177 000 437 000
Additions – 77 500 77 500
Disposals – (4 000) (4 000)
Depreciation for the year – (19 000) (19 000)
Carrying amount at 31 December 20.15 260 000 188 500 448 500
Cost 260 000 237 500 497 500
203
1. During the year machinery with a cost price of R17 000 was sold for cash at its carrying
amount and replaced with new machinery. Depreciation to the amount of R13 000 was
recorded in respect of the sold machinery, as from the date of purchase to the date of
sale.
2. An additional machine was purchased for R40 000 to expand the operating capacity of
the business.
3. Machinery was purchased for cash.
4. No equipment was purchased or sold during the financial year ended
31 December 20.15.
5. Listed investment pertains to shares purchased on 31 December 20.15 from Doc
Limited. The shares are held for trading. No shares from the listed investment were sold
during the current financial year.
6. All inventories are purchased and sold on credit.
7. Inventory is recorded at cost.
8. Trade and other payables include:
20.15 20.14
R R
Accrued wages 6 000 5 000
9. The close corporation will be renting additional premises as from 1 January 20.16.
10 The trade receivables control pertains to the trade debtors to whom trading inventory
was sold on credit.
11. The prepayment was in respect of a rental expense which is included in administrative
expenses.
12. The long-term borrowings pertain to a long-term loan. The interest on the loan is not
capitalised.
REQUIRED
Prepare the statement of cash flows of Cash CC for the year ended 31 December 20.15 to
comply with the requirements of IFRS appropriate to the business of the close corporation.
The cash generated from/(used in) operations must be disclosed according to the direct
method. Comparative figures and notes are not required.
204
SOLUTION 9.3
CASH CC
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20.15
Note R R
Cash receipts from customers c 485 000
Cash paid to suppliers and employees d (390 500)
Dividends received e 13 000
Interest paid f (14 000)
Income tax paid g (38 000)
Distributions to members paid h (25 000)
Investments in property, plant and equipment to maintain
operating capacity (37 500)
Replacement of machinery i (37 500)
Investment in property, plant and equipment to expand operating
Capacity (40 000)
Addition to machinery (40 000)
Proceeds from sale of machinery j 4 000
Net cash from in investing activities (73 500)
Proceeds from members’ contributions k 20 000
Proceeds from long-term borrowings ᬎ 30 000
Net cash from financing activities 50 000
Cash and cash equivalents at beginning of year 7 000
Comment
Take note of the following:
x How to disclose an investment in property, plant and equipment to maintain operating
capacity.
x How to calculate the cash receipts from the sale of machinery.
x The non-cash entry pertaining to the revaluation of the financial asset at fair value through
profit or loss: Held for trading: Listed investment. The fair value adjustment of R15 000
R(50 000 – 35 000) pertains to a revaluation of the listed investment. The increase in the
statement of financial position is therefore a non-cash entry.
205
Calculations
ᬅ Cash receipts from customers

R
Revenue (Sales) 490 000
Add: Trade receivables control (opening balance) 30 000
Less: Trade receivables control (closing balance) (35 000)
Cash receipts from customers 485 000
ᬆ Cash paid to suppliers and employees
20.14 20.15 Cash to

+ Accrued - Accrued suppliers and
Items
expenses – expenses + employees
Prepayments Prepayments during 20.15
R R R R
Statement of profit or loss and other
comprehensive income:
Purchases (for payments made to
trade payables control) 301 500 + 33 000 - 25 000 309 500
Salaries to members 24 000 – – 24 000
Administrative expenses 20 000 – + 2 000 22 000
Wages 36 000 + 5 000 - 6 000 35 000
390 500
ᬇ Dividends received
No dividends are indicated as receivable at the beginning or end of the financial year
under review. It can therefore be concluded that the dividend income of R13 000 for the
year ended 31 December 20.15 was received in cash.
ᬈ Interest paid
No accrued or prepaid amounts were indicated in respect of an interest expense. It can

therefore be concluded that the interest of R14 000 in the statement of profit or loss and
other comprehensive income for the year ended 31 December 20.15 was paid in cash.
ᬉ Income tax paid
R
Income tax expense 36 000
Add: Current tax payable (opening balance) 11 000
Less: Current tax payable (closing balance) (9 000)
Income tax paid 38 000
ᬊ Distribution to members
R
Distribution to members 47 500
Add: Distribution to members payable (opening balance) 15 000
Less: Distribution to members payable (closing balance) (37 500)
Distribution to members paid 25 000
206
ᬋ Replacement and addition to machinery
machinery and equipment at cost account:
The note in respect of property, plant and equipment show that there were additions to
the amount of R77 500. In additional information 2, it was mentioned that machinery to
the amount of R40 000 was purchased to expand the operating capacity of the business.
It can therefore be concluded that machinery to the amount of R37 500 was purchased
to replace machinery sold.
Step 2: Determine whether the additions pertain to a cash flow:

Additional information 3 states that the purchases of machinery were paid for in cash.
ᬌ Proceeds from the sale of machinery
Cost – Accumulated depreciation = Carrying amount

R(17 000 – 13 000) = R4 000
Additional information 1 states that machinery was sold for cash at its carrying
amount. The selling price of the machinery is therefore R4 000.
ᬍ Proceeds from members’ contributions
members’ contributions account:
R
Members’ contributions (Statement of financial position as at 31 December 20.15) 375 000
Less: Members’ contributions (Statement of financial position as at
31 December 20.14) (355 000)
Increase in members’ contributions* 20 000
* Also refer to the statement of changes in net investment of members for the year ended
31 December 20.15.
Step 2: Determine whether the increase pertains to a cash flow:
No further information was given in respect of members’ contributions. It can therefore

be concluded that the increase in the members’ contributions was a cash contribution.
ᬎ Proceeds from long-term borrowing
long-term borrowing:
R
Long-term borrowings (Statement of financial position as at 31 December 20.15) 100 000
Less: Long-term borrowings (Statement of financial position as at
31 December 20.14) (70 000)
Increase in long-term borrowings 30 000
Since there was an increase in the long-term borrowing and the interest charged on the
borrowing is not capitalised, the R30 000 must have been received in cash.
207
EXERCISE 9.4 – Preparation of a statement of cash flows in respect of a close
corporation
The following information pertains to Greengrow CC:

31 DECEMBER
20.15 20.14
R R
Members’ contributions 375 000 375 000
Retained earnings 48 000 15 000
Long-term loan 70 000 100 000
Machinery and equipment at cost 177 000 220 500
Accumulated depreciation: Machinery 43 000 49 000
Fixed deposit 35 000 50 000
Inventory 31 000 50 000
Bank (Dr) 47 000 –
Prepaid rental expense – 3 000
Bank overdraft – 2 000
Current tax payable 11 000 9 000
Distribution to members payable 15 000 37 500
Interest payable 5 000 6 000
EXTRACTED INFORMATION FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.15
R
Interest income (Fixed deposit) 13 000
Depreciation 19 000
Loss on sale of machinery and equipment 500
EXTRACTED INFORMATION FROM THE STATEMENT OF CHANGES IN NET INVESTMENT

OF MEMBERS FOR THE YEAR ENDED 31 DECEMBER 20.15
R
Distributions to members 37 500
1. No machinery and equipment were purchased during the financial year. Machinery and
equipment were sold for cash
2. Inventory is disclosed at cost.
3. A fixed deposit was redeemed in cash during the financial year.
4. The interest on the long-term loan is not capitalised.
5. The were no other comprehensive income for the year.
REQUIRED
Prepare the statement of cash flows of Greengrow CC for the year ended 31 December 20.15
to comply with the requirements of International Financial Reporting Standards (IFRS)
appropriate to the business of the close corporation. The cash generated from/(used in)
operations must be disclosed according to the indirect method. Comparative figures and notes
are not required.
208
SOLUTION 9.4
GREENGROW CC
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20.15
R R
Profit before tax c 113 500
Adjustments for:
Loss on sale of machinery and equipment 500
Depreciation 19 000
Interest income (Fixed deposit) (13 000)
134 000
Decrease in inventories R(50 000 – 31 000) 19 000
Decrease in trade receivables R(35 000 – 30 000) 5 000
Decrease in prepaid rent R(3 000 – Nil) 3 000
Decrease in trade payables R(25 000 – 13 000) (12 000)
Interest received d 13 000
Interest paid e (15 000)
Income tax paid f (41 000)
Distribution to members paid g (60 000)
Proceeds from the sale of machinery and equipment h 18 000
Proceeds from the maturity of fixed deposit i 15 000
Net cash used in investing activities 33 000
Repayment of long-term borrowing j (30 000)
Net cash from financing activities (30 000)
Comment
Take note of the calculation of profit before tax and the adjustments necessary.
Calculations
ᬅ Profit before tax

R
Add: Income tax expense 43 000
ᬆ Interest received
No interest income is indicated as receivable at the beginning or end of the financial year.
It can therefore be concluded that the interest of R13 000 earned for the year ended
31 December 20.15, was received in cash.
209
ᬇ Interest paid
R
Add: Interest payable (opening balance) 6 000
Less: Interest payable (closing balance) (5 000)
Interest paid 15 000
ᬈ Income tax paid

R
Add: Current tax payable (opening balance) 9 000
Less: Current tax payable (closing balance) (11 000)
Income tax paid 41 000
ᬉ Distribution to members paid

R
Distribution to members 37 500
Add: Distribution to members payable (opening balance) 37 500
Less: Distribution to members payable (closing balance) (15 000)
Distribution paid 60 000
ᬊ Proceeds from the sale of machinery
machinery and equipment at cost account:
R
Machinery and equipment at cost (opening balance) 220 500
Less: Machinery and equipment at cost (closing balance) (177 000)
Decrease in machinery and equipment at cost 43 500
Step 2: Determine whether the decrease pertains to a cash flow:
Additional information 1 states that no machinery and equipment were purchased during
the year and that machinery and equipment were sold for cash. The decrease in the
machinery and equipment was caused by a cash sale of machinery and equipment with
a cost price of R43 500.The cash inflow is equal to the proceeds (selling price) of the
sales transaction.
Carrying amount of machinery and equipment sold (unknown) minus Loss on sale of
machinery and equipment = Selling price (unknown)
The carrying amount = Cost price of the machinery and equipment sold minus
Accumulated depreciation of the machinery and equipment sold
210
The calculation of the accumulated depreciation is best illustrated by the reconstruction of the
accumulated depreciation account:
Accumulated depreciation
Dr (reconstructed for calculation purposes) Cr
20.14 R 20.14 R
Dec 31 Realisation account* 25 000 Jan 1 Balance (given) b/d 49 000
Balance (given) c/d 43 000 Dec 31 Depreciation (given) 19 000
68 000 68 000
20.15
Jan 1 Balance b/d 43 000
* Balancing entry: Pertain to the accumulated depreciation in respect of the sold machinery and
equipment.
Carrying amount of the machinery and equipment sold = R(43 500 – 25 000) = R18 500
Selling price = R(18 500 – 500) = R18 000
ᬋ Proceeds from the maturity of fixed deposit
Step 1: Determine the difference between the opening and closing balances of the fixed
deposits:
R
Fixed deposits (opening balance) 50 000
Less: Fixed deposits (closing balance) (35 000)
Realisation of fixed deposit 15 000
Additional information 3 states that a fixed deposit was redeemed in cash during the
financial year.
ᬌ Repayment of long-term borrowing
long-term loan disclosed as long-term borrowings in the statement of financial
position:
R
Long-term (opening balance) 100 000
Less: Long-term loan (closing balance) (70 000)
Decrease in long-term loan 30 000
Since there was a decrease in the long-term loan to the amount of R30 000 and the
interest charged on the borrowing is not capitalised the R30 000 must have been repaid
in cash.
211
Self-assessment
Yes No
Briefly discuss the purpose and importance of a statement of cash
flows.
Briefly explain the relationship between a statement of cash flows and

the other financial statements that were prepared on the accrual basis
of accounting, and describe how this relationship impacts on the
preparation of a statement of cash flows.
Prepare a statement of cash flows and the notes in respect of non-

cash transactions pertaining to investing and financing activities
according to the requirements of IAS 7 by utilising information which
is mainly obtained from the other financial statements and any
relevant notes thereto, for each of the following business entities:
Sole proprietor
Partnership
Close corporation
If you answered "yes" to all of the above assessment criteria, you have complete the
learning unit on cash flows and can now focus on revision of the study material for the
exams. If your answer was "no" to any of the above criteria, revise those sections
concerned before commencing with the revision of the study material.
212

FAC1602 STUDY GUIDE 001 - 2019 - 4 - B

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Introduction and overview of the module....................................................................iv

LEARNING UNIT 1 .................................................................................................... 1

LEARNING UNIT 2 .................................................................................................. 25

LEARNING UNIT 3 .................................................................................................. 45

LEARNING UNIT 4 .................................................................................................. 67

LEARNING UNIT 5 .................................................................................................. 85

LEARNING UNIT 6 ................................................................................................ 101

LEARNING UNIT 7 ................................................................................................ 143

LEARNING UNIT 8 ................................................................................................ 163

LEARNING UNIT 9 ................................................................................................ 185

2. Overview of FAC1601 and assumed knowledge from FAC1502

Collecting and processing accounting data

Including the processing of data and adjustments, closing off

Accounting for current and non-current assets

Accounting for current and non-current liabilities

Learning outcomes. This icon indicates what aspects of

Key concepts. The learning content will address the

Activity. This icon indicates activities that you must do in

Self-assessment. This icon indicates that you will be

Feedback. This icon indicates that you will receive feedback

Read. If it is suggested that you should read a certain

Study. This icon indicates which aspects of the study

Timeout. Well done – you have completed the learning unit!

x plan the answer systematically;

Apply Use in a practical manner; use as relevant or suitable

Calculate Ascertain by mathematical procedure/exact reckoning

Compare Examine in order to observe resemblances,

Complete Finish/add what is required; show the necessary detail

Define State precisely the meaning/scope/total character of;

Describe Give clearly the distinguishing details or essential

Discuss Examine by argument, debate, hold conversation about

Explain Set out in detail (interpret); the meaning of account for

List Record/itemise names or things belonging to a class

Mention/name/state Specify by name; cite names, characteristics, items,

Prepare Make ready/complete for a particular purpose; to put

Reconcile To make or become visible, noticeable; to exhibit or

Record Put in writing; set down for reference or retention

Show To make compatible or consistent with each other

5. Calculations and cash transactions

Learning outcomes ..............................................................................................................2

Key concepts .......................................................................................................................3

1.1 Introduction .................................................................................................................4

1.2 Conceptual framework for financial reporting ..............................................................5

1.3 Applicable International Financial Reporting Standards ............................................11

1.4 Presentation of financial statements: IAS 1...............................................................11

1.5 Financial instruments ................................................................................................15

1.6 Practical applications of IAS 1 and financial instruments...........................................17

1.7 Exercises and solutions ............................................................................................18

After studying this learning unit, you should be able to:

a) Describe in your own words what you perceive a framework to be.

b) The purpose of the Conceptual Framework inter alia is to assist

a) We refer to the communication of financial information as an accounting system.

a) False. Communication of financial information is referred to as financial reporting. The

b) The statement of financial position

1.2.3 Objective of general purpose financial reporting

Read paragraph 1.2.3 in the prescribed textbook.

1.2.4 Underlying assumption when preparing financial statements

Study paragraph 1.2.3 in the prescribed textbook.

1.2.5 Qualitative characteristics of useful financial information