Accounting Yellow Book

Grade
Study & Master Study & Master

10 10
Accounting
Study & Master Accounting Grade 10 has been especially Accounting
Accounting Learner’s Book

developed by an experienced author team according to the
Curriculum and Assessment Policy Statement (CAPS). This new
and easy-to-use course helps learners to master essential
content and skills in Accounting.
The comprehensive Learner’s Book includes: CAPS

case studies which deal with issues related to the real world,
and move learners beyond the confines of the classroom
margin notes to assist learners with new concepts –
especially GAAP flashes, that give learners guidance on
General Accepted Accounting Practice
examples with solutions after the introduction of each
new concept.
The Teacher’s Guide includes:

a daily teaching plan, divided into the four terms, that
guides the teacher on what to teach per day and per week
moderation templates to assist teachers with assessment
solutions to all the activities in the Learner’s Book.
CAPS
The CD-Rom with a PowerPoint® presentation includes:
interactive examples to explain new concepts
links to all solutions to activities and assessments in
the Learner’s Book
Study & Master

a colourful, exciting and dynamic interface with
numerous graphics and tables designed to enhance
the learning experience.
Learner’s Book Grade
10
www.cup.co.za
I S B N 978-1-107-60251-9
Elsabé Conradie • Derek Kirsch • Mandy Moyce
9 781107 602519
SM_Accounting_10_LB_CAPS_ENG.indd 1 2011/11/02 7:58 PM

Study & Master
Accounting
Grade 10
Learner’s Book
FET Accounting Grade 10 LB Book.indb 1 11/2/11 6:41:37 PM

cambridge university press
Cambridge, New York, Melbourne, Madrid, Cape Town,

Singapore, São Paulo, Delhi, Tokyo, Mexico City
Cambridge University Press

The Water Club, Beach Road, Granger Bay, Cape Town 8005, South Africa
www.cup.co.za
© Cambridge University Press 2011
This publication is in copyright. Subject to statutory exception

and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2011
ISBN 978-1-107-38048-6
Editor: Christine de Nobrega

Typesetter: Brink Publishing & Design
Illustrators: Sue Beattie, Dedré Fouquet, Claudia Eckhard
Acknowledgements
ARTICLES: p.4: “One-man Bike Shop” – Bicycling Magazine; p.15: “Bring back ethical
leadership” – News24.com; p.17: “Organisations learn ethics make good business
sense” – Business Day; p.38: “How to protect your business against fraud” – Sunday
Times; p.40: “150 poisoned after eating dumped food” – Independent Online; p.247:
“Tax fraud syndicate bust”– Brand South Africa; p.287: – “Cosatu: We will fight against
‘Walmartisation’’’ – BizCommunity
PHOTOS: p.252 (left) Shutterstock; (right) GreatStock
……………………………………………………………………………………………………………
If you want to know more about this book or any other Cambridge University Press
publication, phone us at +27 21 412-7800, fax us at +27 21 419-8418 or send an e-mail to
capetown@cambridge.org

Contents
Chapter 1 Indigenous bookkeeping and informal businesses 1
Chapter 2 Ethics 9
Chapter 3 GAAP principles 20
Chapter 4 Internal controls 27
Chapter 5 Financial accounting of a sole trader 42
Chapter 6 Bookkeeping of a sole trader – Revision of Grade 9 content 60
Chapter 7 Bookkeeping of a sole trader – Debtors 97
Chapter 8 Bookkeeping of a sole trader – Creditors 119
Chapter 9 Bookkeeping of a sole trader – Additional cash

transactions and the Petty Cash Journal 137
Chapter 10 Bookkeeping of a sole trader – The General Journal 181
Chapter 11 Reconciliation of control accounts and Debtors and

Creditors Lists 208
Chapter 12 Combined bookkeeping activities 224
Chapter 13 Value-added tax (VAT) 236
Chapter 14 Salaries and wages 250
Chapter 15 Financial accounting of a sole trader – Final accounts and

year-end adjustments 298
Chapter 16 Financial accounting of a sole trader – Financial

statements 362
Chapter 17 Financial accounting of a sole trader – Interpretation of

financial statements 398
Chapter 18 Cost Accounting 414
Chapter 19 Budgeting 428
Chapter 20 Revision activities 444

HoW To use THis BooK
Study and Master Accounting Grade 10 follows the Curriculum and
Assessment Policy Statement (CAPS) for Grade 10 Accounting.
All the financial reports and statements are formatted according to
the latest CAPS.
Study and Master Accounting Grade 10 also has the following extra features
to help you study:
fixed deposit Definitions are provided for new or difficult

Money placed in a special bank words that appear for the first time.
account at a higher interest rate,
and where you need to give
i The business makes use of a

60% profit mark-up on the
Info boxes provide additional information
to the topic being discussed.
cost price.
Transactions on discount Notes in the margin remind you of

allowed and discount received important points.
are included in this chapter to serve
as re-enforcement.
gAAp flash gAAP flashes appear where GAAP

Prudence principle: When a principles are being applied. You learn about
debtor’s debt cannot be collected, it these principles in Chapter 3.
can no longer be shown as an asset
in the business’s books.
Clipboards appear throughout the textbook

to remind you which controls to apply in
certain situations. You learn about these
controls in Chapter 4.
Controls for debtors
• There is a policy for credit approval. 

Chapter 1
Indigenous bookkeeping and
informal businesses
By the end of this chapter, you will be able to:
• compare and contrast the bookkeeping systems of the informal sector
and the formal sector
• understand how resources are managed by a business in the
informal sector
• know how selling prices, cost prices and labour costs are determined
in the informal sector
• calculate incomes and expenses for a business that operates in the
informal sector.
Key concepts
• formal accounting system • indigenous (informal) accounting system
How much are the almonds, mama?
Very cheap.
Only R15 a packet.
i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses • c h a p t e r 1 1

1. The formal accounting system
You have learnt about formal accounting systems in Grade 9. In this
system, all transactions are recorded on source documents and formal
records are available to the owner and management. This system uses
a set of rules and guidelines in the recording process and computerised
accounting systems can be used.
2. The indigenous (informal) accounting system

An informal business is one that:
• is not registered with SARS or any other government department
• does therefore not usually have a trading licence
VAT vendor • is not a registered VAT vendor.
A business that has registered with
An informal business does not usually have a formal set of accounting
SARS to charge VAT to its customers
books. The owner generally writes up transactions in a notebook for
their own records. Business operations are fairly straightforward and
transactions are usually on a cash basis only. This sector is often referred
to as the second economy and even though no formal bookkeeping takes
place, the business owner strives to make a profit.
3. Contrasts between formal and informal

bookkeeping systems
The following table describes how formal bookkeeping compares to
informal bookkeeping systems:
Concept Formal bookkeeping Indigenous bookkeeping

Capital Capital is either provided by the owner or The owner is the only one investing capital
obtained from investors or shareholders. or will make a personal loan from the bank
in order to start the business. Friends and
family could also lend money to the owner
as start-up capital.
Drawings Some formal businesses will not allow the The owner will draw money whenever he
owner(s) to take drawings, especially a needs in order to pay personal expenses.
company (public or private).
Fixed assets These items are of value to the business Often fixed assets purchased are treated
and will be depreciated (lose value) over as one-off expenses and will carry no
the lifespan of the asset. value to the business.
Stock Stock is an asset in the books of the Stock purchased will be treated as a
business. Stock is controlled and accurate payment of cash or an expense. Stock
records are kept of stock bought and sold. is safeguarded and an informal record
might be kept of stock bought and sold.
2 c h a p t e r 1 • i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses

Concept Formal bookkeeping Indigenous bookkeeping Business entity concept
Banking The business will have its own banking The banking account will be in the name The owner and the business are
account account in the name of the business, of the owner. The business entity concept two separate entities. So by law,
such as an account in the name of Pick n rule does not apply here. they are separate (see page 21).
Pay. This is because the business
entity concept applies here.
Credit The business will sell on credit as well as Most transactions are cash transactions.
buy on credit. Debtors and creditors are The owner will certainly not sell on credit.
strictly administered and monitored and He could, however, introduce a “tab”
controls are rigorous. system where credit sales are informally
written up in a notebook.
Income Sales will be monitored through money Income is just informally written up in a
received into the tills, as well as invoices notebook or sometimes not at all. Income
issued for credit sales. in this case will just equal the money
received for the day via sales.
Expenses Expenses are monitored and budgeted Expenses are often paid for in cash.
for and must be proportionate to the
income earned.
Profit Sales less Cost of sales Money received for stock less money paid
= Gross profit less expenses for stock less any other related business
= Net profit expenses = Profit
Sometimes money left over after

purchases and all expenses are paid is
seen as profit.
Selling price Selling price is determined by calculating Selling price is determined by the
mark-ups and by monitoring the industry demand for the product and by the price
in which the business operates. For at which other competitors are selling the
instance, a business selling TV sets will product. For instance, at a flea market,
look at what other similar businesses are identical items are sold for the same or
selling the TV sets for and keep the price similar prices.
in line with its competitors.
Cost of sales A record is kept of cost of sales (if the
business uses the perpetual inventory
No record is kept of cost of sales as the
business is unlikely to keep strict records i The perpetual inventory system
is discussed on page 56.
system). By taking sales less cost of of purchases or sales.
sales, the business can determine their
gross profit.
Labour costs Costs are determined via production Often the owner is the only person
levels or output requirements. In other working in the business and he/she is
words, the business will carefully consider prepared to work long hours in order to
its labour requirements and employ complete what needs to be done, for
people to match these requirements. example a dressmaker.
InDIGEnouS BookkEEPInG AnD InFoRmAL BuSInESSES • chapter 1 3

Case study 1.1
Read the following article and answer the questions that follow.
ONE-MAN BIKE SHOP my business just took off, growing into what it
by André Valentine is today.”
Between then and now he has gone from
TWO FREIGHT CONTAINERS the ten bikes initially supplied by BEN to two
STAND ON ROCKLANDS entire containers filled with bikes, tubes and
HIGH’S SCHOOL GROUNDS IN other components. While all this was happening
MITCHELL’S PLAIN. THEY ARE he also helped to grow bike riding in the
HOME TO THE FLAG CYCLE SHOP community.
“Since I opened my shop, we‘ve seen more
– MITCHELL’S PLAIN’S ONLY
children with bikes on the roads of Mitchell‘s
SPECIALIST BIKE SHOP.
Plain than ever before,” he says. “Whenever a
F
ive years ago Ismail Cassiem was an youngster comes here I always advise them to
unemployed single father with no money. ride safely and look out for cars – and also for
But a passion for bicycles, the generosity the gangsters that walk around here.”
of a charity and pure hard work has helped SELF-SUFFICIENT
Cassiem turn his life around. He works on his own, unpacking and repacking
Cassiem is the owner, manager and chief his stock every day while also doing repairs and
mechanic of his own one-man specialist bicycle picking up stock, which he does by bike.
shop situated in the middle of a relatively poor “I use my bike to get my spares in places as
area within Cape Town‘s Mitchell‘s Plain. far as Parow (a 50 km round trip), and then ride
“I had been working on bikes since I was 13 back with all those spares packed on the bike,”
and had been employed in the bicycle industry he explains.
for a long time before, so I went with what I Although he commutes everywhere, his
knew best,” he says of his initial decision to open business and family don‘t allow him to ride
up his shop. recreationally “I‘m a single father, so I have
With no capital and no space to call a to look after my two children when I‘m not
shop, he started out doing repairs from home, working,” he says. “I work from Monday to
but soon an opportunity came his way and he Saturday and take Sundays off, but on Sunday
grabbed it with both hands. I do laundry and other household chores, so
BEN that”s as good as a work day.”
He heard about the Bicycle Empowerment Over the last five years Cassiem has
Network (BEN), an organisation aimed at received some stiff competition in the area –
empowering communities through bicycles some hardware stores in Mitchell‘s Plain have
and cycling. started offering bike services and taken some
Cassiem contacted them about their Bicycle of his business away. Despite this he remains
Empowerment Centres, an initiative where BEN positive, and says that while repair jobs have
supplies people with containers (converted become rare, his sales are still booming.
into workshops), tools and bikes, while also He considers his business a success, but still
training them in business management and has his feet firmly on the ground. “I have plans
bike maintenance. “They got back to me and to grow my business and get more high-end
supplied me with the two containers and bikes components and bikes, but I don‘t want to say
to start the business,” says Cassiem. “From there too much, because I might jinx my plans.”
Source: By Andre Valentine, extracted from Bicycling magazine, November 2010 issue

Questions
1. How did Cassiem start up the business?
2. What positive attributes did he possess that contributed towards his success?
3. Who is responsible for stock, and is it managed properly?
4. What contributes to his main income?
5. How did competition in the area affect his business?
6. If you were to advise Cassiem on his business operations, what would you say?
Activity 1.1
You should answer the questions in writing after you have discussed them with
a partner.
1. Briefly explain the difference between indigenous and formal

bookkeeping systems.
2. Think about the following statements and decide which ones would apply
to each system:
A. indigenous bookkeeping systems
B. formal bookkeeping systems.
Some statements could apply to both systems.
a. June is a flower seller; she is the only person involved in her business.
b. The management of MXB Financial Services draws up budgets and holds
planning meetings to set goals for the future of the business.
c. George only makes notes of his transactions in his notebook.
d. Mary owns a home baking business; she relies mainly on
cash transactions.
e. West Prop uses a computerised accounting system to capture their
financial data.
f. Oscar owns a small business. He has a private banking account and his
business has a separate banking account.
g. Bongile owns a motor mechanics business and uses source documents
to complete the financial records of his business.
h. The business sets out to make a profit from its operating activities.
i. Sydney keeps journals and ledgers and prepares a Trial Balance at the
end of each month.
j. Epson Stores adheres to the principles of GAAP.
k. Maxime’s Boutique employs an accountant to prepare its
financial statements.
l. Donovan safeguards the business‘s cash and assets himself.
m. Susan counts her daily takings and calculates her profit roughly. She
then uses the money she makes to pay for household expenses.
n. Michael’s business is a registered private company; it is also a registered
VAT vendor.
o. Simile pays VAT on the stock she purchases but cannot charge VAT on
the items she sells.

Option 1
Formal Assessment task: Questionnaire and written and

oral presentation on an informal business using indigenous
bookkeeping system
Aim: The learners conduct an interview using a questionnaire and then

make oral and written presentations about an informal business and its
bookkeeping system.
Work in pairs or groups of three.
Required
1. Design a questionnaire
Your questionnaire must include all the aspects below.
2. Conduct an interview
Identify someone in your community who operates a small informal
business, such as running a pavement stall or selling goods from
home. This person must be involved in buying and selling goods.
Make an appointment with this person and explain the aim of
your visit.
Use the questionnaire to gather information for both your written and
oral presentations.
3. Written presentation
Your written presentation must include an introduction as well as a
conclusion. It must not be longer than three typed pages (A4 size)
excluding photographs, tables and graphs.
4. Oral presentation
Prepare an oral presentation of not longer than five minutes on the
main points of your written presentation. Use visual aids such as
posters or pictures or, if available, computer software.
Aspects to be included
Background of the business
• The type of goods supplied to clients
• Where the business operates from (and who owns the buildings)
• Why the person started the business
• How much capital was needed to start the business and where the
person obtained the funds needed.
Buying and controlling stock
• Where the person buys goods or supplies
• Why this supplier is used.

Determining the selling price of the goods
• How the selling price is determined.
Handling financial information
• Whether financial information is recorded or not
• If financial information is recorded, how this is done (are source
documents used, and if so, include an example).
Explanation of the costs or expenses
• Whether the person has employees and if so, how their wages are
determined (if there is a partnership, investigate profit-sharing)
• What the main costs of the business are.
Budgeting and calculating profits
• Whether a budget is drawn up from time to time and, if so, how often
and when
• How profit/loss is determined and how regularly it is calculated.
Competitors and other problems or challenges
• If there are competitors, who they are and how the person handles
the situation
• The biggest problems/challenges for the business (such as safety) and
how the person handles them
• Other interesting facts.

Option 1
Rubric for assessing questionNaire and presentations

Criteria 9–10 6–8 3–5 0–2 Mark
The questionnaire Questions are Questions are well Questions are well Questions are well
excellently structured and are structured and are structured and but
structured and are understandable. Good understandable. Fair not understandable.
understandable. use of language use of language Language used not
Excellent use of acceptable
language
Background of the Excellent and Good presentation Average presentation; None; weak attempt;
business comprehensive; of information; most some information not information
interesting information covered covered incomplete
presentation
Buying and controlling Comprehensive Good presentation Average presentation; None; very little
stock information given; of information; most a few aspects not information given
interesting aspects covered well covered
Determination of the Excellent and clear Good understanding Satisfactory None; partial
selling price of goods insight; supplied of determining price; understanding; some understanding;
correct information; information mostly information incorrect some information
presented very well correct questionable
Handling of financial Excellent Good understanding Satisfactory None; poor
information understanding of of accounting system; understanding of understanding of
accounting system; most information accounting systems; accounting systems;
information correct correct some information some information
and complete incorrect/missing questionable
Explanation of the Excellent Good understanding Satisfactory None; partial
costs or expenses understanding; of costs and expenses; understanding of costs understanding
information correct; most information and expenses; some of costs; some
presentation very correct and acceptable information incorrect information
good questionable
Budgeting and Excellent Good understanding; Satisfactory None; poor
calculating profits understanding; information presented understanding and explanations;
information is correct well explanations; some some information
and presented very information incorrect/ questionable
well misleading
Competitors and Excellent and Good reporting; most Satisfactory reporting; None; poor reporting;
other problems or comprehensive aspects covered some aspects left out only one or two
challenges reporting aspects mentioned
Introduction and Good introduction and None; satisfactory
conclusion conclusion introduction and
conclusion
Technical presentation Neat, attractive report Handed in late/
of report not at all; untidy;
unattractive
Oral presentation Excellent; key-note Good presentation, Only some areas are Poor presentation
areas presented in an but some areas either informative
informative manner irrelevant or not
informative
Total /100

Chapter 2
Ethics
• understand the meaning and importance of a code of ethics
• identify and explain the basic principles of a code of ethics.
Key concepts
• ethics • professional conduct
This morning a customer wanted to

return a book he bought a month
ago. He says he did not read it, but it
was dog-eared. I told him to sell it to a
second-hand bookshop!
You are right! We can’t

sell second-hand books as
new books!
ethics • c h a p t e r 2 9

1. Introduction
A code of ethics is a written system of standards of ethical conduct. In
essence, it is a set of rules and regulations governing the behaviour of
the members of the organisation that has established the code. The code
of ethics sets out standards of acceptable behaviour and principles to be
adhered to in order to maintain a high level of professional conduct.
1.1 Who must adhere to a code of ethics?

It is important to realise that a code of ethics is written for all members
of a business. It should not be seen as a code of conduct written by top
management to be followed by lower-level employees only. Everyone
within the business should adhere to the code of ethics. Moreover, in
order to be successfully implemented, employees at all levels should be
consulted while formulating the contents of the code of ethics. This way
the employees will feel empowered, responsible and involved, as opposed
to the negative effect that goes with rules being thrust upon people.
2. Basic principles of ethics

All members of a business should observe the following basic principles
of ethics and professional conduct.
2.1 Integrity
Integrity is essentially the quality of being honest and having strong
moral principles. People of integrity will conscientiously strive to
perform their duties to the best of their ability. They will set high
standards for doing their work and be determined not to lower
those standards.
2.2 Objectivity
Objectivity is the ability to be impartial, intellectually honest, and free of
conflicts of interest. People who are objective will make decisions based
on real facts and their judgement will not be influenced by personal
feelings. They will be fair and unbiased in carrying out their duties and
will not be influenced by others.
2.3 Professional competence and due care

Professional competence is the ability to perform your tasks well,
by possessing the necessary technical expertise, skill, knowledge
and experience. Due care is about ensuring that tasks are performed
in a responsible, careful and diligent manner. People who display
professional competence and due care have the ability to perform their
10 C h a p t e r 2 • ethics

tasks well and possess the desire to perform to the best of their ability.
They have technical expertise and a conscientious professional attitude,
and take pride in their work.
2.4 Confidentiality
Confidentiality means not disclosing information obtained while carrying
out your professional duties. Any such information should be regarded
as private, and should not be disclosed to anyone unless there is a legal or
professional obligation to do so.
2.5 Professional behaviour

Professional behaviour relates to the conduct of a person in the
workplace. Employees should not behave in such a way that would have a
negative impact on the reputation of their profession or employer. People
who conduct themselves in a professional manner would be courteous,
considerate, friendly and polite.
2.6 Technical standards

Employees should meet the relevant technical and professional standards
required by their job. They should carry out the instructions of the
employer with integrity. They should also conform to the technical and
professional standards laid down by the government and the relevant
institute, authority and legislation.
3. C
haracteristics of good and ethical leadership
Leaders should not only display a high level of business competence, but
should also be responsible for ensuring a culture of moral and ethical
conduct within their organisation. Good and ethical leadership ensures
that ethical practices are carried out throughout the business. In the
business environment, such leadership is often termed “good corporate
governance”.
The recommended standards and principles of good corporate King Code
governance in South Africa are set out in a report commonly known as Provides guidelines to implement
the King Code. According to the King Code, the primary characteristics good business practices in an
of good and ethical leadership are discipline, transparency, accountability, organisation.
fairness, sustainability, independence and responsible management. The
King Code will be dealt with in more detail in Grade 12, so here we will
only briefly discuss the characteristics of good and ethical leadership.

3.1 Discipline
Discipline refers to the commitment by leaders to behave and carry out
their duties in a correct and proper manner. By doing so, leaders set a
standard of good and ethical conduct for others to follow.
3.2 Transparency
Transparency is essentially about conducting business activities in an
open manner without withholding information or having any hidden
agendas. Information that is disclosed should also be true, accurate
and complete.
3.3 Accountability
Accountability is to acknowledge and assume responsibility for your
actions, duties and decisions. In other words, it is the obligation of
an individual or business to account for its activities and to be held
responsible and answerable for the quality and accuracy of these activities
or their results.
3.4 Fairness
Fairness means all actions and decisions should be made impartially
and free from any bias, dishonesty or prejudices. For example,
accountants have an ethical duty to ensure that financial statements are
fairly presented.
3.5 Sustainability
Sustainability is the ability to maintain economic, social and
environmental resources. Businesses should operate in such a way that
does not jeopardise our current and future social, environmental and
economic wellbeing. Sustainability is the main moral and economic
issue of the 21st century and it is critical that today’s leaders consider
economic, environmental and social issues when making decisions.
3.6 Independence
Independence is basically being able to avoid conflicts of interest and
undue influence. Leaders who display this quality act objectively and
with integrity, and are not swayed by external influences.

3.7 Responsible management
Responsible management is an essential aspect of good leadership and
is a multi-faceted task. Responsible management involves conducting
business activities:
• with care and regard for the interests of all stakeholders
• in a sustainable and socially acceptable manner
• without taking unnecessary and undue financial risks
• in an ethical and law-abiding manner.
Activity 2.1
1. What is a code of ethics?

2. List and explain six basic principles that should be followed in order to
achieve the objectives of ethics and professionalism.
Activity 2.2
Redraw the following crossword puzzle in your classwork book. Then follow the
clues to complete it.
1 2 3 4
5 6
8 9
10
11
12
13
14

Clues
Across
1. A written system of standards that guides ethical conduct (4, 2, 6)
6. This characteristic is displayed when actions and decisions are made
impartially and free from any bias, dishonesty or prejudices. (8)
7. A quality characterised by being honest and having strong ethical and
moral principles (9)
8. People who conduct themselves in a professional manner would be
courteous, considerate, friendly and p____________. (6)
11. The report that sets out the recommended standards and principles of
good corporate governance in South Africa (4, 4)
12. Good and ethical l____________ can and should ensure that ethical
practices are carried out throughout the business. (10)
13. Someone with good ethics knows the difference between wrong and
r____________. (5)
14. This term refers to the commitment by leaders to behave and carry
out their duties in a correct and proper manner. (10)
Down
1. Not disclosing information obtained while carrying out your
professional duties (15)
2,3. People who display this quality perform their tasks in a responsible,
careful and diligent manner. (3, 4)
4. The ability to maintain economic, social and environmental
resources (14)
5. People who behave ethically usually have good m____________. (6)
9. People who make decisions based on facts and whose judgement are
not influenced by personal feelings are said to be o____________. (9)
10. Impartial (8)

Case study 2.1
Read the following article, and answer the questions that follow.
Bring back ethical For the sake of posterity, it was important

leadership: Motlanthe to know one's responsibility in ploughing back
into the communities and crucially, giving
I
n a world where the line between corporate back to the planet. The BP oil spill in the Gulf
governance and ethical leadership has of Mexico was a reminder of the path everyone
become blurred, it is important to revert needed to avoid, Motlanthe said.
back to the fundamentals, Deputy President The consequence of this tragic episode
Kgalema Motlanthe said on Wednesday. might very well affect millions, most of whom
Speaking at the Regenesys graduation had stood to gain nothing from the mega-
ceremony, he said perhaps the best way to profits BP made. He said generations to come,
balance the cut-throat environment in which "we mostly from poor acres of planet earth, might
must thrive in business, should always be guided be doomed to wallow in even deeper misery
by our conscience", taking into account the than their forebears for the environmental
abiding interest of humanity and the public good. crimes of a few.
It followed then that the safest route At the level of social context, the recent
to follow for any self-respecting business controversies around Fidentia and commodity
leadership was to align with the supreme laws price-fixing had called into question the status
of the country. It might not always be easy to of corporate governance and ethical leadership
do so, but given the impartial credentials of the in the private sector. What had emerged quite
Constitution, it was not only safe to base business clearly from these cases of price-fixing was the
ethics on the constitutional framework, but also imperfection of the system.
a sure way of ensuring that the ethical purview of
the operation was just and fair. Competition removed
”This, therefore, calls for business to In a situation which allowed for mergers and
espouse universal ethical principles that define hostile takeovers, it reached a point where
the best interest of humanity,” he said in a competition was determined from within and in
speech prepared for delivery at the event. the process, competition was removed. The end
result was that prices were determined by price
Giving back givers, the monopolies, and not through the
“Universally applicable ethical conception laws of supply and demand.
enables us to see life not only through the “This is a reason why good governance has
prism of profit, critical as it is to the survival of to be central in moderating the system through
business, but also makes us understand that if rules and regulations,” he said.
we destroy the planet through our operations, For any society to thrive, especially for
or unreservedly fleece society, there will be the benefit of the poor, it had to have in place
no one to do business with in the near future. moderating mechanisms, plus checks and
On this account, I would like to appeal to balances because the system, in its nature, was
you to mind the results of your intended and imperfect. According to the Ethics Institute of
unconscious actions.” South Africa, ethics touched on good and fair

conduct which ”shapes the decision and actions ”We see a direct link in the practice
of organisations and individuals making decisions of ethical leadership and transparent and
on its behalf”. representative governance. It is what we mean
If they were to have real meaning, codes of by servant leadership, given that the opposite
ethics needed to be enforceable. If there were of servant leadership is self-seeking leadership,”
no mechanisms to enforce them, this left room Motlanthe said.
for their manipulation and venality. By definition, self-seeking leadership
”Our society is full of examples where placed individual interests high above those of
unethical actions have had negative effects on society and was subsequently liable to pursue
the lives of ordinary people, especially on the ill-gotten wealth and fall into the trap of
poorest of the poor.” corruption and greed. Self-centred leadership
But ethical considerations were not was an indication of unethical leadership
confined to the private sector only. In the which had forgotten its primary responsibility
political sphere, good ethical practice had had to the electorate, shareholders and ordinary
its own ups and downs. employees. Such a leadership had sacrificed the
principles of accountability, he said.
Extracted from an article appearing on News24.com, 4 August 2010
Questions
1. Who is Kgalema Motlanthe?
2. What does Mr Motlanthe mean when he says that “we should always be
guided by our conscience”?
3. According to Mr Motlanthe, what will be the ultimate consequence for
businesses “if we destroy the planet through our (business) operations”?
4. Mr Motlanthe mentions two companies that have recently been involved in
unethical business practices. List the two companies and very briefly explain
what each one did that was unethical.
5. According to the article, what is required to ensure that codes of ethics
“have real meaning”?
6. According to the article, what other sphere (besides the private sector)
requires good ethical leadership?
7. Briefly explain the meaning of the sentence “such a leadership had sacrificed
the principles of accountability” (the last line of the article).

Case study 2.2
Read the following extract from an article that appeared in Business Day, and
answer the questions that follow.
Organisations learn the University of Cape Town Graduate School

ethics make good of Business, says many individuals and
organisations regard ethics as being a vital part
business sense of the bottom line.
C
ompanies realise they need to address His point is that while history’s moral
the minds, hearts and behaviour of teachers argue that no matter what the
employees to achieve sustainable results. consequences, it is intrinsically good to do the
In an ideal world, parents teach their children right thing and be ethical, there are many more
right from wrong from a young age. It is a material reasons to operate an ethical business:
continuing lesson. • Without strong ethical values, companies
Today, my nine-year-old was told, in no easily slide into dangerous legal territory that
uncertain terms, that finding a seven-year- is potentially costly.
old’s missing marbles on the playground and • Investors avoid immoral organisations.
selling them back to him was wrong, however Recent market declines in the US are
entrepreneurial it may seem. attributed, in part, to concerns about
Little ones are informed in simple terms that unethical accounting practices.
unethical means just not right, even when it is • Irresponsible, unethical business conduct
only a little dishonest or when it harms others, brings more regulation and bureaucratic
things or the environment in a small way. red tape.
Yet no matter how diligent the parent and • Partnerships and supplier trust are
school, it seems that once in business, people compromised by unethical conduct.
need detailed and pragmatic training and • In today’s transparent era, unethical
guidance on issues such as ethics, integrity practice is often exposed and punished in
and accountability. the marketplace.
“It is an interesting phenomenon that • Customer loyalty is threatened by disreputable
people who are fair and principled at home are behaviour.
not always so in their work environment,” says • If a company is unethical, it is unlikely its
Mariaan van Kaam, executive director of ethics employees will feel the need to be moral.
training company Voice It. This can result in increased pilfering and
“While many organisations have written, intraorganisational crime.
edited and proudly published their codes • Companies that have a poor reputation find
of conduct, value statements and corporate it hard to attract and retain top talent, nor do
standards, they have not rolled out any they benefit from the personal pride of their
programmes to ensure that these ideals are leaders and employees.
brought into being or even understood by The Ethics Institute of South Africa found in
their employees.” its business ethics survey last year that South
James Joseph, former US ambassador African companies fell short on technical
to South Africa and honorary professor at and effective compliance with ethics codes,

and to remain attractive to investors they In many cases, this requires methodological
needed to improve the ethical culture of their ethics education and training.”
organisations. Van Kaam says ethics management needs
“Companies are most certainly becoming to be applied from top management down.
increasingly aware of the important role that Once a company’s code of ethics has
ethics management plays in business,” says been approved in the boardroom and
Van Kaam. communicated to managers, it needs to be
“They are beginning to realise that made real to employees. Ideally, they should
it is not enough to invest in an expensive be consulted before the code is finalised to
closed-circuit television system to counter assure its credibility and ensure it is written
intraorganisational crime, and that they need in a manner that is easily understood by
to address the minds, hearts and behaviour of everyone in the organisation.
their employees to achieve sustainable results.
Extract from an article by Penny Haw, Business Day,

15 September 2003
Questions
1. The article refers to children being taught ethics from an early age. What are
the two main influences mentioned in the article?
2. What phrase used in the article explains the meaning of the word
“unethical” in simple terms?
3. Mariaan van Kaam talks about the problem of unethical behaviour in the
workplace, even in organisations that have a code of ethics.
a. What does she suggest is the root of this problem?
b. What does she offer as a solution to this problem?
4. According to James Joseph, “many individuals and organisations regard
ethics as being a vital part of the bottom line”. What does the term “bottom
line” mean?
5. James Joseph suggests that there are a number of material reasons why a
business should operate ethically. List and briefly explain the reasons he
identifies, using your own words.
6. According to the Ethics Institute of SA, what do South African companies
need to do in order to remain attractive to investors?
7. What steps, recommended in the article, should be taken in order to make
the code of ethics real to employees?

Project 2.1
Draw up a suggested code of ethics for your school. Set out a guideline of
rules and regulations that you think learners at your school should follow in
order to create a harmonious environment that is based on mutual respect and
consideration for others.
Project 2.2
Approach a local business and ask them about their code of ethics. You should
ask the business:
• to show you (or give you) a copy of their code of ethics
• to explain some of the main principles set out in the code
• how they educate their employees with respect to ethical behaviour
• what they do to ensure that a high standard of professional conduct
is maintained.

Chapter 3
GAAP principles
• understand the meaning and importance of GAAP
• identify and explain the fundamental GAAP principles.
Key concepts
• GAAP • business entity concept • historical cost concept
• going concern concept • matching concept • materiality principle
• prudence concept
I want this jacket, but it’s quite

expensive. Maybe I should put it
through my business as uniforms.
I don't think you should. It’s

not legal anyway.
20 c h a p t e r 3 • gaap pri n ciples

1. Introduction
Generally Accepted Accounting Practice, or GAAP as it is more
commonly known, is a collection of rules, procedures and guidelines
for accountants to follow when recording and reporting financial
information. Collectively these form the statements of GAAP, which aim
to ensure that financial information is accurate, relevant and reliable,
and that financial statements are recorded in a consistent, uniform and
meaningful manner. This is particularly important for investors, banks
and creditors who use financial statements to determine whether a
business is suitable for investment or whether to grant credit. Without
the standardised accounting practice provided by the statements of
GAAP, it would be extremely difficult to accurately evaluate and
compare businesses.
2. Fundamental gaap principles

Although the statements of GAAP are constantly evolving, the following
are some of the fundamental GAAP principles and concepts.
2.1 Business entity concept

The business entity concept provides that a business functions as a separate
financial entity from its owners, or from any other business or organisation.
In other words, the financial affairs of a business must be kept separate
from the financial affairs of its owner (or from any other business or
organisation). It follows that the business and the owner should each have
their own bank account and that the business transactions must be kept
separate from the owner’s personal transactions.
Example: The owner’s personal insurance cannot be recorded as a
business expense in the books of the business. Besides being
financially inaccurate, this is also illegal as it would result in the
business paying less tax than it should.
2.2 Historical cost concept

The historical cost concept provides that assets should be valued at
historical cost. In other words, assets are recorded in the accounts
of the business at the amount that was originally paid for them.
Although it has been argued that the historical cost method is often
inaccurate because the market value of assets fluctuates over time,
the overriding advantage of the historical cost method is that the cost
is determined objectively.
gaap pri n ciples • c h a p t e r 3 21

Example: ATP Suppliers bought their business premises for R200 000
in 1996. A local estate agent has estimated that the property
is currently worth R800 000. Even though the property may
be valued at four times its historic cost, there is no guarantee
that that value would be realised until it is actually sold. So the
accountant of ATP Suppliers should continue to record the
property at its historic cost of R200 000.
2.3 Going concern concept

The going concern concept provides that the financial statements of a
business should be prepared based on the assumption that the business
will continue to operate for the foreseeable future. Based on this
assumption, assets are simply valued in accordance with the historical
cost concept. Conversely, if it was assumed that the business was closing
down, the value of the assets would usually suffer because they would
have to be sold under unfavourable circumstances (sold on short notice).
Example: Jack & Jill Ltd ordered corporate stationery (paper, envelopes
and business cards bearing the company logo and details) at
a cost of R10 000. By the end of the year they estimated that
they had only used about 10% of this stationery. Since it is
assumed that Jack & Jill Ltd is a going concern, the company
will be able to use this stationery in future years, so the
accountant reflected this by showing stationery valued at
R9 000 (R10 000 less 10%) in the books at the end of the year.
If the business was about to close, this same stationery would
be worth almost nothing.

2.4 Matching concept
The matching concept provides that income and expenses are recognised
and recorded in the correct time period. In other words, income and
expenses are matched to the period in which they are earned or incurred,
irrespective of whether the income has actually been received or the
expenses actually paid. Expenses should also be matched to the same
accounting period as the income that they helped to generate.
Example: The financial year of Tata Traders runs from 1 January to
31 December. In order to boost their sales, Tata Traders
signed an advertising contract with their local newspaper on
27 September 2020. The terms of the contract stipulate that
the newspaper will place Tata Trader’s advertisement every
day for six months, starting on 1 October 2020, at a cost of
R18 000. On 1 October 2020, Tata Traders paid the R18 000
to the local newspaper. Although the advertising expense was
paid in full during the financial year ending 31 December 2020,
the benefit from the advertising (additional sales due to the
advertising) will, in fact, be realised over the entire six-month
period. Three of these months are part of the financial year
ending 31 December 2020; while the other three months
( January, February and March 2021) fall in the next financial
period. So, according to the matching concept, half of the
advertising expense should be allocated to the financial year
ending 31 December 2020 and the other half to the next
financial period ending on the 31 December 2021.
2.5 Materiality principle

The materiality principle provides that all significant information must be
included in the financial statements, while items which are insignificant
need not be disclosed in detail. The aim is to ensure that financial
statements include any information that is of importance, but that the
financial statements should not become unnecessarily long and confusing
or difficult to read. In determining the materiality of an item, the size and
nature of the item will usually be assessed.
Example: Joe Mali owns Mali Traders, a mail order business. He works
out of a small office at home and posts catalogues and order
forms to hundreds of customers each month. The expenses of
Mali Traders for the financial year amount to R90 000, which
includes R25 000 for postage and R85 for cleaning materials. In
the financial statements of Mali Traders, the expense amount
for postage is significant and would be shown separately.
However, the R85 for cleaning materials would be grouped

with other small miscellaneous expenses and listed together as
sundry expenses.
Conversely, Carol owns a small car-wash business called
Carol’s Car Wash. The business uses a large amount of liquid
soap, polish, cloths and sponges to clean the cars and the
business premises. Carol carries out most of her business
correspondence using e-mail, so she spends very little on
postage. The expenses of Carol’s Car Wash for the financial
year also amount to R90 000. However, in this case, R25 000
is for cleaning materials and R85 for postage. In the financial
statements of Carol’s Car Wash, the expense amount for
cleaning expense is significant and would be listed as a separate
expense item. However, the postage expense of R85 would be
included under sundry expenses.
2.6 Prudence concept

The prudence concept provides that accountants should be
conservative in the preparation of financial statements. They should
take care not to overstate assets or income and not to understate
liabilities and expenses. In other words, the accountant should adopt a
pessimistic approach and should not include any income that has not
been earned beyond all doubt, and should provide for any possible loss
even if the amount is uncertain.
Example: At the end of their financial year, Alma Attorneys had
debtors amounting to R60 000. From her experience over
the last five years, the accountant of Alma Attorneys estimates
that about 10% of their debtors do not pay their accounts
and that this money is never recovered. The accountant will
therefore exercise prudence and show the net value of debtors
as R54 000 (R60 000 less 10%) in the financial statements.

3. T
he significance of gaap in informal
(indigenous) bookkeeping
In Chapter 1, you were introduced to informal (indigenous)
bookkeeping and compared it to the formal accounting system. One
of the primary differences between formal and informal bookkeeping
is the adherence to the statements of GAAP. While GAAP plays a
vital role in shaping the formal accounting system, it has very little
significance in informal accounting.
Owners who keep informal business records usually develop their
own unique bookkeeping system that is specifically designed to work for
them and their business. Generally, the objective of such record-keeping
is to facilitate the day-to-day running of the business. So there is usually
very little effort or attempts to conform to any standards or norms.
GAAP’s business entity concept, for example, is very seldom adhered to
in the informal sector, where the business’s affairs and the owner’s affairs
are often intermingled.
4. The relationship between GAAP and ethics

One of the key aims of GAAP is to ensure that the information recorded
in the financial statements of a business is accurate and reliable. This is
particularly important to management, investors and banks that rely on
this information to make financial decisions, such as whether to invest in
a business or approve a loan. So it follows that accountants have a duty to
act ethically and responsibly when preparing financial statements. In fact,
in many instances accountants would be acting unethically if they did not
adhere to the statements of GAAP.
As mentioned previously, the statements of GAAP are guidelines
so it is often up to the accountant to judge how best to record certain
information. In doing so, the accountant would need to draw on some
of the basic principles of ethics, such as integrity and objectivity. The
accountant would also need to display professional competence, exercise
due care and meet the required technical standards while preparing
financial statements in accordance with GAAP.
5. GAAP references
As we work through this textbook and learn more about various
accounting procedures, we will refer back to some of the GAAP
concepts that you have learnt about in this chapter. Look out for
the GAAP flashes, which are indicated by the icon in the margins
of the rest of the chapters.

Activity 3.1
Match each of the GAAP principles/concepts in Column A with the most

appropriate scenario/transaction in Column B. Write down only the numbers
(1.–6.) and the corresponding letters (A.–F.).
Column A Column B
GAAP principles/concepts Scenario/transaction
1. Business entity concept A. In order to make their financial statements more
readable, some businesses round off their figures
to the nearest rand, as they feel that the cents
are insignificant.
2. Historical cost concept B. When goods are sold on credit, the amount on the
invoice is recorded in the books as income for that
day, even though no money has been received yet.
3. Going concern concept C. Even though the owner pays her personal cell phone
account with a business cheque, she does not record
this amount as an expense to the business.
4. Matching concept D. A client has undertaken to pay a R20 000 bonus to
Bob Builders (Pty) Ltd if the client is satisfied with
the house they are building for him. However, the
accountant for Bob Buildings (Pty) Ltd will not enter
this amount in the books until it is received.
5. Materiality principle E. The business factory has a market value of
R600 000, yet the accountant still has it listed in the
books at R120 000, the price that it was bought for
eight years ago.
6. Prudence concept F. In their storeroom, Nesbury Chocolate Manufacturers
have 50 000 plastic chocolate containers that have
been specifically moulded as packaging for their
chocolates. These containers are valued at R10 000 in
their books.
Activity 3.2
1. What does the abbreviation GAAP stand for?

2. Write a short paragraph in which you explain the nature and purpose
of GAAP.
3. Use a single sentence to explain each of the following GAAP principles:
a. Business entity concept
b. Historical cost concept
c. Going concern concept
d. Matching concept
e. Materiality principle
f. Prudence concept.

Chapter 4
Internal controls
• understand the importance and meaning of internal controls
• identify different types of control
• identify basic internal control processes.
Key concepts
• types of control • control processes • the need for controls
• the importance of controls
Wow, great! I was only ill one

day last month.
Wait a minute, not according to my

records. It says here you didn’t come
to work on the 4th and the 22nd.
i n ter n al c o n tr o ls • c h a p t e r 4 27

1. Introduction
In our daily lives we are surrounded by controls, whether we realise it or
not. There are road safety controls (such as road signs), security controls
(such as locks on doors), physiological controls (such as our immune
system) and electrical controls (such as a thermostat switching off a
boiling kettle). Controls have become part of everyday life; they help
prevent disaster or detect potential disaster.
2. Types of control
Controls may be classified into four types.
2.1 Preventive controls

A preventive control is used to deter or prevent an undesirable event from
occurring, for example, when burglar bars are used to prevent burglars
from breaking into a building.
2.2 Detective controls

A detective control is used to detect undesirable events that have
occurred, for example, where a burglar alarm is used to detect when
someone has broken into a building.
2.3 Corrective controls

A corrective control is used to correct the effects of undesirable events,
for example, when a burglar alarm is linked to a security company that
(hopefully) responds in time to stop burglars from stealing anything.
2.4 Directive controls

A directive control is used to discourage an undesirable event from
occurring or encourage a desirable event to occur, for example, where
a sign warning that a building is protected by a burglar alarm is used to
discourage burglars from attempting to break in.
3. Internal controls in business

Internal controls are systems and measures used in businesses to help
ensure that the goals and objectives of the business are achieved. These
controls are essential for all types of business, and are designed by the
management of the business to cater for the specific needs of that
business. Proper internal controls should be effective in the prevention
(or early detection) of errors, fraud and theft and should be part of
everyday procedures in a business.
28 c h a p t e r 4 • i n ter n al c o n tr o ls

3.1 Objectives of internal controls
Internal controls are designed and implemented to ensure that business
objectives are accomplished. These objectives include:
• ensuring that the financial information is reliable and accurate
• ensuring that employees comply with the policies, procedures and
rules of the business
• ensuring that employees adhere to the code of ethics of the business
• safeguarding the assets of the business
• ensuring that the resources of the business are used economically
and efficiently.
4. Internal accounting controls

Internal accounting controls form part of the internal controls of a
business. They are implemented not only to ensure that the transactions
of the business are recorded accurately, but also to protect the business
against possible financial loss due to fraud or error.
4.1 Objectives of internal accounting controls

The internal accounting controls should ensure that the accounting
objectives are achieved. These objectives include ensuring that all:
• income is received and correctly recorded in the accounting records
• expenses are properly authorised and entered in the accounting
records
• assets are safeguarded and properly recorded in the accounting
records
• liabilities are paid timeously and are properly recorded in the
accounting records
• accounting records are accurate and reliable
• errors and irregularities in processing accounting information
are detected.
5. Basic internal control processes

Internal control policies and procedures may differ from one business
to another depending on the risks, complexity, size and nature of the
business. However, the following basic internal controls should exist in
most businesses.

5.1 Controls for cash receipts
The internal control process for cash receipts should ensure that all
cash intended for the business is received, promptly deposited, properly
recorded, reconciled and kept under adequate security. The following are
a few of the procedures that should be adhered to:
• Cash receipts must be physically safeguarded against theft and loss.
• Someone other than the bookkeeper should open the mail and
prepare a record of cash receipts as soon as they are received.
• All receipts should be deposited in the bank as soon as possible
(preferably within 24 hours).
• All receipts should be entered promptly in the Cash Receipts Journal.
• The listing of cash receipts should be compared with the Cash
Receipts Journal and deposit slips.
• At month’s end, the bank statement should be reconciled with the
Cash Receipts Journal.
• Cash receipts should be posted promptly to accounts receivable
ledgers (Debtors Ledgers).
• The cash receiving function should be separated from the cash
disbursing (payments) function.
5.2 Controls for cash payments

The internal control process for cash payments should ensure that cash is
paid only upon proper authorisation of management, for valid business
purposes and that all payments are recorded properly. The following are a
few of the procedures that should be adhered to:

• All unused cheques should be safeguarded physically.
• Access to cheques should be limited and controlled.
• All payments should be made by cheque (other than petty
cash payments).
• All cheques should be pre-numbered and all cheques should be
accounted for.
• All cheques should be recorded when issued.
• All void cheques should be marked void and retained.
• Cheques should only be signed if adequate documentation and
authorisation is presented.
• Paid invoices should be stamped so that they cannot be used to
support a duplicate payment. The stamp should indicate the date paid
and the number of the cheque issued.
• Blank cheques should never be signed.
• Only high-level personnel (not the bookkeeper) should be authorised
to sign cheques.
• Cheques for large amounts should require two signatures.
• Cheques payable to cash should be prohibited.
• Cheques should be mailed promptly by someone other than the
person who writes the cheques.
• All payments should be entered promptly in the Cash Payments Journal.
• Cash payments should be posted promptly to accounts payable
ledgers (Creditors Ledgers) to avoid double payment.
• Bank reconciliations should be prepared monthly by someone other
than the person authorised to sign the cheques.
• Duties should be separated adequately, different people should
prepare cheques, sign cheques, reconcile bank accounts and have
access to cash receipts.
5.3 Controls for petty cash

The internal control process for petty cash should ensure that petty
cash is used only for proper purposes, is adequately safeguarded and is
recorded properly. The following are a few of the procedures that should
be adhered to:
• Petty cash should be safeguarded physically against theft and loss.
• Petty cash should be kept and used separately from the cash float.
• Petty cash should only be used when payment cannot be made
by cheque.
• Access to petty cash should be limited to one person
(called the custodian).
• Supporting documentation should be required for all petty
cash payments.
• A voucher must be filled out and signed by the custodian for all
payments from petty cash.

• There should be a limit to the amount that can be reimbursed from
petty cash.
• Periodic unannounced counts of petty cash should be made by
someone other than the custodian.
• The petty cash should be a reasonable predetermined amount and be
restored when the petty cash is low.
• When petty cash is restored, invoices, receipts and vouchers should
be reconciled with the petty cash balance by someone other than
the custodian.
• Any cash shortages identified must be reported promptly.
5.4 Controls for debtors

The internal control process for debtors should ensure that debtors
are creditworthy, credit sales are recorded properly, reconciliations
are performed and outstanding accounts are adequately monitored.
The following are a few of the procedures that should be adhered to:
• There should be a policy for credit approval.
• Credit checks should be performed regularly.
• Sales orders should be approved for price, terms, credit and account
balance limits.
• All credit sales should be recorded properly on pre-numbered
invoices and initialled by the sales person (all numbers should be
accounted for).
• Monthly statements for outstanding balances should be reviewed and
mailed by someone other than the bookkeeper.
• The balance of the Debtors Control (Accounts Receivable) account in the
General Ledger must be reconciled monthly with the Debtors List
from the Debtors (Accounts Receivables) Ledger.
• Write-offs and other adjustments to debtors’ accounts must be
properly authorised.
• Interest should be charged on overdue accounts.
5.5 Controls for creditors

The internal control process for creditors should ensure that credit
invoices received from creditors match the goods received and are
recorded accurately, reconciliations are performed and accounts payable
are monitored adequately. The following are a few of the procedures that
should be adhered to:
• Prices charged and the accuracy of invoices from creditors should
be checked.
• The quantities of goods received should be checked against the
invoices from creditors.
• All available discounts should be taken.

• Invoices must be properly processed before payment (for example,
they should be stamped).
• There should be adequate segregation of duties – the same person
should not be responsible for purchasing and receiving goods.
• The balance of the Creditors Control (Accounts Payable) account in the
General Ledger must be reconciled monthly with the Creditors List
from the Creditors (Accounts Payable) ledger.
• Creditors should be paid as late as possible without incurring
interest charges.
5.6 payroll controls

The internal control process for paying salaries and wages should ensure
that payments are made only upon proper authorisation to bona fide bona fide
employees and are properly recorded. The following are a few of the Authentic, genuine, without any
procedures that should be adhered to: fraud or deceit
• Personnel files should be maintained for all employees, detailing rates
of pay, deductions, as well as any changes in employment status.
• Access to personnel files should be limited.
• Detailed time sheets should be used to record the hours employees
work, including overtime.
• These time sheets should be signed by the employee’s immediate
supervisor who authorises payment for work.
• Time recording systems should be monitored carefully and
controlled adequately.
• The accuracy of salary and wage calculations should be checked.
• Regular employees should be paid by direct deposit (EFT).
• The payroll list should be checked regularly to make sure that all i Electronic funds transfers
(EFTs) are explained in more
employees are existing and bona fide. detail in item 6.2 on page 74.
5.7 Controls for fixed assets

The internal control process for fixed assets should ensure that fixed
assets are acquired and disposed of only upon proper authorisation, are
safeguarded adequately and are properly recorded. The following are a
few of the procedures that should be adhered to:
• Fixed assets must be safeguarded physically against theft and loss.
• Proper authorisation and approvals should be required for the
acquisition of fixed assets.
• Detailed records of fixed assets should be maintained.
• These records should be checked periodically by a physical stocktake.
• Lost, stolen or destroyed items must be reported immediately.
• Depreciation policies must be established and documented.
• Any movements of fixed assets should be recorded promptly in the
appropriate journal.
InTERnAL ConTRoLS • chapter 4 33

5.8 Controls for stock inventory
The internal control process for inventory should ensure that stock is
acquired and disposed of only upon proper authorisation, is adequately
safeguarded and properly recorded. The following are a few of the
procedures that should be adhered to:
• Proper authorisation and approvals should be required for
purchasing stock.
• Detailed perpetual inventory records should be maintained and
any movements of stock should be recorded promptly in the
appropriate journal.
• These records should be checked periodically by a physical stocktake.
• When stock is received, the items should be compared with the
items listed on the invoice and discrepancies should be reported
immediately.
• Inventory must be safeguarded against theft, pilferage and loss.
• Lost, stolen or destroyed items must be reported immediately.
• Extra safety measures should be put in place for very expensive items.
• Stock should be insured adequately.
• Expiry dates should be displayed on perishable items and these items
should be disposed of safely once the expiry date is reached.
• Access to stock should be limited and supervised.
• Inventory records should be kept separate from the physical
stocktake records.

Activity 4.1
Read the following statements about internal controls. Write down the number
of each statement and whether the statement is true or false. If a statement is
false, explain why.
1. Internal controls are not required when payments are made by cheque.
2. All payments should be made by cheque, except for petty cash payments.
3. A good internal control procedure is where the same person is responsible
for paying all accounts, writing all cheques and signing all cheques.
4. In order to be efficient, all employees should have direct access to
petty cash.
5. Bank reconciliation statements need only be drawn up every six months.
6. Cheque books should be kept in a locked safe as a preventive control.
7. A blank cheque can be signed to replenish the petty cash fund if it is
handed to the custodian.
8. All cash receipts should be stored in the cash register and deposited at the
end of the week, in order to make fewer trips to the bank.
9. Separation of duties is a vital part of internal control procedures.
10. Any employee of a business should be able to buy assets for the business.
11. Keeping personnel files in a locked filing cabinet is a corrective control.
12. To save time, the employer should ask the wage earners to keep a record of
the time worked during the week and then pay them accordingly.
13. If there is not enough money in petty cash, the custodian should take
money from the cash register.
14. Reconciling the cash journals with the bank statement may be classified as a
detective control.
15. The same employee should be in charge of receiving cash and paying cash.
Activity 4.2
Match each of the items in Column A with the most appropriate item in Column B.
Write down only the numbers (1.–5.) and the corresponding letters (A.–E.).
Column A Column B
1. The employee who is responsible A. … should not be responsible for depositing money
for purchasing goods … into the bank account.
2. The employee who is responsible B. … should not be responsible for distributing
for opening mail and receiving salary cheques.
cash …
3. The employee who is responsible C. … should not be responsible for reconciling the
for signing cheques … petty cash.
4. The employee who is responsible D. … should not be responsible for receiving goods.
for the payroll calculations …
5. The employee who is responsible E. … should not be responsible for approving
for controlling the petty cash … cash payments.

Activity 4.3
As part of a practical Accounting project at Rainbow Nation High, five Grade 10

Accounting learners have been running a small tuckshop business at the
school. Read through the business’s transactions, operations and procedures.
Then answer the questions that follow.
• Each learner contributed R100 as capital to start the business.

• The tuckshop sells cooldrinks, chips and chocolates.
• All stock is bought and paid for in cash from a local wholesaler.
• All sales are strictly on a cash basis only (no credit is allowed).
• The tuckshop is operated in the shade of a tree in the school grounds
during breaks.
• The learners borrowed a long table from the school to use as the
tuckshop counter.
• They serve their fellow learners from behind the counter and display their
stock on top of the counter.
• When the tuckshop is not in operation, the stock and cash float are stored in
an unlocked cupboard in the Accounting teacher’s classroom.
• At the start of break, the learners transport the stock and cash float from the
classroom to the tuckshop area. This procedure is generally disorganised
and involves each of the five learners carrying stock and cash in their hands
and pockets at various times.
• The cash float is stored in a cardboard shoe box, which is also kept on top of
the tuckshop counter.
• All five of the learners work in the tuckshop during each break.
• While serving behind the counter, the learners write out cash sales slips for
each of their sales transactions.
• Towards the end of break, the five learners start returning the stock and
cash float to the cupboard in the Accounting teacher’s classroom. Again, this
is generally disorganised and often the learners are alone while transporting
the stock and cash.
• On Friday afternoons, the learners perform a stocktake and count the cash
in the cash float. They then walk to the local wholesaler and buy more stock
for the next week.
• At the end of the month, the learners get together and draw up the Cash
Receipts and Cash Payments Journals for the month, post to the ledgers and
compile a Trial Balance.

At the end of March, after the first month of trading, the five Grade 10
Accounting learners compiled the following:
Information
• The Trial Balance on 31 March 2011:
Balance Sheet accounts Debit Credit

Capital R500 00
Cash R230 00
Trading stock R420 00
Nominal accounts
Sales R400 00
Cost of sales R250 00
R900 00 R900 00
• The trading stock on hand, according to the stocktake done on

31 March 2011, amounted to R344.
• The actual amount of cash in the cash float on 31 March 2011 was R158.
Questions
1. Calculate the value of the trading stock that had “gone missing”.
2. Calculate the amount of the cash that had “gone missing”.
3. According to the Trial Balance, how much profit did the tuckshop generate
during March 2011?
4. How much profit did the tuckshop actually make during March 2011, after
taking the “missing” amounts from questions 1 and 2 into account?
5. The learners were very disappointed and were convinced that the “missing”
trading stock and cash were stolen. They have asked you to help them
identify aspects of the business operations that required stricter control,
and to recommend various control measures that should be implemented.
a. Describe three possible scenarios in which the trading stock or cash
could have been stolen from the tuckshop business.
b. Recommend four control measures or procedures that should be
implemented in order to protect the tuckshop business from theft or
errors in future.

Case study 4.1
Read the following article, which appeared in the Sunday Times, and answer the
questions that follow.
How to protect organisation burned by an unscrupulous

your business worker. So, check all references – not just the
against fraud last job held.
Also, verify educational qualifications and
A
recent survey found that more than half certifications. “She claimed she was a CPA!” comes
of the world’s largest companies had too late when the damage is already done.
been victims of fraud during the previous
fiscal year – and that 25% of them lost millions 3. Document and enforce policies
of dollars each during the previous five years. and procedures.
Organisations are often reluctant to admit Ensure that all internal control policies
publicly that their employees have stolen from and procedures are well documented,
them. They fire those responsible, but often fail communicated and enforced. Your policies
to fix the underlying problems. should address issues such as:
In some workplaces, trivial fraud and • Can staff accept gifts?
pilfering are accepted as normal practice. Fraud • When do gifts become bribes?
of any kind should never be tolerated. • When do hospitality and perks become
It may be wise to implement fraud- corruption?
protection measures in your organisation. • When does pilfering become fraud?
Here’s how: Written guidelines are needed so employees
can differentiate between accepted custom
1. B e aware. Your staff are usually the and what is not acceptable.
villains. Communicate how suspicions of fraud can
Regrettably, your own employees pose the be raised, who is responsible for dealing with it,
greatest threat when it comes to fraud – some and how.
are highly motivated to get rich quickly; they If necessary, put in place an audit committee
usually know what controls are in place; and with a policy development, monitoring and
they often have the ability to circumvent those investigative role.
controls and exploit company weaknesses.
Remember, the core element in all fraud 4. Install safeguards to limit abuse of
is people, which means that effective human computers.
resource management in all forms is vital. Our dependence on computer technology has
meant that almost all major fraud committed
2. C heck the references of potential today involves the use of computers by staff who:
employees. • establish phoney accounts
Although previous employers are often • drain legitimate accounts
reluctant to provide anything but confirmation • purchase assets for private use
of employment dates and positions held, • change ownership of assets or ship assets
as a rule they also do not want any other to false addresses

• create phantom sales transactions Regularly print out and review your
• give individuals rewards they have vendor master list to check that each vendor is
not earned. authorised to supply goods and services, and
The keys to preventing this are to restrict access to compare this list with all payments made. Any
sensitive transactions to those with a legitimate discrepancy could be a cause for concern.
need, and to monitor employee activities to
ensure that misdeeds are detected and addressed. 6. Regularly review bank statements.
Consider the use of: Spotting fraud is like spotting pornography!
• passwords that authenticate those seeking “I can’t define it, but I know it when I see
access to the network. To limit misuse of it.” Checking bank statements and cancelled
passwords, you may need to change them cheques allows you to examine payees,
frequently, depending on the sensitivity endorsements and the cheque sequence.
of the material.
• firewalls, which are programs that sit between 7. C onsider taking out insurance against
your network and the Internet fraud.
or other networks, and reduce Insurance protecting employers against
unauthorised access fraud – on all employees with finance-related
• encryption, which prevents the reading of responsibilities – is relatively inexpensive.
intercepted data by a criminal by encoding
it with a special key known only to 8. Take a stand against fraud.
legitimate users The message condemning fraud and
• audit software, which detects and corruption must come across loud and clear
responds immediately to suspicious or from the top and be reinforced with action.
threatening computer transactions. • Be adamant that you will treat the problem
Databases integrated across departments seriously.
also allow organisations to cross-reference • Define it clearly.
information, and thus provide security checks • Call it fraud if you find it.
against fraudulent behaviour. • Use newsletters and seminars to explain your
commitment to tackling it.
5. Review your vendor lists periodically. • Open up channels that allow staff who
A common fraud technique is to establish a identify fraud to communicate their suspicions
fictitious vendor account. – go around line managers if necessary.
When signing a cheque payment, would • Never sweep fraud under the carpet or be
you know the differences between IBM itself lenient over issues.
and a phoney IBM Computer Inc.? • Be seen to act promptly when you uncover fraud.
And, importantly, how would you know if the Remember, everyone in your organisation has a role
products were authorised or the services performed? in the process of detecting and preventing fraud.
Extracted from an article in the Sunday Times

Questions
1. Who poses the greatest threat of fraud in any organisation?
2. Briefly describe the control mentioned in point 2. of the article. Explain why
this would be classified as that particular control.
3. Why is it important to document all internal control policies and procedures
as referred to in point 3. of the article?
4. What is the meaning of the term “pilfering” (point 3.)?
5. Which controls should be used in order to prevent fraud involving
computers? Explain how each control would help prevent fraud
(point 4.).
6. Why is it important for a business to review their vendor list regularly
(point 5.)?
7. What internal control process is referred to in point 6.?
8. What type of control is referred to in point 7.? Explain.
9. Why is it important for a business to send out loud messages condemning
fraud and corruption (point 8.)?
Case study 4.2
Read the following article, which appeared in the Cape Times, and answer
the questions that follow.
150 poisoned after

Resident Simphiwe Mafilika said: “On
eating dumped Friday, I drank apple juice I picked up and
food yesterday (on Saturday) at 4 p.m. I became very
M
ore than 100 residents of the Pholile sick. I had severe cramps and a runny tummy,
Park informal settlement near Strand but no vomiting. It was terrible, but I was
had to be admitted to hospital with fortunate not have been taken to hospital.”
food poisoning at the weekend after they had City of Cape Town Disaster Risk
consumed expired food dumped there. The City Management Centre spokesman Wilfred
of Cape Town’s health department wants the Solomons-Johannes said 151 residents were
police to investigate. affected. Some were treated on the scene while
Pholile Park community leader Siphe Kaka others were taken to hospital. “This morning,
said: “On Thursday morning, a white truck came 43 were taken to hospital and this afternoon
into the area and just dumped the food. There were another 60. We investigated the food and found
jams, biscuits, sweets etc. People rushed to get to a leaflet that showed the items came from a
the food and it was later that day when many got ill place Simply Value Factory Food Shop.”
– especially children. On Friday and Saturday, more He said the city’s health department would
became ill and today another 40 people got sick.” lodge criminal complaints because the items
He said ambulances came and went all weekend as were supposed to be disposed of at a proper
residents fell ill, vomited and had skin rashes due to dump site. “This was not done. Our health
food poisoning. The food they had consumed had department inspectors have taken samples of
expired as far back as 2007, Kaka said. the foods for testing and we have dumped the

remainder of the items. The department will taking it to his place. They would have taken
tomorrow make a case with the police,” he said. it to Stellenbosch [landfill site], but people
Simply Value Factory Food Shop manager passing by with trolleys said they normally
Santa Kotze had told authorities that H Hearn get [expired] stuff there (at Simply Value
Refuse Removal had been contracted to Factory Food Shop). I personally ate a packet of
properly dispose of the expired foods. H Hearn monkeys [peanuts].”
Refuse Removal manager Henry Hearn said last Messages for Kotze were not replied to.
night he did not have a contract with Kotze. Lwandle police spokesman Mthokozisi Gama
His company’s vehicle was used and a Pholile said concerned residents had alerted police
Park casual labourer persuaded the driver to and taken items to the police station. “No case
take the food items to his home in the informal has been opened as no one has lodged any
settlement as he wanted to open a spaza shop. complaints,” he said.
“When people got sick, police called me to come Said Kaka: “Somebody must be held
and remove the stuff. I removed 14 refuse bags responsible for this. They can’t just come and
and I warned the casual. I only provided the dispose of old food in a community that is poor
transport. My staff are on holiday. The casuals and desperate. People here suffer a lot from
were picked up along the road,” he said. poverty and the last thing we need is for them
About expired food items, Hearn said: “The to be given food that makes them sick.”
driver and the casual called me to say they are
Extracted from an article by Aziz Hartley, Cape Times, 10 January 2011
Questions
1. What caused the food poisoning?
2. How long ago had some of the food expired?
3. What internal control measure was not adequately adhered to by Simply
Value Factory Food Shop?
4. What should have been done with the expired food?
5. Eating expired food is extremely dangerous and can make people very sick.
List four symptoms of food poisoning mentioned in the article.
6. If the various parties mentioned in the article had acted more ethically, this
incident could have been avoided. Briefly explain examples of unethical
conduct mentioned in the article.

Chapter 5
Financial accounting of a sole trader
• understand and use (communicate) financial language
• distinguish between and identify different types of assets
• know what income and expenses are
• know what liabilities are
• understand what the profit motive is
• know who the users are of accounting information
• know why accounting is important to a business
• know the steps in the accounting cycle
• know that there are two bookkeeping systems: the perpetual and the
periodic bookkeeping system
• be able to distinguish between financial and managerial accounting.
Key concepts
• transactions • creditors • debtors • entity rule • capital contribution
• owner’s equity • assets • liabilities • income • expenses • profit
• the accounting cycle • sole trader • profit • loss • equity • drawings
• net worth • debit • credit • bank overdraft • perpetual inventory system
• financial accounting • managerial accounting
Robert Kiyosaki says an asset is

something that puts money in
my pocket and a liability is I definitely need more assets
something that takes money out and fewer liabilities!
of my pocket.
42 c h a p t e r 5 • fi n a n cial acc o u n ti n g o f a s o le trader

1. What is accounting?
Accounting is the way to communicate or pass financial information on transactions
to those who need it. In the case study that follows, Thabo needed to Actions that take place in a business
know how much money his business was making. context, such as an action between
Accounting means recording or writing down all the transactions the business and an outside party.
that take place in a business. It is communicated in rands and cents so We always view the transactions
that the business can determine whether or not they are being profitable. from the business’s point of view,
not the customer’s; in other words,
always ask, “What is the business
Case study 5.1 doing?”
Thabo is a sole trader who owns a successful panelbeating business in sole trader
the Athlone industrial area. Before relocating to his existing premises, he Owns the business on their own;
worked from home because at the time his business was relatively small. is a self-employed person. They
Thabo, a qualified spraypainter, started his business, Thabo’s Body Works, run their business alone and bear
on 1 March 2016 after being retrenched. He found it convenient to start all the risks and losses, and take
working from home and build up customers from there. He started out all the profits and benefits. Also
called a sole proprietor.
working alone as there was no need for help.
March 2016 (Month 1)
Thabo realised that he had to convert his garage into a workshop. He used
R45 000 of his pension payout and contributed it as capital in order to
convert the garage into a work space, and to buy the necessary machines,
tools and spraypainting materials. He was ready for business.
April 2016 (Month 2)
He had worked on five cars and received a total of R15 000 from his
customers. He had to pay R500 in telephone expenses.
May 2016 (Month 3)
Thabo repaired three cars and received a total of R4 500 from his
customers. He had to buy more spraypainting materials for R3 100 and pay
for the telephone expenses of R300.
The problem
Thabo was not keeping a record of the money he was receiving from his
clients, or of the payments of various business-related expenses. Although
he spent most of his money on household expenses, he could not
determine the amount of money his business was generating.
If Thabo were to keep a strict record of the money he was receiving and
spending, we could say that he could account for the money flowing
through his business. This is called accounting in business language.
fi n a n cial acc o u n ti n g o f a s o le trader • c h a p t e r 5 43

2. Accounting terminology
2.1 Business entity
assets If Thabo was not a sole trader, he would have been able to open his
Resources or items of value own bank account and have assets in his name, and also have a separate
belonging to a person or to bank account and assets for his business. The business could then enter
a business into contracts with other businesses and have its own legal status. Thabo,
however, has one account for both business and personal expenses.
2.2 Capital
capital Before any business can commence, the owner or owners must
The money contributed towards contribute money or assets to the business. The money contributed is
a business called capital and is informally known as start-up costs. Thabo used
R45 000 of his own money to start up his business.
There are three reasons why the owner must contribute capital:
• In order for Thabo to obtain his own bank account and own assets, he
needs money. Thabo had to contribute capital to his business before
he could equip his garage with machines and tools. Once the capital is
contributed, the money belongs to Thabo.
owner’s equity • The capital contribution reflects the owner’s interest in the business.
The owner‘s intest in the business In accounting terms, this is called owner’s equity. The owner will
want to make his business work because he has a vested interest in the
business, his capital. He would not want to waste his money.
• Investors of outside capital, such as banks, will look at the amount of
capital in the business to determine the amount of borrowed finance
the bank may allow the business. The bank will look at the debt-to-
equity ratio, where the debt ratio is lower than 1. The reason for this
is that the owner must be the majority contributor of capital.
2.3 Owner’s equity

As mentioned above, owner’s equity is the owner’s interest in the
business. When the owner contributes capital to the business, his owner’s
equity increases, because his investment increases. The owner can also
drawings take money and stock out of his business, thus decreasing his owner’s
What the owner takes out of their equity. When the owner takes money or stock out of his business it is
business for their personal use; the called drawings. Another term for owner’s equity is net worth, which
owner can take money or stock for will be discussed later. The profits or losses made by the business also
personal use.
affect owner’s equity. Profit and losses will also be discussed later.

2.4 Assets
The term assets has already been mentioned. What are assets? Assets are
resources or items of value owned by the business. You can own assets as
well. Assets are things that are yours and that are of value to you.
2.4.1 Tangible assets

Tangible assets have a reasonably long lifespan. They were not purchased
with the intention of reselling them. When Thabo started his business, i The term “liquid” is explained
on page 47.
he had to equip his garage with machines and tools. These are known as
tangible assets, because they are used to help the activities of the business
and, as a result, to produce income. Without the machines and tools it
would be impossible for Thabo to start work. Tangible assets are not very
liquid because it would be difficult for the business to convert them into
cash quickly. This makes them non-current assets. Examples are property,
cars, vans, motorcycles, machines, tools, furniture, shop fittings and
computer equipment.
Here are some terms used to describe tangible assets in Accounting:
• Property is known as land and buildings.
• Cars, vans and motorcycles are known as vehicles.
• Machines, furniture, tools and shop fittings are known as equipment.
2.4.2 Investments
Investments are assets because they represent money that the business
invests or “stores away” in an investment account. The business will
transfer money from their current bank account into an investment
account, such as a fixed deposit or notice deposit account. The
investment is made for more than a year, so the money is a non-current
asset because it is not immediately available to the business. The business
will earn interest on its investment made. This will be discussed in more
detail later on.
2.4.3 Current assets

Current assets are used in the business cycle of the business; the value
of current assets changes continually. These assets are more liquid than
tangible assets, because they can be converted into cash in the short term.
Examples are cash, trading stock and debtors.
Cash is the money the business possesses. There are three types of
cash in a business:
• money in the bank account of the business, known as Bank
• the cash float in the tills, which is used as change
• the petty cash that is used when the business needs to make
small payments.
FInAnCIAL ACCounTInG oF A SoLE TRADER • chapter 5 45

Trading stock is the stock used for resale. If the business sells office
equipment, then it will have to buy office desks, chairs and boardroom
tables. These items will be its stock and will be used for resale.
Debtors are outsiders who owe the business money. If the business
sells stock on credit, the money for the stock will be owed to the business
by the customer. These customers are called debtors.
Case study 5.2
This case study looks at how current assets flow through the business and are
changed back into cash.
Masechaba owns a spaza shop in her village in Mandini. She sells

household supplies to her village and she makes a small profit. She started
trading in March 2018 and her business has grown since. Let’s look at how
the money in her bank account grows as she buys and sells the trading
stock to her customers.
1
Money in bank
account of
business
4 2
Debtors pay Cash used to buy
for the trading trading stock
stock previously 3a
purchased Resold for cash
3 Trading stock
resold at a
3b higher price
Resold on credit
than previously
to debtors
purchased
1 The money in the bank account of the business is used 2 to buy stock
for cash. 3 The stock can be sold in one of two ways: 3a for cash, or 3b
on credit. If it is sold for cash, the stock is converted into cash immediately.
If it is sold on credit, then Masechaba will have to wait a while until her
debtors pay her the money for the stock. 4 When the debtors pay, the
stock is converted back into cash. This cycle takes place over and over again
in the business.

Activity 5.1
1. If you were Masechaba, which would you prefer: cash or credit sales
to customers?
2. Rule the following columns in your workbook and fill in as many advantages
and disadvantages of cash sales, from the business’s point of view, that you
can think of.
Cash sales of stock to customers

Advantages Disadvantages
3. Rule the following columns in your workbook and fill in as many advantages
and disadvantages of credit sales, from the business’s point of view, that you
can think of.
Credit sales of stock to customers

Advantages Disadvantages
2.5 Liquidity
Liquidity, or being liquid, refers to how close a business is to converting
its assets into cash. A business needs cash in order to meet its short-term
obligations (such as to pay creditors). Assets that are not very liquid are
harder to convert into cash than assets that are liquid. Stock and debtors
are more liquid than land and buildings. Cash (money) is obviously the
most liquid asset.
Activity 5.2
Rule the following columns in your workbook. Write down the correct
accounting term for the description and identify whether it is a tangible or
current asset by placing a tick (✔) in the correct column.
Description Correct Tangible asset Current asset

accounting term
Cars, vans, motorcycles, and so on
Money in the till used as change
People who buy on credit
Stock bought for resale
Money used to make small payments
Computers, printers, office furniture,
and so on
Money in the business‘s banking
account
A building that was bought to trade
out of

2.6 Liabilities
Liabilities refer to debts incurred by the business owed to outside parties.
2.6.1 Non-current liabilities

mortgage bond The business might need extra capital for expansion purposes. In Thabo’s
Money borrowed to buy a property, case, his business expanded and he had to move his premises from home
usually repaid over 20 years to an industrial site. He could have financed the purchase of the property
himself or he could have obtained a mortgage bond from a commercial
bank. This bond is a non-current liability.
loan If Thabo needed to buy more machinery, he could have acquired a
Money borrowed that has to be loan from a commercial bank. This loan would be a non-current liability.
paid in instalments that include Non-current liabilities are repaid over a long period of time. In the
interest case of a mortgage bond, the period is up to 20 or 25 years, and in the
case of a loan, between one and five years.
Other sources of finance for Thabo’s business could be vehicle
asset finance finance, which is also known as asset finance.
Money borrowed from the vehicle
financing division, for example, and 2.6.2 Current liabilities
which is repayable in installments Often the business does not have sufficient cash to buy stock or materials.
that include interest, usually over
The owner can decide to obtain these items on credit from suppliers,
3–5 years
known as creditors. Creditors are outsiders to whom the business owes
money. Creditors are current liabilities because they are repaid in the
bank overdraft short term – within 90 days. A bank overdraft is also a current liability.
An arrangement with the bank
whereby they extend credit up to a 2.7 Income
maximum amount against which
a business can make withdrawals
Income is money received or receivable by a business that renders a
and write cheques service or sells goods. Thabo’s income was derived from spraypainting
customers’ cars. The income Thabo derived from the work he did is
called current income. When a business sells goods, as in Masechaba’s
case, the income derived is called sales.
2.8 Expenses
Operating expenses are costs incurred directly or indirectly so that the
business can carry on with its activities. What sort of expenses could
Thabo have incurred? Some examples are telephone, materials, possibly
rent, wages and salaries. Other examples of expenses are stationery, water
and electricity, maintenance and rates.

The following table is a summary of some of the above concepts.
Study this table well.
Assets Owner’s equity Liabilities

NON-CURRENT ASSETS Capital NON-CURRENT LIABILITIES
Tangible assets Drawings Mortgage bond
Land and buildings Long-term loan
Income accounts
Vehicles
Sales CURRENT LIABILITIES
Equipment
Current income Creditors
Investments
Rent income Bank overdraft
Fixed deposits
etc. Short-term loans
Notice deposits
Expense accounts
CURRENT ASSETS
Cost of sales
Trading stock
Trading licence
Debtors
Rent expense
Bank
Telephone
Petty cash
Wages and salaries
Cash float
Stationery
Maintenance costs
Rates
Water and electricity
Packing materials
Advertising
etc.
Activity 5.3
Use the list of words below to complete your copy of the table. Write each word
and term under the correct heading and in the correct column.
Here are the headings:

Assets = Owner’s equity + Liabilities
NON-CURRENT ASSETS Capital NON-CURRENT LIABILITIES
Tangible assets Drawings CURRENT LIABILITIES
Investments Income accounts
CURRENT ASSETS Expense accounts
Here is a list of words to be written under the correct headings:

Stationery Creditors Cash float
Land and buildings Sales Wages
Trading stock Vehicles Cost of sales
Advertising Postage Equipment
Bank Current income Rent income
Salaries Trading licence Packaging
Rent expense Rates Debtors
Mortgage bond Petty cash Bank overdraft
Telephone Loans Fixed deposit

Case study 5.3
Let’s look at the full cycle of business activities. Then answer the questions
that follow.
Brandon graduated from Cape Peninsula University of Technology’s Faculty

of Informatics and Design and decided to open a T-shirt manufacturing
and retailing business, making and selling T-shirts that target the teenage
market. He contributed R25 000 as start-up costs. He opened a bank
account in the name of the business, As You Like It Traders, and deposited
the money into the bank account.
The following diagram shows the cycle of business activities for the
month of June 2017, the first month of trade for As You Like It Traders.
Paid expenses Paid creditors after Purchased

incurred by about 90 days sewing machines,
business, such overlockers, tables
as electricity, and chairs on
telephone and credit
wages
5
1
Deposited money
into bank account Purchased
of the business materials to
manufacture
T-shirts for cash
4
Sold T-shirts for

Debtors pay for the cash
T-shirts bought on Used labour to
credit after about manufacture
30 days T-shirts
2a
3
2
Sold T-shirts to
customers for
Sold T-shirts on
more than
credit to debtors
manufactured
2b price

Questions
1. What are the start-up costs called in accounting?
2. Why are the T-shirts sold for a much higher price than that at which they
are manufactured?
3. In the diagram, debtors pay within 30 days and creditors are paid within
90 days. Why is it important to first receive money from debtors before
creditors are paid?
4. Mention a few more expenses that As You Like It Traders could
have incurred.
5. What is the price called at which the T-shirts are manufactured?
6. What is the price called at which the T-shirts are sold?
7. What would the difference between these prices be called?
3. The profit motive

Let‘s look at Thabo’s situation again.
Thabo was retrenched from his place of formal employment. In our
volatile economic environment, job security is not always a certainty.
Thabo lost his income and needed to replace it. His obvious motive
for opening his own business was to make a profit, thus generating an
income for himself and his family. All entrepreneurs primarily venture
into their own businesses to make a profit.
How is profit determined? Businesses either render a service, such as
hairdressers, plumbers, lawyers, building contractors or taxi owners do,
or they sell stock in order to make a profit.
Thabo sells a service, panelbeating and spraypainting cars. He uses
his skills to make money. In this case, the income he earns from selling
his skills, less the expenses paid, equals his profit. Therefore, profit is
determined by taking the income made and deducting the expenses,
which then equals profit. Obviously the income made must exceed
expenses in order to realise a profit. When expenses exceed income, it
results in a loss for the business.
Activity 5.4
Now that you have learnt some accounting terminology, let’s summarise.
Choose the correct words from column B to match the descriptions in column A.
Only write down the number in column A and the letter in column B.

Column A Column B
1. Money the owner gives to start up a business A. Current assets
2. The owner and his business are seen as separate B. Profit motive
3. The owner’s interest in his business C. Capital
4. Money received by the business for rendering a service D. Mortgage bond
or selling stock
5. Their value changes continually and can easily be E. Tangible assets
converted into cash
6. Money acquired from a commercial bank in order to buy F. Income
property
7. Outsiders to whom the business owes money for stock G. Entity rule
purchased
8. Outsiders who owe the business money for stock sold H. Owner's equity
9. The primary reason why an entrepreneur would start a I. Liquidity
business
10. Assets that have a reasonably long lifespan J. Debtors
11. Converting current assets into cash in order to pay K. Creditors
current liabilities
Activity 5.5
Write down the missing words.

1. When the income the business makes exceeds expenses, a ____________
is made.
2. The three current assets of a business are ____________, ____________ and
____________ .
3. A ____________ is an action that takes place between the business and an
outside party.
4. A loan that has to be paid back over a long period of time is a ____________
____________ liability.
5. If the income of the business is R125 000 and the expenses are R145 000,
then the net result will be a ____________ to the business.
6. The three tangible assets of a business are ____________, ____________
and ____________ .
7. Another word for owner’s equity is ____________ ____________ .
8. When the owner takes money out is the business for personal use, it is
called ____________ .
9. A liability that has to be paid back within 90 days is called a ____________
____________ .
10. Running costs that a business incurs is also called ____________ .
11. If the business invests R100 000 for a fixed period of five years, it is called
an ____________, which is a non-current asset.

4. The accounting cycle
Now that you have learnt some accounting vocabulary, let’s look at
the accounting cycle. The accounting cycle takes place every month in
the books of a business that keeps a formal set of records. This cycle is
shown below.
6
The balances are
transferred to the Trial
Balance.
5
The General Ledger 1
is balanced and totalled. Transactions
take place.
4
The journals are posted
2
Transactions are
to the General Ledger, recorded onto source
Debtors Ledger and documents.
Creditors Ledger.
3
The journals are
drawn up from source
documents.
Activity 5.6
1. Identify the type of account by placing a tick (4) in the correct column.
Tangible Current Income Expense Non-current Current

asset asset account account liability liability
Vehicles
Salaries
Petty cash
Advertising
Trading stock
Sales
Equipment
Cash float
Debtors
Trading licence
Bank overdraft

(continued) Tangible Current Income Expense Non-current Current
asset asset account account liability liability
Cost of sales
Stationery
Mortgage bond
Telephone
Creditors
Land and
buildings
Bank
Maintenance
and repairs
2. Fill in the accounting cycle for one month and explain the process.
5 1
4 2
5. Who needs accounting information?

Thabo needed to know whether his business was making a profit or not,
but outsiders to his business might also need his financial information.
Who are these outsiders?
5.1 Creditors
Thabo might decide to buy his materials on credit from creditors
(suppliers). They use the financial information to decide whether the
business will be able to pay its debts and whether to grant it credit or not.

5.2 Debtors
Thabo might want to do business on credit with customers. These
debtors will want to know whether the business is a going concern; that
is, whether it will be around for a long time.
5.3 The South African Revenue Services (SARS)

SARS will need to have Thabo’s financial information. A business or
its owner pays tax on profit earned. If the business is a registered VAT
vendor, it would need proper accounting records in order to declare its
finances to SARS. Once audited, the business will receive a tax clearance
certificate from SARS.
5.4 The bank

Thabo might want to apply for a loan or an overdraft from a commercial
bank. The bank will request the financial information to see whether the
business qualifies for a loan or an overdraft facility.
5.5 Prospective investors

Thabo’s business might expand and he could invite outsiders to invest in
his business. They would want to see whether this business would be a
viable investment.
6. Why is accounting important?

The main purpose of accounting is to record the monetary value of
transactions between the business and an outside party, and to report on
the information so that decisions can be made based on the accounting
information presented.
What information can the business owner get from the accounting
information? Here are a few examples of questions that accounting
information can answer.
• Have sales increased from one year to the next?
• Are expenses being kept under control?
• How many tangible assets does the business own?
• How is the business managing its cash flow?
• How much money does the business owe to its creditors
(both in the short term and long term)?
• Are debtors paying their accounts regularly?
• Has the business made a profit or a loss during a particular
accounting period?

Income Statement It is important to know that merely recording transactions is not
Shows the net result of the business enough. The process of recording information is called bookkeeping.
activities for a specific period; that Bookkeeping is simply the recording of transactions on a day-to-day
is, a profit or a loss basis. Accounting includes a lot more than just recording transactions. It
is the process of assimilating information in the form of statements so
Balance Sheet that the business can measure its financial performance. These statements
Shows the financial position of a
are called the Income Statement and the Balance Sheet. It is also
business at the end of a particular important for the business owner to analyse and interpret the accounting
period; that is, the net worth of information.
the business The owner can also find out about the financial history of the
business by studying its financial reports. These reports assist the owner
in planning, and they help to manage the business more efficiently.
7. The perpetual inventory system

When managing stock, a business can choose to use one of two systems:
the perpetual (continuous) inventory system, or the periodic inventory
system. The periodic inventory system is not discussed in this book – it
will be covered in Grade 11.
When using the perpetual inventory system, a business will continually
keep a record of the value of stock on hand. This record will be kept in the
Trading Stock account. When stock is bought, the Trading Stock account
is debited and when stock is sold, the Trading Stock account is credited. A
detailed explanation of this system is given later in this book.
The perpetual inventory system is also called the continuous
inventory system. In this method of stock control, the business knows the
cost price
exact value of the stock that they are holding, because they can calculate
the cost price of the goods sold at the point of sale.
How much it costs to produce
an item
All references to trading stock and how it is recorded in the rest of this
book refer to the perpetual inventory system. It is important for control
cost of sales purposes that the business calculates the cost price of the goods sold.
This cost price is called cost of sales.
The cost price of goods sold
The trading business buys goods (trading stock) at a certain price
profit mark-up and sells them at a higher price. In order to sell the goods at a higher
price, the owner must mark up the goods at a certain percentage. This
The percentage at which the goods
are marked up above cost price percentage will be predetermined by the owner so that he can cover the
cost price of the article, as well as pay for all other expenses. After paying
his expenses, the owner should have some profit left.
stock turnover This system is only practical in a business that has a low
stock turnover; that is, a business that sells big items of high value, such
How many times stock is replaced
(bought and sold) during the year
as cars, electrical appliances and furniture. However, with the use of
computerised accounting packages, it has become easy to determine the
cost of sales when the item is sold.

Activity 5.7
1. Write down at least four reasons why the perpetual inventory system would
not be practical if used by a business that sell fast-moving consumable
goods, such as fresh fruit and vegetables.
2. Discuss your answers in class.
8. Financial accounting
In Grade 9 you completed the financial records (books) of a business,
which are the journals, ledger accounts and financial statements. These
financial records must represent a true and fair view of the business’s
performance. This means that the records must give an honest
interpretation of the financial transactions of the business.
Financial accounting is the process of identifying, measuring and
communicating financial information in such a way to ensure that users
of this information can make informed decisions. They report on historic
events for both internal and external use.
The time line below shows how financial information is gathered
throughout the year in order to determine the financial result of a business.
Source documents The journals are posted A Trial Balance is

are entered into the to the ledger accounts drawn up at the end
various journals daily. each month. of each month.
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
1 28
2017 This process is repeated for twelve consecutive months. 2018
At the end of the financial year, adjustments and financial statements are completed in order to
determine the financial result of the business.
Financial accounts are used to plan and control the activities of a

business. The information obtained through financial accounting
measures whether the business is achieving its financial objectives.
Financial information is not only used in the business, or by the
business owner, but also from time to time by outsiders. These outsiders
(external users) include creditors, trade unions, financial institutions,
SARS and possible investors in the business.
The purpose of financial information is to:
• present a broad overview of the business
• account for the money invested in the business
• report the financial results and position of the business to the various
role players.

9. Managerial accounting
Accountants use various accounting techniques to assist managers in
decision making and controlling. This differs from financial accounting
as it focuses on matters such as cost control, budgeting, cash-flow control
and profit planning. Managerial accounting is thus chiefly for internal
users, such as the owner and management. The focus is on the future
(where the business is going) rather than on the past.
Managerial accounting is the process of identifying, measuring,
combining, analysing, preparing, interpreting and communicating
information to be used by management in order to plan, evaluate and
set controls within an establishment. This ensures efficient use of its
resources by management accountants, who play a vital role in the
strategic decision making of the organisation.
Managerial accounting is an integral part of management that identifies,
publishes, interprets and uses the information with regards to:
• formulating corporate strategy
• planning and controling business activities through budgeting
and forecasting
• formulating decision-making strategies
• ensuring the efficient and effective use of resources
• improving productivity and profitability
• protecting tangible and current assets
• developing internal control strategies.
Case study 5.4
Sipho, the accountant of SA Wool Producers, was asked to present the

financial records of the business to management. The reason for the urgent
meeting was that profits were down by 30% compared to the previous
year. This happened because sales were down and management was
concerned that they would have to retrench workers.
Sipho informed management that sales for the year dropped by 40% and
that retrenchment seemed imminent if proper planning was not done. By
looking at the Income Statement, he could tell that cost of sales was higher
than the previous year because wool prices had increased dramatically.
Management would like to increase profits in the next financial year. How
could they do this?
Suggested solutions to increase profits
• Decrease expenses such as water, telephone, maintenance and insurance.
• Retrench workers, thus decreasing the wages and salaries expense.
• Increase the selling price of wool.
• Try to find a new wool supplier that supplies cheaper wool of the same quality.

Questions
1. In class, discuss how the suggested solutions could influence the business.
2. Present your answers to the class as a business proposal. Your proposal
should be written, as well as presented verbally, and each person in the
class should take part.
You can see that the information needed by management to make informed
decisions with regards to the business’s future will be extracted from the
historical data contained in the financial records.
Activity 5.8
1. Briefly explain the difference between financial and managerial accounting.

2. Read the following job descriptions and decide which ones are for:
A. financial accountants
B. managerial accountants.
Some answers could apply to both.
a. Determine the financial result and financial position of a business.

b. Prepare the various budgets for a business.
c. Forecast revenue and costs.
d. Report the financial result and financial position to interested parties –
both internal and external.
e. Make sure source documents are recorded and posted correctly.
f. Prepare financial records according to the accounting cycle.
g. Analyse and interpret the information on the financial statements.
h. Plan and control the business‘s activities.
i. Report whether a business is making a profit or loss.
j. Prepare VAT returns and determine provisional tax payments.
k. Use financial information to make decisions about the future
of a business.
l. Focus on matters such as cost control, cash-flow control and
profit planning.
m. Use an accounting package to capture financial data.
n. Belong to a professional accounting body.

Chapter 6
Bookkeeping of a sole trader –
Revision of Grade 9 content
• identify source documents and know when to use them
• understand the relationship between assets, owner’s equity and
liabilities as it is expressed in the accounting equation
• classify accounts in terms of assets, owner’s equity and liabilities
• understand the double-entry principle
• calculate cost price, selling price and profit mark-up for a
trading business
• prepare the cash journals and credit journals for a trading business
• post the cash and credit journals for a trading business to the
General Ledger
• prepare the Trial Balance
• understand internal control measures over cash
• understand ethics concerning cash
• apply the entries according to the perpetual inventory system.
Key concepts
• source documents • the accounting equation • the double-entry
principle • General Ledger • cash journals • service businesses
• trading businesses • posting to the General Ledger • Trial Balance
• perpetual inventory system
Hey, Bronwyn, do we really need to

keep all these receipts and invoices?
I mean, just look at this mess.
Yes! Those are our source

documents. We definitely
need to keep them.
60 c h a p t e r 6 • b o o k k eepi n g o f a s o le trader – revisi o n o f grade 9 c o n te n t

1. The accounting equation
Accounting is based on an equation called the accounting equation. The
relationship between assets (A), liabilities (L) and owner's equity (OE) is
represented in the accounting equation.
The accounting equation can be expressed in one of three ways:
A = OE + L or OE = A – L or L = A – OE
In all instances, the accounting equation must balance because any
transaction will cause a change in two parts of the equation.
To understand the accounting equation a bit better, look at how it is
set out in the following table.
Assets = Owner’s equity (net worth) + Liabilities
These belong to the business. This belongs to the owner. These belong to outsiders.
Possessions of the business, such Money the owner invested and Debt owed to outsiders, such as
as cars, computers, money and the profit earned by the business creditors, and loans made from
property the bank
Liabilities
Assets
Owner’s equity
c h a p t e r 6 • b o o k k eepi n g o f a s o le trader – revisi o n o f grade 9 c o n te n t 61

Owner’s equity
Owner’s equity is calculated as follows:
Capital + Income – Drawings – Expenses
Owner’s equity is also known as net worth:
Total assets – Total liabilities = Net worth of the business
In other words, what the business owns (assets) minus what they owe
to outsiders (liabilities) is what the business is worth to the owner or
investors (equity).
To better understand the accounting equation, make sure that you have
studied the table on page 49.
2. The double-entry principle

Accounting is also based on the double-entry principle, which means that
for every debit entry there must be a corresponding credit entry and for
every credit entry there must be a debit entry. The double-entry principle
is best expressed by using a T-account. This T-account is a representation
of the General Ledger accounts, which will be covered later in this chapter.
Debit (Dr) Credit (Cr)

Left side of the T-account Right side of the T-account
3. T
he accounting equation and the
double-entry principle
The accounting equation works with the double-entry principle and is
expressed as follows.
Assets = Owner’s equity + Liabilities

Increases with Decreases with Decreases with Increases with Decreases with Increases with
a debit entry a credit entry a debit entry a credit entry a debit entry a credit entry
Let’s look at owner’s equity in more detail on the following page.

Dr Owner’s equity Cr
1 Drawings Capital 3
2 Expenses Income 4
1 Drawings decrease owner’s equity with a debit entry, because the

owner takes money out of the business.
2 Expenses decrease owner’s equity with a debit entry, because it

decreases what is owed to the owner via profits.
3 Capital increases owner’s equity with a credit entry, because

the owner puts his or her own money into the business, thus
increasing equity.
4 Income increases owner’s equity with a credit entry, because income

increases what is owed to the owner via profits.
4. Analysing transactions
Before you can analyse the accounting equation, you have to understand
the following process.
1. Read the following transaction:
Jack Straw paid the weekly wages to his employees.
2. Ask yourself the following questions:
Which accounts What type of Is the account Must I debit

are involved in account is it: increasing or or credit the
this transaction? asset, owner’s decreasing account?
equity or because of the
liability? transaction?
3. Here are the answers to the above questions:
Bank is involved Bank is an asset. Bank is Credit bank

because money decreasing because assets
is being paid. because money are decreasing.
is being paid.
Wages is Wages is an Wages Debit wages
involved expense. decreases because owner’s
because the owner’s equity equity is
employees because it is an decreasing.
received money expense.
for the worked
they did.

Activity 6.1
Work in pairs. Complete the table by analysing the transactions that follow.
Example: Viwe sold a ball gown to a customer for R1 200 cash. The cost price of
the gown is R800.
No. Accounts involved Type of account + or – Debit or credit Amount

e.g. Bank Asset + Debit
R1 200
Sales Income + Credit
Cost of sales Expense – Debit
R800
Trading stock Asset – Credit
Transactions
1. V Mozonyana sells ball gowns from her shop in Illovo, Johannesburg.
She increased her initial capital of R125 000 by 15%.
2. Bought equipment from Motala Traders for R11 200. Issued a cheque for
the amount.
3. She rents a small shop for R1 780 per month. Paid two months’ rent
by cheque.
4. Paid the electricity account, R800.
5. Bought a vehicle on credit for R147 000 for business use. Paid a deposit
of 10% of the cost price to the car dealer in cash.
6. Viwe employs one person in her business. She paid her salary of R7 500.
7. Viwe withdrew R670 cash for her personal use.
8. Sold three gowns on credit to a customer at R750 per gown
(cost of sales for all three, R1 250).
9. Bought stationery on credit from Venus Stationers for R420.

Activity 6.2
Now rule the following columns in your workbooks and analyse the
transactions for Viwe’s Gowns using the accounting equation.

Effect Reason Effect Reason Effect Reason
Example: Viwe sold a ball gown to a customer for R1 200 cash. The cost price of
the gown is R800.

+1 200 Bank increases
–800 Trading stock decreases +400 Profit gained
Activity 6.3
1. What does the double-entry principle state?

2. The accounting equation states that __________ must equal __________
plus __________.
3. Other ways of expressing the accounting equation is as follows:
a. Owner‘s equity = __________ – __________
b. Liabilities = __________ – __________
4. Calculate owner’s equity using the following information:
a. The owner took goods costing R1 500 and a monthly salary of R15 000.
Income for the month amounted to R55 000.
Expenses paid amounted to R23 000.
The capital account shows a credit balance of R120 000.
b. The capital account showed a credit balance of R354 000.
The owner increased his capital by 15%.
The owner took a salary of R20 000 and stock to the value of R8 000.
The business made a profit of R67 000.
5. Calculate the net worth (owner‘s equity) of the business using the following
list of balances:
a. Tangible assets R850 000
Investments R102 000
Current assets R210 000
Non-current liabilities R395 000
Current liabilities R54 000
b. Vehicles R308 000
Creditors R64 000
Cash R83 000
Loan R24 000
Equipment R195 000

Activity 6.4
Read the transactions below and complete the table provided.
Example: Mandy opened a banking account in the name of the business,

Mandy’s Beauty Spot, and deposited her capital contribution of
R50 000 into the bank account.
No. Account to be Account to be Assets Owner‘s equity Liabilities

debited credited Cap. Draw. Inc. Exp.
e.g. Bank Capital + +
1. Paid R300 to the local municipality for the trading licence.

2. Issued a cheque to Fourways Mall to pay the rent, R1 200.
3. Cashed a cheque to pay the two staff members their weekly wages. Each
employee earns R400 per week.
4. The shop officially opened for business and she received R4 200 from
customers for cash sales (cost of sales, R2 100).
5. The business needed a vehicle in order to service clients at their homes.
Purchased an Uno from African Cars for R105 000 on credit.
6. Mandy borrowed R10 000 from My Bank. The bank deposited the amount
directly into the banking account of the business.
7. Paid Telkom R730 by cheque. R430 was for the business’s telephone account
and the remainder was for the owner’s personal telephone account.
8. Mandy rendered services to customers on credit, R5 600.
9. Mandy discovered that the shop was too big for her own business needs
and sublet a portion to Lisa, a massage therapist. They agreed on a monthly
rental of R500. Received a cheque for that month‘s rent.

5. Cost calculations
5.1 C
alculating selling price, cost price and profit
mark-up
5.1.1 Calculating selling price
Example: River Traders sells camping equipment. They bought camping
tents for R1 200 each from a supplier. The camping tents are
marked up at 20% on the cost price. Calculate the selling price.
The formula
cost price % = 100%
+ profit % = 20%
selling price % = 100% + 20% = 120%
Selling price % ______

Cost price ____________
_________
    
1  ×  
Cost price %     =
1    R1 200
    120   
 × ___
100
= R1 440
5.1.2 Calculating cost price

Example: River Traders sold one pair of hiking boots for R840. All hiking
boots are marked up by 50%. Calculate the cost price.
The formula
cost price % = 100%
+ profit % = 50%
selling price % = 100% + 50% = 150%
Selling price ____________

Cost price %
__________
    
1
×  
 
1       R840
  = _____
    100  
 × ___
150
Selling price %
= R560
5.1.3 Calculating profit mark-up

Example: River Traders sold a sleeping bag to a customer for R350.
The sleeping bag cost them R200. Calculate the percentage
profit mark-up.
The formula
selling price – cost price = profit
R350 – R200 = R150
  Profit   
_________ 100  = ___
×  ___  100  
 150  × ___
Cost price 1 200 1
= 75%

Activity 6.5
Copy and complete the following table your workbooks.
No. Cost price Selling price Profit mark-up

1. R800 ? 85%
2. ? R9 600 20%
3. R620 R1 550 ?
4. R1 900 ? (granted 4% discount) 75%
Activity 6.6
Calculate the following. Show all your calculations.

1. If goods costing R400 are sold for R700, calculate the profit mark-up
maintained by the business.
2. If a retailer sells goods for R1 800 at a profit mark-up of 33 __13 % on cost price,
calculate the price the retailer paid for the goods.
3. Calculate the selling price of goods that cost R5 000 if a profit mark-up of
25% is maintained by the retailer.
4. Daniel bought ten TV sets for R5 000 from TV World. Daniel sells the TV sets
at a profit mark-up of 50% on the cost price.
a. Calculate the selling price of one TV set.
b. Calculate the total profit on the sale of five TV sets.
6. Bookkeeping of a sole trader

6.1 Transactions
As you learnt in Grade 9, there are two different types of transactions:
cash transactions and credit transactions.
6.1.1 Cash transactions

These transactions are when money is exchanged for goods and/o r
services. The money is paid and received when the transaction takes
place. It is important that the business maintains strict control over
their cash. The control measures for cash transactions are discussed in
Chapter 4 on page 30.

6.1.2 Credit transactions
These transactions are when goods are sold or a service is “purchased”,
but the money is paid or received later. The “buy now, pay later” concept
applies here.
Sales on credit to debtors

As previously mentioned, debtors are those to whom the business sells on
credit. Before management can sell to a debtor on credit, they will specify
the terms of the credit agreement. Businesses selling on credit to debtors
usually agree to terms of 30 days (this could be more or less). This means
that the debtor has to pay the amount owed within 30 days of sale.
The diagram below illustrates the flow of goods sold on credit to
customers, as well as money received from them:
Business Debtor
1
Goods sold on credit
Money received from debtor (CRJ)

5
Statement of Account sent to debtor
4
2 3
Debtors Journal Debtors Ledger and General Ledger
Purchases from creditors

As previously mentioned, creditors are those from whom the business
buys on credit. When buying on credit from a creditor, management
will negotiate terms of up to 90 days. This means that the debt has to be
repaid within 90 days of purchase.

A retail store can also request that the supplier give them a trade
discount on goods bought on credit. A trade discount is simply a
reduction on the purchase price or invoice price of the goods. A trade
discount could be offered because:
• trading stock is bought in bulk from the supplier
• it is an incentive to promote loyalty
• it allows slow-moving items to be cleared from stock.
The trade discount is simply deducted from the price on the invoice and
should not be recorded in the books of the business.
Example: If the business buys stock with a cost price of R10 000 from
a supplier, they will be invoiced at R10 000 less 5% trade
discount. The calculation is as follows:
R10 000 × ___95   = R9 500

 100
Only R9 500 is recorded in the books of the business.

The following diagram illustrates the flow of items bought on credit
from suppliers as well as money paid to them:
Creditor Business
1
Buys items on credit and receives a Credit Invoice
Pays creditor at a later date
5
2
Business owes
creditor more The Creditors Journal is posted to the Creditors Ledger and General Ledger Original invoice renumbered
and recorded in the
4 3 Creditors Journal

6.2 Source documents
You learnt earlier that the first entry of a transaction is filled in on a source document
document. Different kinds of transactions mean that different documents The original document where a
are filled in. All documents are completed in duplicate, and the business transaction is first recorded. It is
used to record the transaction in a
keeps one copy in order to record the transaction in the books of the
subsidiary journal.
business. This copy is called a source document.
6.2.1 The receipt

The business will give a receipt when money is received from:
• owners when they contribute capital
• a customer for services rendered
• a tenant for rent income
• a debtor when they pay their account.
The receipt is issued to acknowledge the money being received and the
duplicate receipt is kept in order to make an entry in the Cash Receipts
Journal (CRJ).
Example
Transaction On 25 January 2017 the bookkeeper issued receipt no 1 to
M Bentley, the owner, who contributed R100 000 to start
his business, Shu-biz Stores.
Receipt No. 1
Received from: M Bentley Date: 25/01/2017
the amount of: One hundred thousand rand
only R100 000,00
for: Capital contribution
for: Shu-biz Stores
6.2.2 The cash register roll

The cash register roll records cash sales of the trading stock to customers.
The business issues a cash register slip to the customer and the cash
register roll remains in the cash register. This cash register roll shows the
total of the day’s cash sales and is used to record the transactions in the
Cash Receipts Journal (CRJ).

example
Transaction On 30 March 2017, Shu-biz Stores sold shoes to cash
customers totalling R7 500.
Shu-biz Stores Tel 021 451 4414

30-03-2017
Cape Town
R7 500,00 Total
R921,05 VAT on items
6.2.3 The cheque

The business can issue a cheque to make cash payments. The cheque is a
legal tender and represents the cash the business has in its bank account.
A cheque can be issued for:
• payment of expenses
• purchase of fixed assets
• purchase of trading stock
• payment to a creditor.
The cheque is issued to the payee and the business keeps the cheque
counterfoil in order to record the information on it in the Cash
Payments Journal (CPJ).
example
Transaction On 1 May 2017, Shu-biz Stores issued a cheque to the City
Council in payment of the water and electricity account, R560.
This makes the cheque safe.
01 May 2017 02-50-09-11
WEST BANK
Date
Rondebosch
To City Council 01 / 05 / 2017
NOT TRANSFERABLE
For Water & Electricity
Pay
Bal. City Council or Bearer
Betaal
of Toonder
Dep.
This chq R 560,00 The sum of

Die som van Five hundred and sixty rand only
Bal R
R 560,00
Amount in words must correspond

with amount in figures.
001 001: 02500911 : 076321542 01 For: Shu-biz Stores
The cheque counterfoil stays in the The cheque is removed and

cheque book. given to the payee.
72 chapter 6 • BookkEEPInG oF A SoLE TRADER – REVISIon oF GRADE 9 ConTEnT

There are three parties to a cheque:
• The drawer is the person or business who issues the cheque.
• The payee is the person or business to whom the cheque is paid.
• The drawee is the bank that is instructed by the drawer to make the
payment to the payee.
In our example, the following parties to the cheque can be identified:
• the drawer: Shu-biz Stores
• the payee: the City Council
• the drawee: West Bank.
6.2.4 The ATM withdrawal slip

A business owner could decide to withdraw money with his debit card
at an Automatic Teller Machine (ATM). In order to withdraw money, a i A debit card is small plastic
card that can be used as a
personal identification number (PIN) must be entered into the machine. method of payment where the
This PIN code protects the owner of the card against fraud and theft, money is debited against your
bank account when the purchase or
because a withdrawal cannot be made at an ATM without the PIN payment takes place.
being entered. The owner will use the ATM withdrawal slip to enter the
transaction in the Cash Payments Journal (CPJ).
6.2.5 Debit and credit card slips

A business owner can make purchases or payments without writing
out cheques or withdrawing money. These payments can be done
directly with his debit card or credit card. These transactions are seen
as cash transactions because the money is debited against the business’s i A credit card is small
plastic card that can be used
account when the transaction is approved. A PIN code is also required to make purchases where the bank
and the cashier will ask that the business owner signs a slip to verify the pays the purchase amount to the
dealer and the credit-card holder
transaction. The business will use the debit or credit card slip as a source
pays the bank back at a later stage.
document to enter the transaction in the Cash Payments Journal (CPJ).
chapter 6 • BookkEEPInG oF A SoLE TRADER – REVISIon oF GRADE 9 ConTEnT 73

6.2.6 Electronic Funds Transfer (EFT) or Internet banking
Most businesses make use of Internet banking, a facility offered by
the bank whereby a business pays another business or person via the
Internet. The person making the payment logs onto their bank’s website,
using a secret password. Once on the bank’s website has been accessed,
beneficiary the payment can be made by entering the beneficiary’s banking details
A person, business or group and the amount to be transferred electronically, and then accepting the
who receives the money being transaction. The amount will appear in the beneficiary’s account within
transferred 24 to 48 hours. The business owner must print a copy of the payment
receipt and use it as a source document to enter the transaction in the
Cash Payments Journal (CPJ).
Payment Receipt
Beneficiary Name: FUNKY FEET

Bank Name: DIAMOND BANK
Beneficiary account number: 52694877862
Branch code: 20030901
Branch name: MOWBRAY, CAPE TOWN
My reference: FUNKY FEET
Beneficiary reference: JOE SOAP
Payment date: 2017-04-20
Amount: R 369,00

6.2.7 The credit sales invoice
The business issues a credit sales invoice each time it sells trading stock
on credit. The details on the credit invoice must be accurate to ensure
that the debtor owes the correct amount to the business. You will learn
more about this later.
NO. 107
CREDIT INVOICE
To: B Bunting 18 Rockford Road
9 5th Street Epping Industria
Westridge 8104
3120 Date 14 / 02 / 2017
Bought from: Shu-biz Stores

Terms: 60 days
Quantity Description Price Amount
1 pair Boots R329 R329
E & OE
The original invoice is issued to the debtor and the business keeps the
duplicate invoice as the source document to record the transaction in the
Debtors Journal (DJ).
6.2.8 The credit purchases invoice

The business receives the original credit invoice from a supplier when credit
purchases are made. It uses the original credit invoice as a source document,
and the order form sent to the supplier as a supporting document.
CREDIT INVOICE NO. RO 565
To: Shu-Biz Stores 31 Bridal Street

18 Rockford Road Athlone Industria
Eppindust 7302
8104 Date 17 / 02 / 2017
Bought from: Regal Office Suppliers

5 Office chairs R1 099 R5 495
E & OE
When the business receives the original invoice, this invoice will be
renumbered by the bookkeeper of the business and be used as the source
document to record the information in the Creditors Journal (CJ).

6.2.9 Credit note
This is issued to a debtor to acknowledge that the business has received
their returned stock or reduced their account with the overcharged
amount. The debit note that accompanied the returned stock is used as
a supporting document. The credit note is the source document used to
write up the transaction in the Debtors Allowances Journal (DAJ).
CREDIT NOTE
NO. 001
To: B. Bunting Date 17 / 02 / 2017

9 5th Street
Westridge
3120
Returned to: Shu-biz Stores
1 pair Boots R329 R329
E & OE
6.2.10 Debit note

This is issued to a supplier when a business returns unwanted or defective
stock to them. The business will also issue a debit note if they were
overcharged on an invoice. The debit note serves as a notice to the creditor
that their account has been debited in the business’s books with the stock
returned or the reduction requested. The creditor will send a credit note
in return, which will serve as a supporting document. This credit note
serves as acknowledgement that they have credited the business’s account
in their books. The debit note is the source document used to write up the
transaction in the Creditors Allowance Journal (CAJ).
DEBIT NOTE
NO. 001
To: Regal Office Supplies Date 25 / 02 / 2017

31 Bridal Street
Athlone Industria
7302
Returned by: Shu-biz Stores
1 Office chair R1 099 R1 099
E & OE

Activity 6.7
Copy and complete this table in your workbooks.
Type of transaction Source document Journal

1. Bought a new motor vehicle on credit
2. A debtor returned unwanted trading stock.
3. Received money for cash sales
4. Received a cheque from owner as a
capital contribution
5. Sold trading stock on credit to a debtor
6. Paid the telephone account
7. Returned defective stationery to a supplier
8. Paid for the purchase of equipment
9. The owner took his wife out for lunch and paid
using the business’s credit card.
10. Received cash from a tenant for rent
11. Received money for services rendered
12. A debtor settled his account by issuing a cheque to
the business.
13. Made an EFT to pay a creditor in settlement of
the account
14. The owner withdrew cash to pay the
casual labourers.
Activity 6.8
Complete the following table by reading the transaction and filling in the
columns correctly.
Example: Paid the manager, S Clark, his salary by cheque, R7 500.
No. Source doc. Journal Account Account Amount

debited credited
e.g. Cheque CPJ Salary Bank R7 500
counterfoil
Transactions
1. The owner decided to increase his capital of R170 000 by 20% by
depositing a cheque directly into the current banking account of
the business.
2. Made an EFT into the account of the Durban City Council to pay for the
trading licence, R350.
3. Rented out a portion of the building to B Botha for R1 500 per month.
First month’s rent received.

4. Purchased the following from L Lunga on credit:
• trading stock, R3 000 (less 5% trade discount)
• consumables, R210.
5. Sold stock, with a cost price of R950, for R1 700 cash.
6. Issued a cheque to settle our account with L Lunga (our creditor), R5 620.
7. Paid the weekly wages to two employees by cashing a cheque.
Each employee earns R450 per week.
8. Bought the following from Makro using the businesses debit card:
• computer desk, R1 300
• computer and printer, R4 500
• two boxes of printer paper at R145 each
• pens and pencils, R42.
9. Sent a cheque to Telkom to pay the business’s telephone account of
R490 and to pay for the owner’s personal telephone account, R560.
10. A debtor paid her account, R875 cash.
6.3 Subsidiary journals

A journal is the book of first entry. This means that the journal is where
a bookkeeper will first record a transaction from the source document.
There are three types of cash journal:
• the Cash Receipts Journal (CRJ)
• the Cash Payments Journal (CPJ)
• the Petty Cash Journal (PCJ).
There are two types of credit journal:
• the Debtors Journal (DJ)
• the Creditors Journal (CJ).
There are two types of returns journals:
• the Debtors Allowances Journal (DAJ)
• the Creditors Allowances Journal (CAJ).
Each journal has a specific purpose.
• The Cash Receipts Journal is used to record all money received by
the business.
• The Cash Payments Journal is used to record all payments made by
the business.
• The Petty Cash Journal is used to record small (petty) expenses. The
business will specify the limit of payments. For example, all payments
under R200 will be made through petty cash and therefore recorded in
the PCJ.
• The Debtors Journal is used to record credit sales to debtors.
• The Creditors Journal is used to record credit purchases
from creditors.

• The Debtors Allowances Journal is used to record returns of trading
stock from debtors.
• The Creditors Allowances Journal is used to record returns of items,
such as trading stock or stationery, to creditors.
The business uses another journal called the General Journal (GJ). This
journal will be discussed in Chapter 10.
Activity 6.9
Required
Use the transactions below to draw up the following journals in the books of
Simon Stores for March 2018:
1. Cash Receipts Journal with columns for Analysis of receipts, Bank, Debtors
control, Sales, Cost of sales and Sundry accounts
2. Cash Payments Journal with columns for Bank, Trading stock, Creditors
control, Stationery and Sundry accounts
3. Debtors Journal with columns for Sales and Cost of sales
4. Creditors Journal with columns for Creditors control, Trading stock,
Stationery and Sundry accounts.
Transactions for March 2018

01 Bought goods for R10 000, less 7% trade discount from Luke Traders.
Received their invoice no. XZ12 and renumbered it 46.
Sales according to cash register roll, R2 100 (cost price, R1 400).
03 Sold goods on credit to the following:
• Layla for R1 720 (cost price, R1 376). Issued invoice no. 32.
• Govan for R1 215 (cost price, R972).
05 Purchased stationery from King Supplies for R450 on credit.
09 Received a payment from Layla for R2 300 in part-payment of her
account and issued receipt no. 59.
Sold goods to Bridget for R5 600 on credit (cost price, R4 480).
10 Repairs were done to the business vehicle for R1 450 on credit.
Received an invoice from Max Motors.
15 Sent cheque no. 76 to King Supplies for R3 200 for the following:
• stationery, R150
• trading stock, R1 620.
The remainder was in settlement of account as on 1 March 2018.
18 Bought the following on credit from King Supplies:
• two chairs @ R185 each
• computer, R5 700.
22 The owner, Simon, took R1 500 cash for his own use.

25 Issued Max Motors with a cheque for R8 425 in settlement of account.
A cheque was issued to Luke Traders for R500 in part-payment
of account.
28 Cash sales according to cash register roll, R1 980 (cost price, R1 584).
29 Simon decided to increase his capital contribution by issuing the
business with a cheque for R10 000.
30 Issued a cheque to pay the salary to Zunaid, who earns R5 000
per month.
A portion of the shop was let to Claire at R1 050 per month. Received
the rent for one month.
6.4 Posting the Cash Journals to the General Ledger,

Debtors Ledger and Creditors Ledger
6.4.1 General Ledger

The General Ledger is based on the double-entry principle, which states
that for every debit entry there must be a corresponding credit entry.
The General Ledger is divided into two sections. The Balance Sheet
accounts section contains the following accounts:
• capital
• drawings
• assets (non-current and current)
• liabilities (non-current and current).
The second section is the Nominal Accounts section, which contains
the following:
• all income accounts
• all expenses accounts.
6.4.2 Folio referencing

Each journal is given a specific number. For example, CRJ1 could mean
the Cash Receipts Journal for the first month of that particular financial
year. Therefore CPJ5 could mean the Cash Payments Journal for the
fifth month of that particular financial year. When posting is done from
the journals to the General Ledger accounts, folio references are used to
make checking and cross-referencing easy. Each General Ledger account
is also given a unique number, for example, B1 means Balance Sheet
account number one and N4 means nominal account number four. These
numbers must be quoted in the journal just as the journal numbers are
quoted in the General Ledger accounts.

6.4.3 Entering opening balances
The information gathered in the previous month must be considered in
the next month. In actual trading, the business will keep running balances
of previous months’ information. For school purposes, we will open
information gathered from the previous month or months. This process
is called opening balances.
Opening balances are obtained from one of three sources:
• the Trial Balance completed in the previous month
• the General Ledger balances of the previous month
• a list of given balances obtained from the previous month.
6.4.3.1 How are balances opened?

Balances are opened as follows:
Assets
• A
ll asset account balances are opened on the
Balance
debit side.
Liabilities
• All liability account balances are Balance
opened on the credit side.
Capital Income • T
he Capital account and all income
Balance Balance account balances are opened on the
credit side.
• The Drawings account and all Drawings Expenses

expense account balances are Balance Balance
opened on the debit side.
6.4.3.2 When are balances opened?

Balances are opened on the first day of the new month.

Activity 6.10
The following balances appeared in the books of Simon Stores on 28 February

2018. Open these balances in the General Ledger and post the subsidiary
journals from Activity 6.9.
Capital 150 000 Sales 87 150

Drawings 6 200 Cost of sales 49 800
Vehicles 75 000 Repairs 600
Equipment 34 750 Stationery 875
Furniture 16 830 Salaries 25 000
Trading stock 8 640
Debtors control 3 345
Bank 28 960
Creditors control 12 850
6.4.4 Posting credit sales to the Debtors Ledger

A business will keep a Debtors Ledger for their individual debtors’
accounts. Each debtor will have his own account, detailing any
transactions with the business. The debtor’s individual account in the
Debtors Ledger will be updated as soon as a transaction takes place.
The business will keep a running balance of amounts owed by debtors,
who may call to ask how much is owed to the business. At the end of a
particular month, a computer print-out is made of the debtor’s account
as it appears in the Debtors Ledger and mailed to the debtor. This print-
out is called the Statement of Account.
6.4.5 Posting credit purchases to the Creditors Ledger

A business will keep a Creditors Ledger for their individual creditors’
accounts. Each creditor will have their own account, detailing any
transactions with the business. The creditor’s individual account in the
Creditors Ledger will be updated as soon as a transaction takes place.
The business will keep a running balance of amounts owed to creditors
so that it knows how much is owed to them at any point in time. At the
end of a particular month, the creditor will send the business a Statement
of Account. The business will compare this statement to the creditor’s
account as part of control procedures.

Activity 6.11
Use the balances from the Debtors and Creditors Lists as well as the
transactions in the subsidiary journals in Activity 6.9 to complete the Debtors
Ledger and Creditors Ledger of Simon Stores for March 2018.
The Debtors List showed the following balances on 28 February 2018:

Bridget D1 245 00
Govan D2 800 00
Layla D3 2 300 00
Debtors Control B7 3 345 00
The Creditors List showed the following balances on 28 February 2018:

Luke Traders C1 2 995 00
King Stores C2 1 430 00
Max Motors C3 8 425 00
Creditors Control B9 12 850 00
6.5 The Trial Balance

At the end of the month, after the General Ledger accounts have been
posted and balanced, the Trial Balance is drawn up. The Trial Balance
simply tests the accuracy of the recording process. It checks whether:
• the information from the source documents was correctly recorded in
the journals
• each column in the journal was correctly added
• the journals were correctly posted to the General Ledger or posted
at all
• the General Ledger was balanced correctly
• the double-entry principle has been completed or whether only one
of the entries has been made.
The Trial Balance must balance; in other words, the debit column must
equal the credit column. If it does not balance, check to see that you:
• added the columns in your Trial Balance correctly
• entered the balances from each account correctly or at all
• entered the accounts in the correct column
• balanced the accounts correctly
• completed the double-entry process
• posted correctly from the journals to the General Ledger
• added the columns in the journals correctly.

Activity 6.12
Use the General Ledger in Activity 6.10 to draw up the Trial Balance for Simon
Stores as at 31 March 2018.
Informal assessment 6.1
Marks: 160 Time: 60 minutes
1. Use the Trial Balance of Cameron Traders provided for April 2017 and open
all the balances listed in the General Ledger. (Leave five lines open for Bank
and Trading Stock and four lines for all the other accounts.)
Note
• The business operates on a profit mark-up of 60% on cost price.
The following balances appeared in the books of the Cameron Traders:
Cameron Traders
Trial Balance on 30 April 2017
Balance Sheet accounts Fol. Debit Credit
Capital B1 120 000 00
Drawings B2 3 100 00
Vehicles B3 60 000 00
Equipment B4 50 000 00
Trading stock B5 5 240 00
Debtors control B6 8 785 00
Bank B7 60 145 00
Cash float B8 500 00
Creditors control B9 8 840 00
Nominal accounts
Sales N1 156 160 00
Cost of sales N2 97 600 00
Rent income N3 15 000 00
Vehicle expense N4 3 050 00
Telephone N5 2 000 00
Stationery N6 2 080 00
Wages N7 7 500 00
300 000 00 300 000 00
2. From the transaction for May 2017, draw up the following:

• Cash Receipts Journal with columns for Analysis of receipts, Bank, Sales,
Cost of Sales and Sundry accounts

• Cash Payments Journal with columns for Bank, Trading Stock, Wages,
Stationery and Sundry accounts
• Debtors Journal with columns for Sales and Cost of Sales
• Creditors Journal with columns for Creditors Control, Trading Stock,
Stationery and Sundry accounts.
3. Post the journal to the General Ledger and balance the ledger.
4. Draw up the Trial Balance for May 2017.
5. Calculate the amount owed to Box Traders on 31 May 2017. On 1 May,
Cameron Traders owed them R2 300.
6. The owner suspects that not all the money received is being deposited.
How can he deal with the problem?
7. List three ways this business can exercise better control over its cash payments.
The following documents were issued or received during May 2017:
Duplicates of receipts
Receipt No. 39 Receipt No. 40
Received from: M Zamani Date: 03/05/2017 Received from: C Cameron Date: 12/05/2017
the amount of: Seven hundred and the amount of: Three thousand rand only
twenty rand only R720,00 R3 000,00
for: Account settlement for: Capital contribution
for: Cameron Traders for: Cameron Traders
Receipt No. 41 Receipt No. 42

Received from: S Lizwe Date: 20/05/2017 Received from: Lucy’s Salon Date: 30/05/2017
the amount of: Nine hundred and the amount of: Three thousand and
fifty rand only R950,00 seventy-five rand only R3 075,00
for: Part-payment of account for: Rent
for: Cameron Traders for: Cameron Traders
Duplicates of the cash register rolls
CAMERON TRADERS CAMERON TRADERS CAMERON TRADERS

Cape Town Cape Town Cape Town
Tel 021 451 4414 Tel 021 451 4414 Tel 021 451 4414
05-05-2017 12-05-2017 18-05-2017
R768,00 Total R816,00 Total R1 008,00 Total

R94,31 VAT on items R100,21 VAT on items R123,79 VAT on items
CAMERON TRADERS CAMERON TRADERS

Cape Town Cape Town
Tel 021 451 4414 Tel 021 451 4414
19-05-2017 30-05-2017
R1 200,00 Total R992,00 Total

R147,37 VAT on items R121,82 VAT on items

Cheque counterfoils
Date 03 / 05 / 2017 Date 04 / 05 / 2017 Date 09 / 05 / 2017 Date 12 / 05 / 2017

To Box Traders To Box Traders To Classic Stationers To Super Services
For Stationery For Goods For Account For Repairs
Bal. Bal. Bal. Bal.
Dep. Dep. Dep. Dep.
This cheque R 180,00 This cheque R1 200,00 This cheque R3 000,00 This cheque R 109,00
Bal. Bal. Bal. Bal.
010 011 012 013
Date 15 / 05 / 2017 Date 17 / 05 / 2017 Date 19 / 05 / 2017 Date 21 / 05 / 2017

To Cash To Mbalu Stores To Telkom To Crow Agents
For Owner’s use For Account For Telephone For Advertisements
Bal. Bal. Bal. Bal.
Dep. Dep. Dep. Dep.
This cheque R 200,00 This cheque R2 100,00 This cheque R 140,00 This cheque R 73,00
Bal. Bal. Bal. Bal.
014 015 016 017
Date 24 / 05 / 2017 Date 27 / 05 / 2017 Date 28 / 05 / 2017 Date 29/ 05 / 2017

To Box Traders To E. Elgin To Box Traders To Cash
For Desk For Salary For Merchandise For Wages R300
Bal. Bal. Bal. Cash float R150
Dep. Dep. Dep. Dep.
This cheque R 600,00 This cheque R5 000,00 This cheque R1 890,00 This cheque R 450,00
Bal. Bal. Bal. Bal.
018 019 020 021
Date 30 / 05 / 2017 Date 30 / 05 / 2017 Date 30 / 05 / 2017

To M. Mbalo To Municipality To Box Traders
For Stationery For Water & electricity For Account
Bal. Bal. Bal.
Dep. Dep. Dep.
This cheque R1 200,00 This cheque R 190,00 This cheque R1 650,00

Bal. Bal. Bal.
022 023 024

Duplicates of invoices issued
INVOICE No. 025
To: M Zamani Date: 15 May 2017

23 Barlinka Street
Worcester
Cameron Traders
2 Items of stock 400 00 800 00
E & OE
INVOICE No. 026
To: S Lizwe Date: 19 May 2017

56 Caeser Street
Worcester
Cameron Traders
3 Items of stock 928 00 2 784 00
E & OE
Original invoices received
INVOICE No. CS57 17

To: Cameron Traders Date: 9 May 2017
23 Main Road
Worcester
Classic Stationers
20 Boxes of stock 240 00 4 800 00
E & OE
INVOICE No. BT60 18

23 Main Road
Worcester
Box Traders
5 Boxes of printer paper and pens 155 00 775 00
E & OE

INVOICE No. MS38 19
23 Main Road
Worcester
Mbalu Stores
52 Units of stock items 57 00 2 964 00
E & OE
Baseline tests
1. Accounting concepts
Choose the correct letter (A. B. C. or D.) and write it next to the numbers
1.1 to 1.15.
1.1 A product is sold for R1 200 after a profit mark-up of 25% was added. The
cost price of this product is __________ .
A. R300 B. R960
C. R1 500 D. R900
1.2 Stationery is a/an __________ account.
A. Balance Sheet B. asset
C. expense D. income
1.3 Creditors are credited when stock is bought on credit because __________ .
A. trading stock increases B. liabilities increase
C. assets increase D. expenses increase
1.4 Which source document is used to record goods purchased on credit?
A. Original invoice B. Duplicate invoice
C. Receipt D. Cheque counterfoil
1.5 Valuable possessions of the business are known as __________ .
A. capital B. assets
C. liabilities D. income
1.6 People who owe the business money are known as __________ .
A. debtors B. creditors
C. bankers D. wholesalers
1.7 According to the accounting equation, assets equal __________ .
A. liabilities plus current assets
B. owner’s equity plus current liabilities
C. liabilities plus owner’s equity
D. liabilities minus owner’s equity

1.8 Profits generated by the business will always increase __________ .
A. owner’s equity B. assets
C. creditors D. cash
1.9 Which of the following normally has a debit balance?
A. Income B. Capital
C. Fixed assets D. Liabilities
1.10 The equipment and buildings of a business are __________ .
A. current assets B. capital
C. liabilities D. fixed assets
1.11 An asset which is purchased by the business with the intention of
exchanging it for cash within a year is __________ .
A. a non-current asset B. part of owner’s equity
C. a current asset D. a current liability
1.12 A creditor is someone __________ .
A. who owes the business money B. who buys on credit from the business
C. from whom the business D. to whom the business owes money
buys by cheque
1.13 Which of the following is not a non-current asset?
A. Land and buildings B. Trading stock
C. Vehicles D. Equipment
1.14 Which of the following does not form part of owner’s equity?
A. Capital B. Rent income
C. Debtors control D. Stationery
1.15 If the owner uses the business’s money to pay for his personal telephone
account, which account is used in addition to the Bank account?
A. Drawings B. Owner’s telephone
C. Telephone D. Capital
2. Accounting concepts
2.1 Explain what is meant by the “business entity rule”. (2)

2.2 Explain the following accounting concepts:
2.2.1 Assets (2)
2.2.2 Owner’s equity (2)
2.2.3 Liabilities (2)

3. Source documents
3.1 Explain the importance of source documents. (2)

3.2 Use the template provided to explain the use of the different
source documents. (8)
No. Purpose Name of source document

3.2.1 The document used to record credit sales
3.2.2 The document used to record money received from a debtor
3.2.3 The document used to pay a supplier for an amount owed to him
3.2.4 The document used when money is withdrawn with a debit card
from the machine
3.2.5 The document used when money is transferred via the Internet
3.2.6 The document that is received from a creditor for goods bought
on credit
3.2.7 The document used to record cash sales
3.2.8 The document used when a payment is made with your
credit card
4. Source documents and journals

Catherine Rabie has started her own business, Fables, by selling books.
Catherine did not take Accounting as subject at school and has asked you to
help her look after the financial aspect of her business. Catherine uses the
perpetual inventory system and a mark-up of 40% on cost price.
Catherine has opened a bank account in the name of the business, but is unsure
of the source documents she needs to acquire for the business, as well as the
journals in which the transactions should be recorded.
Use the table below to explain the different source documents and journals:
No. Description of transaction Source document Subsidiary journal

4.1 Payments that need to be made for bigger amounts,
for example purchasing stock worth R20 350
4.2 Smaller cash payments, for example paying
postage of R8
4.3 Cash sales
4.4 Credit sales
4.5 Purchase of stationery on credit
4.6 Payment to a creditor in settlement of his account
4.7 Receiving money from a debtor in settlement of
her debt
(2 × 7 = 14)

5. Accounting equation
Explain the effect of transactions on the accounting equation by using the

table below.
Transactions
Example: Catherine invested an additional R30 000 in her business as capital.
No. Assets Owner’s equity Liabilities

e.g. +30 000 Bank +30 000 Capital
increases contribution
5.1 Buy books on credit from Cambridge University Press for R5 600 and
receive 20% trade discount.
5.2 Cash sales of books amount to R2 996 (profit mark-up on cost price is 40%).
5.3 Pay the telephone account to Telkom, R760.
5.4 Pay R1 200 in settlement of the business’s account at Paper & Co.
5.5 Receive R480 from a debtor K de Villiers as a payment on her account.

6. Subsidiary journals
The following transactions took place during March 2018 between Swift Sport,
its customers and suppliers. The accounting policy is to enter the cash sales for
the week into the books at the end of that week; that is, on the Friday.
Required
Complete the following subsidiary journals in the books of Swift Sport:
1. CRJ with columns for Analysis of receipts, Bank, Sales, Cost of Sales,
Debtors Control and Sundry accounts
2. CPJ with columns for Bank, Trading Stock, Packaging, Wages, Creditors
Control and Sundry accounts
3. DJ with columns for Sales and Cost of Sales
4. CJ with columns for Creditors Control, Trading Stock, Packaging, Stationery
and Sundry accounts.
Swift Sport sells sports clothing and equipment and has a mark-up of 100% on
cost price. Do not total the journals.

01 Issued cheque no. 135 to Neotel for the telephone account, R1 470.
Paid the electricity account to the municipality, R1 640.
02 Sold the following on credit to:
• M Ntini, R8 570 (Invoice no. 36)
• G Smith, R2 200.
04 Bought trading stock on credit from Maxi Sport Wholesalers, R46 220,
less 5% trade discount. Received their invoice and renumbered it 91.
05 Cash sales for the week 1 to 5 March, R18 500.
Paid the wages of the salesperson, R800; she also qualified for a
commission of R300 for the week. This amount treated as wages in
the books.
The owner took R1 000 as drawings for the week.
08 Received the following credit purchase invoice:
CREDIT INVOICE no. DS182 92
To: Swift Sport 82 Gum Road

19 Tweed Road Roodepoort
Durban 6454
5123 Date 08/03/2018
Miller’s Office Stationery

5 Boxes of printer paper R220 R1 100
3 Laser printer ink cartridges R680 R2 040
E & OE Vat on goods at 14% is included R3 140

09 M Ntini owed the business R3 680 on 1 March 2018. He settled this
amount in full and was issued with receipt no. 53.
10 Bought packaging from The Pac Man for R765 and issued a cheque for
this amount as payment.
12 Cash sales for the week from 8 to 12 March, R13 820.
Paid the salesperson her weekly wage (she earned no commission for
the past week).
15 Issued the following credit sales invoice:
no. 38
CREDIT INVOICE
To: G Smith 19 Tweed Road
1 Orion Street Durban
Illovo 5123
6240 Date 15/03/2018
Swift Sport
1 Cricket bat R3 500 R3 500
2 Pairs of gloves R450 R900
E & OE Vat on goods at 14% is included R4 400
18 G Smith paid by cheque to settle last month’s balance of R2 250.

Issued a receipt.
19 Paid the salesperson her weekly wage, R950. She received an increase
of R150 per week but did not qualify for any commission.
Cash sales for the week from 15 to 19 March, R10 230.
23 Made the following payments according to the cheque counterfoils:
Date 23 / 03 / 2018 Date 23 / 03 / 2018

To CoverAll Insurance To Maxi Sport Wholesalers
For Insurance premium For Payment of account
Bal. Bal.
Dep. Dep.
This cheque R1 200,00 This cheque R 11 000,00

Bal. R Bal. R
142 143
25 Paid the manager, S Brighton, her salary, R8 400.

26 Paid the salesperson her weekly wage.
Cash sales for the week from 22 to 26 March, R12 780.
29 Paid the rent to Mutual Properties per cheque, R8 800.
30 The owner took R15 000 for his own use.
31 Issued a cheque to pay Miller’s Office Stationery for the amount on the
invoice received on 8 March.

7. General Ledger
Fables Book Shop has now been running for two months. Use the balances
provided as well as the totals extracted from the various journals to complete
the following General Ledger accounts:
• Trading Stock
• Debtors Control
• Creditors Control
• Sales
• Stationery.
Balances on 31 January 2018

Trading Stock R40 120 (11)
Debtors Control R2 460 (7)
Creditors Control R15 230 (7)
Sales R38 670 (5)
Stationery R850 (5)
Required
Complete and balance the accounts for February 2018 correctly.

Column totals in the journals on 28 February 2018
Cash Receipts Journal

Bank Sales Cost of Sales Debtors Control Sundry accounts
16 058 11 788 8 420 1 970 2 300
Cash Payments Journal

Bank Trading Stock Stationery Creditors Control Sundry accounts
31 064 9 420 234 14 630 6 780
Creditors Journal
Creditors Control Trading Stock Stationery Equipment Sundry accounts
7 152 2 560 112 4 120 360
Debtors Journal
Sales Cost of Sales
5 950 4 250
8. Debtors and Creditors Ledgers

8.1 Debtors Ledger
Required
Use the information given below to prepare the account of M Dollie, a debtor in
the Debtors Ledger of Sassy Fashions.

Information
On 1 February 2018, M Dollie owed the business R3 500.
The following transactions took place in the books of the business during
February 2018:
3 Received a cheque from M Dollie for half of the amount owing as on
1 February. Issued receipt no. 77.
8 Sold goods to M Dollie which cost the business R2 600. Goods are sold
at cost plus 125%. Issued invoice no. 58.
18 M Dollie bought goods for R855 (cost price, R380). Invoice no. 72
was issued.
20 Cash sales of goods to M Dollie, R720. Cost price of the goods, R320.
28 Received a cheque from M Dollie in part-payment of account.
Issued receipt no. 100. After this payment, M Dollie owed the
business R2 455.
8.2 Creditors Ledger

The bookkeeper of Western Traders prepared the Creditors Ledger. Some errors
occurred while preparing the ledger. Answer the questions that follow.
Creditors Ledger of Western Traders

Blue Bell Stores C1
Date Document number Fol. Debit Credit Balance
2018
Apr 1 Account rendered b/d 900 00
5 Cheque 193 8.2.1 450 00 450 00
12 Invoice no. 68 8.2.2
(Issued to debtor B Blue) DJ 600 00 (150 00)
20 8.2.3 8.2.5 1 120 00 970 00
8.2.1 In which journal was the debit entry of R450 recorded?

8.2.2 Explain the negative balance of R150 on 12 April 2018.
8.2.3 Name the source document for the entry of R1 120 on the credit side of
the Creditors Ledger account.
8.2.4 Name a possible contra-account for the amount of R1 120 on the credit
side of the of the Creditors Ledger account.
8.2.5 In which subsidiary journal was the credit entry of R1 120 recorded?
8.2.6 Calculate the correct balance that is owed to Blue Bell Stores.

Chapter 7
Debtors
• identify credit customers (debtors)
• integrate money received from debtors as well as discount allowed to
them in the Cash Receipts Journal (CRJ)
• understand the flow of goods returned by debtors to the business
• complete a credit note
• prepare the Debtors Allowances Journal (DAJ)
• post the Debtors Allowances Journal to the General Ledger and
Debtors Ledger
• understand internal control measures with regard to debtors
• understand ethics with regards to debtors
Key concepts
• cash sales • credit sales • debtors • credit sales invoice • Debtors Journal
• posting credit sales • receipts from debtors • discount allowed
• posting receipts from debtors • debtors allowances • credit notes
• posting to Debtors Ledger
Why don't you open an account with us? Then

you can pay the books off over six months.
b o o k k eepi n g o f a s o le trader – debt o rs • c h a p t e r 7 97

1. Credit sales
When goods or stock are sold and the money is received at a later date,
the transaction is called credit sales to debtors. A service can also be
rendered on credit.
The control measures for debtors were discussed in Chapter 4. Please
refer to this section before you proceed with this chapter.
2. Recording credit sales

In Chapter 5, you learnt that debtors are outsiders who owe the business
money. If the business sells stock on credit, the money for the stock will
be owed to the business by the customer. These customers are also called
debtors. A debtor is classified as a current asset, because their account
is usually settled within a relatively short period of time (usually within
30 days).
2.1 Terms of the credit agreement

Before the management decides to sell to a debtor on credit, they will
specify the terms of the credit agreement. Most businesses agree on
credit terms of 30 days. This means that the debt has to be repaid within
30 days. Most businesses offer incentives in the form of discounts to
encourage debtors to pay promptly. This discount will be expressed as a
percentage of the amount paid within 30 days and is only implemented
when the debt is repaid, for example:
WE OFFER:
5% discount if debt is settled within 30 days.
The percentage discount differs from business to business.

Now that we have revised Grade 9 Accounting in Chapter 6, let’s expand
on debtors.
3. Receipts from debtors

After a certain number of days, debtors need to repay their debt. When
a debtor pays their debt, a receipt will be issued. The original receipt is
issued to the debtor and the business uses the duplicate receipt to record
the transaction in the Cash Receipts Journal. A debtor can choose to
settle his debt or to pay his debt in part. When the debt is settled in full,
the debtor will no longer owe the business the money. If the debt is paid
in part, only a portion of the debt is paid, therefore the debtor will still
owe a certain amount to the business.
98 c h a p t e r 7 • b o o k k eepi n g o f a s o le trader – debt o rs

In order to encourage debtors to settle their accounts early, the
business could allow debtors a discount, which is a reduction in the
amount owed. For example, if the debtor M Marais owes R500 and settles
within the prescribed time, the business could offer a 5% discount. This
means that the debtor only pays R475 and receives R25 discount.
3.1 Discount allowed

The discount allowed to a debtor is an expense to the business, which
decreases owner’s equity on the debit side. Discount allowed is a non-
cash item, which is entered in the Cash Receipts Journal. It reflects
that portion of the debtor’s debt that will not be received in cash, but
decreases the debt owed.
Example
Transaction On 30 June 2017, Shu-biz Stores received a cheque for
R1 254 from B Mangale in full settlement of her account
of R1 320.
Receipt No. 32
Received from: B Mangale Date: 30/06/2017
the amount of: One thousand two hundred
and fifty-four rand only R1 254,00
for: Settlement of account
(less 5% discount of R66)
for: Shu-biz Stores
Cash Receipts Journal of Shu-biz Stores for June 2017 CRJ6

Doc. Day Details Fol. Analysis of Bank 2 Debtors Discount
no. Receipts 1 Control 3 Allowed 4
32 30 B Mangale D1 1 254 00 1 254 00 1 320 00 66 00
B8 B7 N4
Notes
1 The Analysis of Receipts column reflects the amount on the receipt
issued to B Mangale.
2 The Bank column reflects the amount of money deposited on
30 June 2017.
3 The Debtors Control column reflects the amount received from
B Mangale plus the discount allowed to her.
4 The Discount Allowed column reflects the discount allowed to
B Mangale.

3.2 Posting receipts from debtors to the General Ledger
Example
General Ledger of Shu-biz Stores
Balance Sheet accounts
Dr Debtors Control (A) B7 Cr
Date Details Fol. Amount Date Details Fol. Amount
2017
Jun 30 Bank and discount allowed CRJ6 1 320 00
Dr Bank (A) B8 Cr
2017
June 30 Total receipts/Debtors Control CRJ6 1 254 00
Nominal accounts
Dr Discount Allowed (OE/e) N4 Cr
2017
Jun 30 Debtors control CRJ6 66 00
Note
• The amount, which will be included in total receipts in the Bank
account, plus the Discount Allowed account, will equal the amount
in the Debtors Control account.
3.3 Posting receipts from debtors to the Debtors Ledger

Example
Debtors Ledger of Shu-biz Stores
B Mangale D1
Date Details/Document number Fol. Debit Credit Balance
2017 1 Account rendered b/d 1 320 00
Jun 30 Receipt no. 32 CRJ6 1 254 00 66 00
Receipt no. 32 (discount allowed) CRJ6 66 00 – –
The account rendered represents the amount owed to Shu-biz Stores

by B Mangale. How did B Mangale come to owe the business this
amount? She bought from them on credit in the previous month.

Example continued
Notes
• Money received from debtors will decrease their debt. Debtors are
assets that decrease on the credit side.
• The amount of money received from the debtor and the discount
allowed must be entered separately.
3.4 How this affects the accounting equation

Example
–1 320 Debtors –66 Discount
decrease allowed –
expense
+1 254 Bank increases
Activity 7.1
Use the source documents below to enter the transactions in the following
journals of Nyanga Traders for July 2017:
1. Cash Receipts Journal with columns for Analysis of receipts, Bank, Sales, Cost
of Sales, Debtors Control, Discount Allowed and Sundry accounts
2. Debtors Journal with columns for Sales and Cost of Sales.
Note
• The business operates on a profit mark-up of 75% on the cost price of cash
and credit sales.
A. Duplicates of receipts
02 No. 19 issued to A Louw for R520 in settlement of his account of R550
09 No. 20 issued to L Radebe for increasing his capital contribution, R15 000
16 No. 21 issued to C Quail in part-payment of his account, R1 020
23 No. 22 issued to R Sithole for R1 200 in settlement of her account after
4% discount had been allowed
25 No. 23 issued to T Mannie for R820 and allowed a discount of R55 for
prompt payment.
B. Cash register rolls for sales

02 R3 500
09 R525
16 R1 890
23 R2 100
25 R4 935

C. Summary of bank deposit slips
02 R4 020
09 R15 525
16 R2 910
23 R3 300
25 R5 755
D. Duplicates of invoices
03 No. 7 issued to C Quail for R3 535
12 No. 8 issued to T Mannie for R875
18 No. 9 issued to A Louw for R3 010
Activity 7.2
A Ventura owns a stationery supply store called Pen & Paper Stores. He has
both cash and credit customers and sells all his stock at a profit mark-up of 50%
on cost price. He has been trading for some time now and his books show the
following balances on 1 August 2017:
General Ledger Debtors Ledger

Trading Stock R5 120 S Baker R1 250
Debtors Control R5 510 N Pillay R3 210
Bank R7 650 V Sood R1 050
Sales R21 360
Cost of Sales R14 240
Discount allowed R375
Use the transactions below to complete the following in the books of Pen &
Paper Stores:
1. The Cash Receipts Journal with columns for Analysis of receipts, Bank, Sales,
Cost of Sales, Debtors Control, Discount Allowed and Sundry accounts
2. The Debtors Journal with columns for Sales and Cost of Sales.
Use the balances above and post the completed journals to the General Ledger
accounts and Debtors Ledger.
Transactions for August 2017

01 The business sublet a portion of their shop to a hairdressing salon.
The tenant, The Hair Shop, paid their rent for August, R2 000.
Issued receipt no. 51.
07 Sold stationery items to a customer for R795 cash. Cost price of these
items was R530.
10 Sold goods with a cost price of R600 to S Baker on credit for R900.
Issued invoice no. 32.

12 N Pillay settled the amount owed to the business by issuing a cheque
for R2 964.
15 The owner, A Ventura, increased his capital in the business by issuing a
cheque for R25 000.
19 The cash takings for sales for the day amounted to R1 200. The cost of
sales amount is R800.
25 A white writing board was sold to V Sood for R525 on credit
(cost price is R350).
30 Received the following amounts from debtors in part-payment of their
accounts after discount was allowed:
• S Baker, R1 500 (discount R75)
• V Sood, R1 000 (discount R50).
Activity 7.3
1. The inexperienced bookkeeper of B & J Stores completed the account

of M du Toit, a debtor, incorrectly. You are asked to investigate the
Debtors Ledger of B & J Stores and make the necessary corrections.
Some information has also been left out and you are asked to enter
the missing information.
2. Explain to the bookkeeper why it is important to draw up the Debtors
Ledger correctly.
3. What control measures can the business put in place to prevent these
mistakes from happening again?
Debtors Ledger of B & J Stores

M du Toit M1
2017
Jun 1 Account rendered b/d 2 100 00
5 Invoice no. 87 DJ6 1 285 00 3 385 00
16 Receipt no. 103 CRJ6 1 995 00 5 380 00
25 Invoice no. 92 DJ6 830 00 6 210 00
27 Cash register roll 27 CRJ6 630 00 6 840 00
30 Receipt no. 110 CRJ6 2 000 00 4 840 00
Receipt no. 110 (discount allowed) CRJ6 115 00 4 725 00
Additional information
On 16 June, M du Toit settled the amount owed by her as at the beginning of
the month by issuing a cheque for R1 995. A 5% discount for prompt payment
was given.

Activity 7.4
use the information given below to complete the following accounts in the
General Ledger of Spalding Traders.
The number in brackets Trading Stock (6), Debtors Control (5), Bank (5), Sales (5), Cost of Sales (5),
indicates how many lines to Current Income (4), Discount Allowed (4), Stationery (4) and Wages (4)
leave open for each account.
The following balances appeared in the books of the business on
1 February 2017.
Trading Stock 10 320

Debtors Control 5 950
Bank 15 640
Sales 42 340
Cost of Sales 33 872
Current Income 2 650
Discount Allowed 350
Stationery 565
Wages 8 500
The totals below appeared in the Cash Journals on 28 February 2017.
Cash Receipts Journal Cash payments Journal

Bank 27 224 Bank 12 559
Sales 12 870 Trading Stock 4 318
Cost of Sales 6 435 Wages 4 250
Current Income 1 154 Stationery 348
Debtors Control 1 903 Sundry accounts 3 643
Discount Allowed 153
Sundry accounts 11 450
debtors Journal
Sales 954
Cost of Sales 477
104 chapter 7 • BookkEEPInG oF A SoLE TRADER – DEBToRS

4. Debtors allowances
When goods are sold on credit, it often happens that the debtor is not
satisfied with part or all of the goods received. If the business wants to
maintain good customer relations, it would be in their best interests to
provide a facility for these goods to be returned. Providing customers
with a return facility creates customer confidence and increases sales.
Because of good customer relations, the customer will return to make
further purchases from the business. Customer satisfaction is what all
businesses must strive for.
Goods are returned for the following reasons:
• The goods are damaged. When goods are damaged, they are either
taken back into stock and sold at a discount or not taken back into
stock at all. When the stock is completely damaged, it could be sent
back to the manufacturer.
• The goods are faulty. When goods are faulty they are sent in for repair
and then placed back on the shelf to be resold. The business could
also send the faulty goods back to the manufacturer.
• The goods are not according to the specifications on the order.
• The goods ordered differ from the sample viewed.
• The contract between supplier and retailer might state that if
goods are not sold by the retailer within a given period, they may
be returned.
Allowances are also granted to customers for various reasons:
• The customer might decide to keep the damaged goods, but negotiate
a reduction in the purchase price.
• An error on the invoice can be fixed by offering the customer
an allowance.
This diagram shows the cycle that takes place when goods are returned
or an allowance is requested by a debtor.
Business 1 Debtor
Return of goods or allowance claimed by debit note
Issues credit note

2
5
Statement shows debtor owes business less
Debtors Allowances Journal Debtors Ledger and General Ledger

3 4

Notes
1 Goods are returned by the debtor or an allowance is requested.
The debtor issues a debit note (supporting document).
2 The business investigates the complaint and issues a credit note
(original) as soon as the allowance is granted.
3 The duplicate credit note is used to record the transaction in the
Debtors Allowances Journal.
4 The Debtors Allowances Journal is posted to the Debtors Ledger
(daily) and General Ledger (at the end of the month).
5 The debtor owes the business less because of the allowance or return.
4.1 The credit note

The original credit note is issued to a debtor to confirm that the business
has received the returned items or granted the allowance.
The business will keep the duplicate credit note to record the
transaction in the Debtors Allowances Journal.
Example
On 7 July 2017, Shu-biz Stores sold five pairs of ladies' shoes to
T Stanford on credit at R128 each. The business sells all ladies’
shoes at a profit mark-up of 60%.
NO. 015
CREDIT INVOICE
To: T Stanford 18 Rockford Road

15 Bunga Avenue Epping Industria
Athlone 8104
7800 Date 07 / 07 / 2017
Bought from:
Terms: 30 days less 5% Shu-biz Stores
5 pairs Ladies’ shoes 128 640
E & OE
Debtors Journal of Shu-biz Stores for July 2017 DJ2

Doc. no. Day Debtor Fol. Sales Cost of Sales
015 7 T Stanford D2 640 00 400 00
B7/N1 N2/B6
Calculation of cost of sales:

100  = R400
R640 × ___
 160

Example continued
On 25 July 2017, T Stanford returned one pair of shoes because they did
not fit. It was decided to take the pair of shoes back into stock. Issued
credit note no. 001.
NO. 001
CREDIT NOTE
To: T Stanford 18 Rockford Road

15 Bunga Avenue Epping Industria
Athlone 8104
7800 Date 25 / 07 / 2017
Returned to: Shu-biz Stores

1 Ladies‘ shoes 128 128
E & OE
4.2 The Debtors Allowances Journal

Example
The Debtors Allowances Journal is the book of first entry into
which the return or allowance is recorded. The information for the
transaction is extracted from the credit note.
Debtors Allowances Journal of Shu-biz Stores for July 2017 DAJ1

Doc. Day Debtor Fol. Debtors Cost of Sales
no. Allowances
001 25 T Stanford D2 128 00 80 00
N3/B7 B6/N2
Calculation of cost of sales:

100  = R80
R128 × ___
 160
Notes
• The Debtors Allowances column reflects the selling price of the
goods returned.
• The Cost of Sales column reflects the cost price of the goods
returned.

4.3 Posting the journals to the General Ledger
Example
General Ledger of Shu-biz Stores
Dr Trading Stock B6 Cr
2017 2017
Jul 31 Cost of sales DAJ1 80 00 Jul 31 Cost of sales DJ2 400 00
Dr Debtors Control B7 Cr
2017 2017
Jul 31 Sales DJ2 640 00 Jul 31 Debtors allowances DAJ1 128 00
Nominal accounts
Dr Sales N1 Cr
2017
Jul 31 Debtors control DJ2 640 00
Dr Cost of Sales N2 Cr
2017 2017
Jul 31 Trading stock DJ2 400 00 Jul 31 Trading stock DAJ1 80 00
Dr Debtors Allowances N3 Cr
2017
Jul 31 Debtors control DAJ1 128 00
Note
• The Debtors Journal and Debtors Allowances Journal are posted to
the General Ledger at the end of the month.

4.4 posting the journals to the debtors Ledger
example
debtors Ledger of shu-biz stores
T stanford
2017
Jul 7 Invoice no. 15 DJ2 640 00 640 00
25 Credit note no. 1 DAJ1 128 00 512 00
Note
• The Debtors Journal and Debtors Allowances Journal are posted to
the Debtors Ledger on the day the transaction takes place.
The previous examples refer to goods being returned. What happens

when goods are not returned and an allowance is granted to a debtor, or
when damaged goods are returned?
example
Cole’s Flooring is a business selling carpeting and flooring. They sell their
goods for cash and on credit. The following returns and allowances took
place between the business and its customers during November 2017:
07 P Marais returned a carpet with a selling price of R525 (cost price,
R350) because it was not according to the sample. Issued credit
note no. 36.
08 A Ntuli requested that an allowance be given to him because of an
overcharge on wooden flooring sold on credit. On investigation it was
discovered that he was overcharged by R145. Issued credit note no. 37.
15 A carpet marked at R1 860 (cost price, R1 240) was returned
by debtor T Africa because it was not the colour that he had
requested. Issued credit note no. 38.
25 M Bard returned a rug with a cost price of R1 015 and a selling
price of R1 520 because it was damaged when it was delivered to i An entry is not made in the
Cost of Sales column for the
him. Issued credit note no. 39. transactions on 8 November and
25 November because the goods
debtors Allowances Journal of Cole’s flooring for november 2017 are not taken back into stock.
no. Allowances
36 7 P Marais 525 00 350 00
37 8 A Ntuli 145 00 – –
38 15 T Africa 1 860 00 1 240 00
39 25 M Bard 1 520 00 – –
4 050 00 1 590 00
BookkEEPInG oF A SoLE TRADER – DEBToRS • chapter 7 109

Example
Date Effect Reason Effect Reason Effect Reason
7 – 525 Debtors decrease – 175 Profit cancelled
+ 350 Trading stock
increases
8 – 145 Debtors decrease – 145 Debtors
allowances –
expense
Activity 7.5
Hughes & Son sells furniture to the community in Worcester at a profit mark-up
of 60% on cost price.
Required
Complete the following in their books for April 2017:
1. Use the source documents below to complete the Debtors Journal and
Debtors Allowances Journal for April 2017.
2. Post the journals to the General Ledger and to the relevant accounts in the
Debtors Ledger.
3. Show the effect of the transactions on 5 April and 9 April on the
accounting equation.
Source documents
Duplicate invoices for credit sales
HUGHES & SON INVOICE NO. 001
To: R. Heyns Date 5 April 2017

23 Barlinka Street
Worcester

1 Table 1 800 00 1 800 00
6 Chairs 240 00 1 440 00
E & OE 3 240 00

INVOICE
NO. 002
HUGHES & SON
To: E. Louw Date 14 April 2017

56 Caeser Street
Worcester

3 Couches 928 00 2 784 00
1 Carpet 1 600 00 1 600 00
E & OE 4 384 00
Duplicate credit notes for goods returned
CREDIT NOTE
NO. 001
HUGHES & SON
To: R. Heyns Date 9 April 2017

23 Barlinka street
Worcester

2 Chairs 240 00 480 00
E & OE
CREDIT NOTE
NO. 002
HUGHES & SON
To: E. Louw Date 26 April 2017

56 Caeser Street
Worcester

1 Couch 928 00 928 00
E & OE

5. Internal control
Now that you have a better understanding of how transactions involving
debtors are recorded, it is useful to revisit the internal controls for debtors
that were discussed in Chapter 4.
Remember that the internal control process for debtors should
ensure that debtors are creditworthy, credit sales are recorded properly,
reconciliations are performed regularly and outstanding accounts are
adequately monitored. The following is a checklist of some of the
procedures that should be followed:
Controls for debtors

• There is a policy for credit approval. 
• Credit checks are performed regularly. 
• Sales orders are approved for price, terms, credit and account
balance limits. 
• All credit sales are recorded properly on pre-numbered invoices

and initialled by the salesperson. 
• Monthly statements for outstanding balances

are reviewed and mailed by someone other than
the bookkeeper. 
• The balance of the Debtors Control account is reconciled monthly

with the Debtors List from the Debtors Ledger. 
• Write-offs and other adjustments to debtors’ accounts are

properly authorised. 
• Interest is charged on overdue accounts. 

Activity 7.6
Auto Parts is a business that sell motor parts and accessories, mechanical tools,
oil and so on. M Abrahams, the owner, has given you a list of transactions
that took place during March 2017. Use these transactions to complete the
following in the books of Auto Parts for March 2017:
1. Cash Receipts Journal with columns for Analysis of receipts, Bank, Sales,
2. Cash Payments Journal with columns for Bank, Trading Stock, Wages and
Sundry accounts
3. Debtors Journal with columns for Sales and Cost of Sales
4. Debtors Allowances Journal with columns for Debtors Allowances and
Cost of Sales.

01 M Abrahams decided to increase his capital by issuing the business
a cheque for R37 500. Receipt no. 34 was issued.
Bought motor parts and oil from J Lemon and paid by cheque,
R3 120. Issued cheque no. 56.
03 Sold motor parts and accessories that cost the business R760 to
Dawn’s Garage on credit for R1 026. Issued invoice no. 15.
Issued a cash cheque for cash float for the till, R150.
05 The cash register roll for the day showed that cash sales amounted to
R700. The cost price of these sales was R560.
The business lets a portion of the shop to Dan’s Service Centre. Rent
amounts to R500 per month. Received a cheque from Dan for rent for
March 2017.
Auto Parts has three employees who each earn R500 per week. Cashed
a cheque to pay the weekly wages.
10 Adam, a debtor, owed Auto Parts R1 450. Received a cheque for
R1 380 in full settlement of his account.
12 The owner drew a cash cheque for R550 for own use.
Cashed a cheque to pay the weekly wages of R1 500.
14 Motor parts were sold on credit to Craig’s Car Repairs for R405
(cost price, R300).
19 Received a service invoice from Pronto Repairs for repairs done to the
business vehicle. Paid by cheque, R230.
Each employee received R100 bonus in addition to their normal weekly
wage. Cashed a cheque for R1 800 to pay the wages.
20 Stephen owed Auto Parts R635. Received R300 from him in
part-payment of his account and gave him a discount of R35 for
early payment.

Issued a cheque for R2 300 to Southern Spares for the purchase of
motor accessories of R1 800. The rest was for the purchase of motor
parts for the owner’s car.
21 Received a cheque from Dawn’s Garage for half of the amount owing
(see transaction on 3 March).
Craig’s Car Repairs returned motor parts with a selling price of
R102 because the owner was not satisfied with the quality. Issued
credit note no. 14 (cost price, R76).
23 Bought a computer for office use from Compu Tech and paid by
cheque, R4 800.
Sold goods on credit to Dawn’s Garage for R1 971 (cost price, R1 460).
26 Issued an invoice to Adam for goods sold to him, R1 755 (cost price,
R1 300).
Cash sales according to cash register roll, R5 700 (cost price, R4 560).
A cheque was cashed to pay the weekly wages, R1 000. One employee
was on leave and would only collect his weekly wage when he returned.
30 Issued a cheque to Telkom in payment of the telephone account of the
business, R395.
Max, a debtor, settled his account by issuing a cheque for R1 800 after
a R75 discount was given.
The goods sold to Adam on 26 March were not according to
specifications. He has decided not to return the goods, but instead
requested an allowance of R195.
Activity 7.7
Use the information given below to complete the account of T Mazana, a

debtor, in the Debtors Ledger of Bergman Stores. On 1 February 2017, T Mazana
owed Bergman Stores R1 350.
Transactions for February 2017

02 Received a cheque from T Mazana for R1 275 in full settlement of his
account. Issued receipt no. 98.
05 Sold goods that cost the business R960 to T Mazana on credit. Goods
are sold at cost plus 20%. Issued invoice no. 21.
06 T Mazana requested that an allowance for goods not according to
sample be granted, R75. Issued credit note no. 7.
15 Sold goods for cash to T Mazana, R1 000 (cost price, R500).
19 Issued invoice no. 28 to T Mazana for R300 for goods sold on credit
to him.
25 Received a cheque for R685 from T Mazana in payment of his
account and allowed him a discount of R25 for early payment.
Issued receipt no. 106.

Activity 7.8
use the following information to complete the account of Joe Soap, a debtor, in
the Debtors Ledger of munnik Stores for April 2017.
information
The following balances appeared, among others, in the books of
munnik Stores:
debtors List on 1 April 2017 debtors Control

C martin R2 500 Balance R5 000
Joe Soap ?
A Taylor R1 000
Transactions for April 2017

01 Joe Soap paid half of the amount owed by him on 1 April 2017.
Receipt no. 23 was issued to him.
05 Sold goods with a cost price of R480 to Joe Soap on credit
(goods are sold at 25% on cost price). Issued invoice no. 15.
07 Joe Soap returned merchandise with a selling price of R50. These
goods were invoiced on 5 April. Issued credit note no. 4.
12 Joe Soap bought goods for cash, R500 (cost price, R300).
25 Received a cheque from Joe Soap in full settlement of his account
to date and allowed him a 7% discount for prompt payment. Issued
receipt no. 45.
30 Sold merchandise to Joe Soap, R450 (cost price, R360). Issued invoice
no. 26.
Activity 7.9
use the information given below to complete the following accounts in the
General Ledger of milky Traders:
Trading Stock (6), Debtors Control (6), Bank (5), Sales (5), Cost of Sales (6), The number in brackets
Current Income (4), Debtors Allowances (4), Discount allowed (4), indicates how many lines to
Stationery (4) and Wages (4) leave open for each account.
The business operates on a profit mark-up of 50% on cash sales and 100% on
credit sales.
BookkEEPInG oF A SoLE TRADER – DEBToRS • chapter 7 115

The following balances appeared in the books of the business on
1 February 2017:

Debtors control R2 300
Bank R5 120
Sales 65 230
Cost of sales 37 120
Current income 8 690
Debtors allowances 820
Discount allowed 655
Stationery 750
Wages 3 965
The following totals appeared in the Cash Journals on 28 February 2017:
Cash Receipts Journal Cash Payments Journal

Bank R25 000 Bank R22 000
Sales 12 000 Trading stock ?
Cost of sales ? Wages 1 200
Current income 3 400 Stationery 3 500
Debtors control 3 130 Sundry accounts 4 600
Discount allowed 130
Sundry accounts 6 600
Debtors Journal Debtors Allowances Journal

Sales ? Debtors allowances R650
Cost of sales R1 900 Cost of sales 325

1. Use the journals below to post to the following accounts, with the given
balances, to the General Ledger: (41)
Trading Stock R5 848 Sales R19 325

Debtors Control R2 755 Cost of Sales R8 308
Debtors Allowances R176
Discount Allowed R394
2. Post the information to the accounts of M Murray, N Sauls and R Brink in the
Debtors Ledger.
Debtors owed the following amounts on 1 April 2017:
M Murray, R1 300; N Sauls, R550 and R Brink, R905. (23)
3. Answer the following questions.

a. Debtors should settle within 30 days. Are these debtors settling their
debts on time? (3)
b. How can this business ensure that debtors pay on time?
Name four control measures they can put in place. (8)
Information
Debtors Journal of Cameron Traders for April 2017 DJ
Doc. Day Debtor Fol. Sales Cost of Sales
no.
19 5 N Sauls 300 00 120 00
20 10 M Murray 3 215 00 1 286 00
21 17 R Brink 1 250 00 500 00
22 20 N Sauls 890 00 356 00
23 27 R Brink 3 000 00 1 200 00
8 655 00 3 462 00
Debtors Allowances Journal of Cameron Traders for April 2017 DAJ

no. Allowances
5 7 N Sauls 50 00 20 00
6 20 R Brink 250 00 – –
300 00 20 00

Cash Receipts Journal of Cameron Traders for April 2017
Doc. Day Details Fol. Analysis of Bank Debtors Discount Sales Cost of Sundry accounts Fol.
no. Receipts Control Allowed Sales Amount Details
51 1 C Cameron 10 000 00 10 000 00 10 000 00 Capital
52 2 M Murray 1 250 00 1 250 00 1 300 00 50 00
53 3 P Prins 1 500 00 1 500 00 1 500 00 Rent
income
✔ 8 Sales 250 00 250 00 250 00 200 00
54 10 N Sauls 766 00 766 00 800 00 34 00
✔ 13 Sales 410 00 410 00 410 00 328 00
✔ 20 Sales 220 00 220 00 220 00 176 00
55 23 R Brink 905 00 905 00 905 00
56 25 C Cameron 2 000 00 2 000 00 Capital
✔ Sales 340 00 2 340 00 340 00 272 00
17 641 00 3 005 00 84 00 1 220 00 976 00 13 500 00
Activity 7.10
Butterworth Corner Store is a general dealer that started trading at the

beginning of February 2018. Four months later the owner, B Worth, is
concerned about the following issues:
Debtors problem
• He devised a “tab” system where his customers can buy on credit. In order
for them to purchase items on credit, they must sign the Tab Book. It is
brought to his attention that the shop assistants are not writing up all the
credit sales in the Tab Book.
• Customers who buy on credit should repay their debt by the end of the
month, so if they bought goods during May, they must settle by the end of
May. However, this is not taking place.
Stock problem
• Perishable stock, such as milk and cold meats, has to be thrown away
because they are not being sold before their sell-by dates.
• The business is not making the profits projected, and Worth suspects that
his stock is disappearing.
• The owner is often out of the shop doing deliveries or buying more stock for
his store. His friend manages the store in his absence and there is one shop
assistant.
Required
1. Advise Mr Worth how to solve the debtors problem.
2. Also advise how to solve the stock problem.

Chapter 8
Creditors
• identify credit suppliers (creditors)
• integrate payments to creditors as well as discounts received from
them into the Cash Payments Journal (CPJ)
• understand the flow of goods returned to creditors
• complete a debit note
• prepare the Creditors Allowances Journal (CAJ)
• post the Creditors Allowances Journal to the General Ledger and
Creditors Ledger
• combine previously acquired knowledge and complete the
accounting cycle
• understand internal control measures with regards to creditors
• understand ethics with regards to creditors
Key concepts
• credit purchases • trade discounts • invoice • Creditors Journal
• posting credit purchases • payments to creditors • returns and
allowances from creditors • the debit note • posting creditors allowances
That laptop is just what I need for

the business. I'll take it. Please put it
on my account.
Certainly, ma'am. Just

remember that our
terms are 90 days.
b o o k k eepi n g o f a s o le trader – credit o rs • c h a p t e r 8 119

1. Credit purchases
When items such as stock, stationery and equipment are purchased
and the money is paid at a later date, this is called credit purchases from
creditors. A service can also be “purchased” on credit. The control
measures for creditors are explained in Chapter 4.
2. Recording credit purchases

You will remember from Chapter 5 that creditors are outsiders to whom
a business owes money. Creditors are classified as current liabilities,
because the business settles their accounts within a relatively short period
of time.
2.1 Terms of the credit agreement

Before any business can buy items on credit, management will negotiate
the terms of the credit agreement. The business will try to extend
payment for as long as 90 days. This means that the debt will be repaid
within 90 days. The business could also request that a discount be
received from their creditors for prompt payment.
Now that you have revised Grade 9 Accounting in Chapter 6, let’s expand
on creditors.
3. Payments to creditors
The terms of all credit agreements with creditors state that the debt has
to be repaid within a certain number of days or months. The business has
to repay this debt in that time in order to maintain good relations with its
creditors. When the business repays the debt, a cheque could be issued.
The cheque counterfoil serves as the source document to record the
transaction in the Cash Payments Journal.
Example
Transaction
On 5 September 2018, a cheque was issued to Africa Hides for R32 832
in settlement of Wilson’s Leather’s debt of R34 200. A 4% discount was
received for early payment.
120 c h a p t e r 8 • b o o k k eepi n g o f a s o le trader – credit o rs

Example continued
05-90-10-11
FUTURE BANK
Date 05 / 09 / 2018
Durban
To Africa Hides 05 / 09 / 2018
NOT TRANSFERABLE
For Payment of account
R140 532,00 Pay or Bearer
Bal. Africa Hides
Betaal of Toonder
Dep.
The sum of
This cheque R 32 832,00 Die som van Thirty-two thousand eight hundred
Bal. R 107 700,00 R 32 832,00
and thirty-two rand only
065 065 : 03600512 : 085136987 65 For: Wilson’s Leather
Cash Payments Journal of Wilson’s Leather for September 2018 CPJ4

Doc. Day Name of payee Fol. Bank Creditors Discount Sundry accounts
no. Control Received Amount Details
65 5 Africa Hides C1 32 832 00 34 200 00 1 368 00
B8 B9 N4
3.1 Posting payment to creditors to the General Ledger

Example
General Ledger of Wilson's Leather
Dr Bank B8 Cr
2018
Sep 30 Total payments/Creditors Control CPJ8 32 832 00
Dr Creditors Control B9 Cr
2018 2018
Sep 30 Bank and Discount received CPJ8 34 200 00 Sep 1 Balance b/d 34 200 00
Nominal accounts
Dr Discount Received N4 Cr
2018
Sep 30 Creditors Control CPJ8 1 368 00

Example continued
Notes
• The amount for Bank and Discount Received in the Creditors Control
account represents the cheque issued plus the discount received
from the creditor. The amount is posted from the Creditors Control
column of the Cash Payments Journal.
• Creditors will decrease on the debit side because the business has
paid its debt. Bank will decrease on the credit side, because a cheque
was issued. Discount received is an income that is credited.
3.2 Posting payments to creditors to the Creditors Ledger

Example
Creditors Ledger of Wilson’s Leather
Africa Hides (L) C1
2018
Sep 1 Account rendered b/d 34 200 00
5 Cheque no. 65 CPJ8 32 832 00 1 368 00
Cheque no. 65 (discount received) CPJ8 1 368 00 – –
Notes
• Payments to creditors will decrease what the business owes them
on the debit side of the account.
• Creditors are liabilities, which decrease on the debit side.

Example
Below is shown how this affects the accounting equation.

– 32 832 Bank + 1 368 Discount – 34 200 Creditors
decreases received – decrease
income

Activity 8.1
L Johns is the owner of a relatively small woodwork shop called John’s Wood. He
operates from small premises north of Pretoria. For some time now he has been
experiencing a steady increase in the demand for his hand-carved furniture. The
demand grew to such an extent that a local furniture shop signed a contract
with him to supply them with his furniture.
He decided to purchase most of his materials on credit. He also decided
to enter into credit agreements with other suppliers as he discovered the
advantages of buying on credit.
Required
Use the transactions that took place during April 2018 in the books of John’s
Wood to complete the following:
1. the Creditors Journal with columns for Creditors Control, Materials,
Stationery, Packaging and Sundry accounts
2. the Cash Payments Journal with columns for Bank, Materials, Creditors
Control, Discount Received, Wages and Sundry accounts
3. Post to the following accounts in the General Ledger: Equipment, Bank, Creditors
Control, Materials, Stationery, Packaging, Wages and Discount Received
4. Post to the relevant accounts in the Creditors Ledger.

01 Received an invoice (renumbered 001) from New Timbers for materials
bought on credit, R5 690.
02 Bought stationery from Pen & Paper for R80 and paid by cheque no. 88.
04 Craig’s Tech delivered a new sanding machine that was invoiced
at R2 340.
05 John’s Wood employed two carpenters on 1 April 2018. It was agreed
that each carpenter would receive R880 per week. Cashed a cheque to
pay the weekly wages of R1 760.
09 Bought materials and paid MB Traders by cheque, R4 976.
12 Cashed a cheque to pay the weekly wages, R1 760.
15 Bought the following on credit from Herman Stationers:
• receipt book and invoice books, R140
• packaging to the value of R360.
19 The owner wanted to reward his employees for their hard work and
gave them each a bonus of R200 with their weekly wage of R880 each.
He cashed a cheque for the total amount.
20 Issued a cheque to New Timbers for R5 400 in settlement of account.
25 Paid Craig’s Tech R1 000 by cheque in part-payment of account.
26 Paid the weekly wages by cashing a cheque for R1 760.
27 Purchased materials from New Timbers on credit for R3 124.
30 Issued a cheque to Herman Stationers for R475 in settlement of
account. Received R25 discount for early payment.

Activity 8.2
Your Book Store sells books and magazines to the public at wholesale prices.
They purchase all their books and magazines from their suppliers on credit.
They sell their magazines to the public for cash, and also have a home
delivery service.
Required
1. Draw up the following subsidiary journals in the books of Your Book Store
for August 2018:
Repairs and Sundry accounts
• Cash Payments Journal with columns for Bank, Creditors Control,
Discount Received, Stationery, Wages and Sundry accounts.
2. Post to the following accounts in the General Ledger:
Trading Stock, Creditors Control, Stationery, Repairs and
Discount Received.
3. Post to the relevant accounts in the Creditors Ledger.
Information
Your Book Store owes the following amounts to its creditors:
MM Publishing R2 850
Computron R1 974
Great News Suppliers R465
The following balances appeared, among others, in the Trial Balance on

31 July 2018:
Trading Stock R18 700
Creditors Control R5 289
Stationery R643
Repairs R3 650
Discount Received R1 124

02 Received newspapers and magazines on credit from MM Publishing,
R3 580. Received their invoice and renumbered it 87.
07 Issued cheque no. 138 to Great News Suppliers in full settlement of
account, R465.
08 Received an invoice from Computron for repairs done to the printer
and computer, R320.
12 Paid MM Publishing R1 100 in part-payment of account and received
R125 discount.
14 Cashed a cheque to pay the shop assistant her wages, R1 200.
17 Bought books and magazines for R3 146 and stationery for R325 on
credit from Great News Suppliers.

24 Bought packaging for R163 from Quick Pack and paid by cheque.
26 Issued a cheque to Computron for R1 300 for the purchase of a new
cash register.
28 Cashed a cheque to pay the wages to the shop assistant, R1 200.
30 Issued a cheque to Computron for R2 050 in full settlement of account
to date. Received a discount.
4. Returns to and allowances from creditors

In the same way that debtors are allowed to return goods to a business,
creditors should allow returns from its customers. The business will
return goods to its suppliers, or request an allowance from them, for
the same reasons that it would allow debtors to return or request an
allowance.
The diagram below shows the flow of items returned to suppliers, or
an allowance being requested from a supplier.
Business Creditor
1
Debit Note
Credit Note
2
Owes creditor less 5
Duplicate Debit Note used

to record transaction in Post to the Creditors Ledger
creditors Allowances Journal and General Ledger
3 4
Notes
1 The business returns goods or claims an allowance by issuing a debit
note (original) to its supplier.
2 The supplier investigates the complaint and, on acceptance of
the complaint, issues the business with a credit note (supporting
document).
3 The duplicate debit note is used as a source document to record the
transaction in the Creditors Allowances Journal.
4 The Creditors Allowances Journal is posted to the Creditors Ledger
and to the General Ledger.
5 The business thus owes its supplier (creditor) less.

4.1 R
ecording creditors allowances in the books of
the business
Example
Transaction
On 3 October 2018, Wilson’s Leather purchased ten oak and leather chairs
from Africa Hides for R7 500. Renumbered invoice 67.
No. 12
CREDIT INVOICE 67
To: Wilson’s Leather 191 West Street

89 Smith Street Durban
Durban 2005
2005 Date 03 / 10 / 2018
Bought from:
Terms: 90 days less 4% AFRICA HIDES
10 Oak and leather chairs 750 7 500
E & OE
Creditors Journal of Wilson’s Leather for October 2018 CJ5

Doc. Day Creditor Fol. Creditors Trading Stationery Sundry accounts Fol.
no. Control Stock Amount Details
67 3 Africa Hides C1 7 500 00 7 500 00
B9 B6
4.2 The debit note

Example
Transaction
On 18 October 2018, Wilson’s Leather returned one oak and leather chair to
Africa Hides, because there were slight scratches on it. Issued debit note no. 1.
No. 001
DEBIT NOTE
To: Africa Hides 89 Smith Street

191 West Street Durban
Durban 2005
2005 Date 18 / 10 / 2018
Returned by: Wilson’s Leather

1 Oak and leather chair 750 750
E & OE

4.3 The Creditors Allowances Journal
Example
Creditors Allowances Journal of Wilson’s Leather for October 2018 CAJ5
Doc. Day Creditor Fol. Creditors Trading Stationery Sundry accounts Fol.
no. Control Stock Amount Details
01 18 Africa Hides C1 750 00 750 00
Dr B9 Cr B6
4.4 Posting creditors allowances to the General Ledger

Example
General Ledger of Wilson's Leather
Dr Trading Stock (A) B6 Cr
2018 2018
Oct 31 Creditors control CJ5 7 500 00 Oct 31 Creditors control CAJ1 750 00
Dr Creditors Control (L) B9 Cr

2018 2018
Oct 31 Sundry returns CAJ1 750 00 Oct 31 Sundry purchases CJ5 7 500 00
4.5 Posting creditors allowances to the Creditors Ledger

Example
Creditors Ledger of Wilson’s Leather
Africa Hides (L) C1
2018 3 Invoice no. 67 CJ5 7 500 00 7 500 00
Oct 18 Debit note no. 01 CAJ1 750 00 6 750 00

Example
– 750 Trading stock – 750 Creditors
decreases decrease
5. Internal control
Now that you have a better understanding of how transactions involving
creditors are recorded, it is useful to revisit the internal controls for
creditors that were discussed in Chapter 4.
Remember that the internal control process for creditors should
ensure that credit invoices received from creditors match the goods
received and are recorded accurately, reconciliations are performed and
accounts payable are monitored adequately. The following is a checklist
of some of the procedures that should be followed:
Controls for creditors

• Prices charged and the accuracy of invoices from creditors
are checked. 
• The quantities of goods received are checked against the invoices
from creditors. 
• All available discounts are taken. 
• Invoices are properly processed before payment
(for example, they should be stamped). 
• There is adequate segregation of duties. 
• The balance of the Creditors Control account is
reconciled monthly with the Creditors List from the
Creditors Ledger. 
• Accounts are paid as late as possible without incurring
interest charges. 

Activity 8.3
Blues Sports Suppliers sells sports equipment to schools in the Kimberley area.
They buy stock and other items on credit and have 90 days in which to pay their
debt. During February 2018, Blues Sports issued debit notes for the return of
goods and for allowances granted.
Required
Complete the Creditors Allowances Journal with columns for
Creditors Control, Trading Stock, Stationery and Sundry accounts.

05 Issued debit note no. 75 to SARFA Jerseys for two rugby jerseys
returned to them, R570.
09 Received a credit note from Sports SA for a tennis skirt that was
damaged during delivery, R75.
16 Issued a debit note to Diamond Printers for preprinted invoice books
that were returned. It was discovered that vital information had been
left off the invoices and that the business could not use them, R307.
28 Abid Clothing had omitted to deduct a trade discount of 7% on their
invoice of R1 800. Received a credit note from them acknowledging
the mistake.
29 Officequip accepted the return of a computer keyboard by issuing a
credit note for R280.
Activity 8.4
Maxi Electrical, owned by Max Sauls, sells electrical appliances to the public.
They also service fridges, stoves and small electrical appliances. Maxi Electrical
buys most of its stock and materials for servicing appliances on credit from
suppliers, and receives a 6% trade discount when trading stock is bought on
credit. He repays his suppliers within 75 days.
Required
Use the transactions below to complete the following in the books of Maxi
Electrical for March 2018:
1. Creditors Journal with columns for Creditors Control, Trading Stock,
Materials, Stationery and Sundry accounts
2. Creditors Allowances Journal with columns for Creditors Control, Trading
Stock, Stationery and Sundry accounts
3. Cash Payments Journal with columns for Bank, Trading Stock, Materials,
Creditors Control, Discount Received and Sundry accounts.
4. Post the journals to the following General Ledger accounts:
Equipment, Trading Stock, Creditors Control, Materials, Stationery,
Advertising and Discount Received.
5. Post the journals to the relevant creditors accounts.

Information
On 1 March 2018, the following balances appeared in the books of the business:
General Ledger Creditors Ledger

Equipment R15 000 Daily News R840
Trading Stock R7 590 Munro Traders R1 320
Creditors Control R3 480 PCA Stationers R380
Materials R16 997 Electric World R940
Stationery R763
Advertising R1 500
Discount Received R965

01 Issued a debit note no. 54 to Electric World for R40 for a trade
discount that was left off an invoice on goods purchased during
February. Received a credit note in acknowledgement of the request.
03 Purchased stock from Electric World, R7 700. Stock purchased
is subject to a 6% trade discount. Received their invoice and
renumbered it 76.
Received an invoice from Daily News for the monthly
advertisement, R500.
08 Received an invoice from PCA Stationers for pens, invoice books and
printer paper purchased, R440.
10 Issued cheque no. 107 to Electric World for R850 in settlement of
the account as on 1 March 2018 and received R50 discount for
prompt payment.
13 Purchased a second printer from HP Laser for R1 080, three reams of
printing paper for R75, and a printer ribbon for R50 for office use.
Issued them with a cheque for the amount due.
15 Purchased materials for servicing appliances from Munro Traders on
credit for R4 303.
17 Issued a debit note for the return of the printer paper to PCA because
it was of bad quality. Received a credit note for R55.
18 Stock was purchased from Norton Ltd for R5 840 and paid for
by cheque.
20 Due to a printing error, the advertisement did not appear in the
newspaper. Issued a debit note to Daily News in order for them to
reverse the charge of R500.
25 Issued Daily News with a cheque for R840 to pay the outstanding debt.
28 Received the telephone account of R746 and issued a cheque to
Telkom for the amount due.
30 Max, the owner, took cash for his own use by cashing a cheque
for R3 000.

Activity 8.5
Required
Use the transactions below to draw up the following journals in the books of
Springbok Traders for March 2018:
1. Cash Receipts Journal with columns for Analysis of Receipts, Bank, Debtors
Control, Discount Allowed, Sales, Cost of Sales and Sundry accounts
2. Cash Payments Journal with columns for Bank, Trading Stock, Creditors
Control, Discount Received, Stationery and Sundry accounts
3. Debtors Journal with columns for Sales and Cost of Sales
4. Debtors Allowances Journal with columns for Debtors Allowances and
Cost of Sales
5. Creditors Journal with columns for Creditors Control, Trading Stock,
Stationery and Sundry accounts
6. Creditors Allowances Journal with columns for Creditors Allowances,
Trading Stock, Stationery and Sundry accounts.

01 Bought goods for R1 000, less 7% trade discount from LK Traders.
Received their invoice no. LK18 and renumbered it 46.
Cash sales according to cash register roll, R2 100 (cost price, R1 400).
03 Sold goods on credit to the following:
• P Jones for R1 720 (cost price, R1 376). Issued invoice no. 32.
• M Prins for R1 215 (cost price, R972).
05 Purchased stationery from King’s Stationery Store for R450 on credit.
09 Received a cheque from P Jones for R285, after 5% discount had been
allowed. Issued receipt no 59.
Sold goods to B Smith for R5 600 on credit (cost price, R4 480).
10 Repairs were done to the business vehicle for R450 on credit.
Received an invoice from BM Motor Repairs for the amount due.
12 P Jones complained that goods with a selling price of R80 (cost
price, R64) sold to her on 3 March were slightly dented. The business
investigated the complaint and decided to take the goods back into
stock. Issued P Jones with credit note no. 48.
15 Sent cheque no. 76 to T Mazana for R1 200 for the following:
• trading stock, R620.
The remainder of R430 was in settlement of account of R500.
16 Received credit note from King’s Stationery Store for R15. King’s
Stationery Store had overcharged on the stationery purchased on
5 March. Issued debit note no. 20.
17 B Smith requested an allowance of 5% off the value of the goods sold
to her on 9 March because she was unhappy with the quality of some
of the goods. The goods were not returned.

23 Bought the following on credit from TH Consumables:
• two chairs @ R185 each
• computer, R5 700.
25 Issued BM Motor Repairs with a cheque for R425 in settlement of
account of R450.
A cheque was issued to LK Traders for R500 in part-payment
of account.
28 Cash sales according to cash register roll, R1 980 (cost price, R1 548).
29 D Bird, the owner of LK Traders, decided to increase his capital
contribution by issuing the business with a cheque of R10 000.
30 Issued a cheque to pay the salary to T Scott who earns R5 000
per month.
An unused warehouse is let to The Beauty Supply Store at
R1 050 per month.
Received the rent for one month.
One chair purchased from TH Consumables on 23 March
was damaged.
Issued a debit note for the return of the chair, R185.
Activity 8.6
Study the following account of I West, a creditor, as it appeared in the Creditors

Ledger of Martin Limited during October 2018.
Information
The following balances appeared in the list of creditors on 30 September 2018:
Z Enoos C1 1 520
Z Mozonyana C2 120
I West C3 ?
K Summers C4 570
Creditors control C6 2 690

Creditors Ledger of Martin Limited
I West (L) C3
2018 1 Account rendered b/d ?
Oct 5 Invoice no. 25 CJ ? ?
17 Debit note no. 7 CAJ 88 00 ?
20 Cheque no. 38 CPJ 1 311 00 ?
20 Cheque no. 38 (discount received) CPJ ?
25 Invoice no. 30 CJ ?
31 Cheque no. 45 CPJ 550 00 550 00
Required
1. Calculate the amount owed to I West on 1 October.
2. The goods bought from I West on 5 October was invoiced at R1 040. A trade
discount of 5% was obtained. Calculate the cost price of the goods.
3. Which supporting document was received from I West for the transaction
on 17 October? Be specific.
4. Name the account to be debited and the accounts to be credited for the
transaction on 20 October.
5. Calculate the amount of discount received from I West on 20 October, if a
5% discount was received in full settlement of the account.
6. What is the amount of invoice no. 30 received from I West for stationery
purchased on 25 October?
7. Why is it important that the business receives an accurate statement from
its creditors?
8. What control measures can the business put in place to ensure that the
amount according to the statement is correct?
Activity 8.7
Tru-Fruit Exports, owned by S Mbalu, is situated at the Cape Town harbour

and exports canned fruit to Europe. You are presented with a summary of
information extracted from the journals for November 2018. The bookkeeper
has resigned and the manager approached you to draw up certain accounts in
the General Ledger of the business.
1. Use the summary of information extracted from the journals to prepare the
following accounts in the General Ledger of Tru-Fruit Exports (leave six lines
open for each account):
Capital, Equipment, Trading Stock, Debtors Control, Bank, Creditors Control,
Sales, Cost of Sales, Rent Income, Discount Received, Stationery, Wages,
Repairs and Discount Allowed.

2. The manager found out that the bookkeeper set up a fictitious creditor and
brought items on credit on this account from the business. These items were
received by the business, but the bookkeeper took them home. How can
the manager ensure that this does not happen again?
Information
In addition to the transactions you are given, the balances found in the Trial
Balance on 31 October 2018 are as follows:
Debit Credit
Capital 52 000 00
Equipment 45 000 00
Trading stock 23 000 00
Debtors control 18 420 00
Bank 7 200 00
Creditors control 12 345 00
Sales 65 200 00
Cost of sales 40 000 00
Rent income 12 320 00
Discount received 685 00
Stationery 700 00
Wages 7 900 00
Discount allowed 330 00
142 550 00 142 550 00
The following is a summary of information that appeared in the subsidiary

journals for November 2018.

• Total of deposit slips, R45 000
• Cash and cheques received from debtors in payment of their accounts,
R2 890
• Discounts allowed to debtors, R110
• Cash sales, R24 000 (goods are sold at cost plus 50%)
• Rent income, R2 500 (received on 15 November 2018)
• Cheque received from owner to increase his capital, R15 610 on
1 November 2018.

• Total of cheques issued for November 2018, R51 000
• Trading stock bought and paid for by cheque, R12 000
• Cheques issued to creditors in payment of accounts, R11 750
• Discounts received from creditors for early payments, R750
• Wages paid to employees, R18 950
• Stationery bought and paid for by cheque, R500, on 14 November 2018
• Cheque issued for new equipment purchased on 23 November 2018,
R7 800.
Debtors Journal
• Cost price of goods sold on credit, R2 800
• Goods are sold at cost plus 75%.
Creditors Journal
• Sundry purchases amounted to R21 000
• Equipment bought on credit, R1 450
• Stationery bought on credit, R990
• Merchandise bought on credit, invoiced at R16 500 (less 5% trade discount)
• Repairs to the business vehicle done on 21 November 2018, R2 885.
Debtors Allowances Journal
• Selling price of goods returned by debtors, R665.
• Goods were sold at cost plus 75%.
• Allowances made to debtors, R500.
Creditors Allowances Journal
• Goods returned to creditors amounted to R1 230
• Stationery, bought on credit, returned to suppliers, R190
• Allowance granted for overcharge on repairs done to vehicle on
25 November 2018, R85.

Marks: 110 Time: 1 hour
1. Rule the following columns in your workbooks and show the effect of each
transaction on the elements of the accounting equation.

Transactions
a. Sold goods with a cost price of R2 000 on credit to D Maneveld
for R3 500.
b. D Maneveld returned goods to the value of R350 because she was not
satisfied with the quality (cost price, R200).
c. Issued a cheque to A Storm for the purchase of stock, R1 500.
d. Received a cheque from S Africa for R1 190 in full settlement of his account
of R1 250.
e. Returned stationery to B Block, a creditor, because it was discovered that the
incorrect items were delivered, R175.
f. The following details were found on the invoice received from C Maske for
items purchased on credit:
• merchandise, R2 100 (less 10% trade discount)
• packaging, R310.
g. Cash sales according to the cash register roll, R3 000. Goods are sold at cost
plus 60%.
h. Issued a cheque to C Maske for R2 112 in full settlement of account after
4% discount had been allowed.
i. Returned faulty goods with a cost price of R90 to Malan Traders. (48)
2. Rule the following columns in your workbooks. Analyse the transactions

from Question 1. by filling in the columns. (62)
No. Source document Subsidiary General, Debtors and Creditors Ledgers

journal Account debit Account credit Amount

Chapter 9
Additional cash transactions and the
Petty Cash Journal
• know when the Petty Cash Journal is used
• record appropriate transactions in the Petty Cash Journal
• record additional transactions on the required source documents
• record additional transactions in the Cash Journals, such as credit
card transactions, dishonoured cheques, bank costs, interest on bank
overdraft, interest on current account, fixed deposits, loans and
carriage on purchases
• calculate discount allowed and discount received and record these
discounts in cash journals
• post transactions to the ledgers
• indicate the effect of a transaction on the accounting equation
• analyse the transactions
• understand controls over petty cash
Key concepts
• credit card transactions • petty cash imprest system
• dishonoured cheques • overdrafts • interest • stop orders • fixed deposits
• loans • carriage on purchases
Bronwyn, are you perhaps going past

the stationery shop? We need a spool Sure, give me money from
for the cash till and ink for the printer. petty cash and I'll buy
whatever we need.
And
remember to
bring back the
change and
the cash slip.
Yeah, yeah,
I know.
o o k k eepi n g o f a s o le trader –
b
A dditi o n al cash tra n sacti o n s a n d the petty cash j o u r n al
• chapter 9 137

1. introduction
In the revision of Grade 9 work in Chapter 6, you looked at cash journals
and source documents. Before dealing with additional transactions in the
cash journals, let’s summarise what we learnt. There are two cash journals:
Transactions on discount • The Cash Receipts Journal (CRJ) is used to record all amounts
allowed and discount received by the business during a month. The source documents used
received are included in this chapter here are duplicate receipts and the cash register roll. When we post
to serve as reinforcement. Discounts from the CRJ, Bank is debited (it is an asset that increases) and all the
Allowed and Discounts Received are other accounts (except Cost of Sales and Discount Allowed) are credited.
non-cash items that are included
in the Cash Receipts Journal and
• The Cash Payments Journal (CPJ) is used to record all amounts paid
Cash Payments Journal respectively. by the business during a month. The source document used here is
These were dealt with in Chapters the cheque counterfoil. When we post from the CPJ, Bank is credited
7 and 8. (it is an asset that decreases), and all the other accounts (except
Discounts Received) are debited.
Let’s look at further transactions that may occur in the cash Journals.
2. different methods of payment

Every business should keep strict control of their cash payments. This
is why a cheque is issued each time a payment is made. The cheque is
given to the payee and the information on the cheque counterfoil is
recorded in the Cash Payments Journal. The signature on the cheque
makes it legal tender.
Access to computers makes it possible to use the Internet to make
payments as well. These payments are made using Internet banking
facilities and need to be strictly monitored. The bookkeeper will be given
the authority to access the business’s bank accounts on the computer and
a password is used to gain entry to the Internet payment system. This
method of payment has become very popular because it is so convenient
and secure. Other popular methods of payment to be discussed in a later
chapter are debit and stop orders, credit cards and debit cards.
3. petty cash
A business often buys small items, such as stationery, tea, stamps and
other consumables. Because these items are not very expensive and are
often bought in small quantities, they do not warrant the formality of a
cheque payment. These small or petty items are paid for using petty cash.
The petty cash is administered by a capable secretary or clerk or, in a
bigger business, the petty cashier.
Petty cash is a current asset because it represents money. It increases
when money is put into the petty cash box and decreases when payments
are made.
BookkEEPInG oF A SoLE TRADER –

138 chapter 9 •
ADDITIonAL CASH TRAnSACTIonS AnD THE PET TY CASH JouRnAL

3.1 The petty cash procedure
When petty cash is used, certain procedures have to be followed:
• The petty cashier will be given an amount of money to store in a
petty cash box, which is locked and kept in a safe place. This money,
which is likely to cover the demand for petty cash over a month, is
determined by the owner or bookkeeper. The bookkeeper will cash a
business cheque for this amount and record this payment in the Cash
Payments Journal.
• If an amount is required from petty cash, the person requesting the
money will fill in and sign a petty cash voucher on which they will
state for what the money will be used.
• The petty cashier will hand over the amount requested and use the
petty cash voucher and the receipt as source documents for recording
the transaction in the Petty Cash Journal.
3.2 The imprest system of petty cash

At the end of the month, the petty cashier will add up all the petty cash
payments for the month and request a cheque from the bookkeeper for
that amount. The amount of money in the petty cash box at the end of
the month will therefore be the same as it was at the beginning of the
month. This system is called the imprest system and the amount restored
at the end of the month is called the imprest amount.
Example
L Brown is the petty cashier of NZ Stores in Nelspruit. On 1 June
2018 the bookkeeper issued a cheque to her for R150, which was
cashed and placed in the petty cash box. On 30 June 2018, the petty
cashier established that there was R27 left in the petty cash box. This
meant that R123 was paid out during the month and that a cheque for
this amount had to be cashed in order to restore the imprest amount
of R150.
R27 (amount left in box) + R123 (total payments from petty cash)
5 R150 (imprest amount)
b
• chapter 9 139

Activity 9.1
1. What are the responsibilities of the petty cashier in administering the petty
cash on a monthly basis?
2. What is the system called of restoring the petty cash to match the balance at
the beginning of the month?
3. name three methods of payment, other than petty cash, used by a business.
4. Why must the business keep strict control of the payments they make?
5. name the documents used to record payment from petty cash into the
Petty Cash Journal.
6. If the imprest amount is R300 and the amount left over in the petty cash box
at the end of the month is R19, what is the total payments made from petty
cash for the month?
7. If the amount left over at the end of the month is R37 and the total
Read the clipboard on
page 145 for more details payments from petty cash for the month amounts to R188, what is the
on petty cash control. imprest amount?
8. name five internal control measures with regards to petty cash.
3.3 Recording information in the petty Cash Journal

The source document used for a petty cash transaction is the petty cash
voucher. These transactions are then recorded in the Petty Cash Journal
from the petty cash vouchers. Money is paid into the petty cash box by
drawing a cheque. This transaction is entered into the Cash Payments
Journal using the cheque counterfoil as the source document.
example
Transaction
On 3 March 2018, the petty cashier of Mabusela’s Cycle Shop paid R42,60
for postage on a parcel sent to a customer.
Petty Cash Voucher No. 01

Date: 3 March 2018
the amount of: Forty-two rand and sixty cents R42,60
for: Postage on parcel

Signature:

140 chapter 9 •

Example continued
Petty Cash Journal of Mabusela's Cycle Shop for March 2018 PCJ1
Doc. Day Details Fol. Petty Cash Postage Stationery Repairs Sundry accounts Fol.
no. Amount Details
01 3 Parcel 42 60 42 60
Effect on the accounting equation:
No. Assets Owner’s equity Liabilities

01 – 42,60 Petty cash – 42,60 Postage
decreases expense
Example
The transactions below are for Mabusela’s Cycle Shop.
Required
1. Record the transactions in the Petty Cash Journal and Cash
Payments Journal for March 2018.
2. Post to the following accounts in the General Ledger: Petty Cash,
Debtors Control, Postage, Stationery, Repairs, Wages and Donations.
3. Show the effect of the transactions below on the accounting
equation.
01 Drew a cheque (no. 21) for R200 to use for petty cash payment for
the month.
03 Paid R12,60 for postage on a parcel sent to a customer (petty cash
voucher no. 01).
05 Paid R21 to purchase stationery.
11 Bought stamps from the post office, R24.
13 Employed a worker to clean the office windows and paid him R30.
17 Paid R20 to Quick Transport to deliver goods to a debtor, J Small.
This amount must be debited to the debtor’s account.
23 Paid R35,40 to PG Glass for replacing a broken window pane.
28 Donated R15 to the local retirement home.
31 Drew a cheque (no. 34) for R158 to restore the petty cash
imprest amount.
b
• chapter 9 141

Example continued
Petty Cash Journal of Mabusela's Cycle Shop for March 2018 PCJ1
Doc. Day Details Fol. Petty Cash Postage Stationery Repairs Sundry accounts Fol.
no. Amount Details
01 03 Parcel 12 60 12 60
02 05 Stationery 21 00 21 00
03 11 Stamps 24 00 24 00
04 13 Window cleaning 30 00 30 00 Wages N10
05 17 Delivery costs D1 20 00 20 00 Debtors control/J Small B6
06 23 Window pane 35 40 35 40
07 28 Retirement home 15 00 15 00 Donations N11
158 00 36 60 21 00 35 40 65 00
B7 N7 N8 N9
Cash Payments Journal of Mabusela's Cycle Shop for March 2018 CPJ1
Doc. Day Name of payee Fol. Bank Trading Creditors Sundry accounts Fol.
no. Stock Control Amount Details
21 01 Cash 200 00 200 00 Petty cash B7
47 05 …
48 31 Cash 158 00 158 00 Petty cash B7
General Ledger of Mabusela's Cycle Shop

2018
Mar 17 Petty cash PCJ1 20 00
Dr Petty Cash B7 Cr
2018 2018
Mar 01 Bank PCJ1 200 00 Mar 31 Total payments PCJ1 158 00
31 Bank PCJ1 158 00 Balance c/d 200 00
358 00 358 00
Apr 01 Balance b/d 200 00
Nominal accounts
Dr Postage N7 Cr
2018
b
142 chapter 9 •

Example continued
Dr Stationery N8 Cr
2018
Dr Repairs N9 Cr
2018
Dr Wages N10 Cr
2018
Dr Donations N11 Cr
2018
Debtors Ledger of Mabusela’s Cycle Shop

J Small (A) D1
Date Details/Document no. Fol. Debit Credit Balance
2018
Mar 05 Petty cash voucher no. 17 PCJ1 20 00 20 00
The effect on the accounting equation:

Day Assets Owner’s equity Liabilities
01 +200 Petty cash increases
–200 Bank decreases
03 –12,60 Petty cash decreases –12,60 Postage – expense
05 –21 Petty cash decreases –21 Stationery – expense
11 –24 Petty cash decreases –24 Postage – expense
13 –30 Petty cash decreases –30 Wages – expense
17 +20 Debtors increase
–20 Petty cash decreases
23 –35,40 Petty cash decreases –35,40 Repairs – expense
28 –15 Petty cash decreases –15 Donations – expense
31 +158 Petty cash increases
–158 Bank decreases
b
• chapter 9 143

Activity 9.2
Complete the following in the books of Hip Hop Stores for April 2018:
1. The Cash Payments Journal with columns for Bank and Sundry accounts only
2. The Petty Cash Journal with columns for Petty Cash, Postage, Stationery,
Repairs and Sundry accounts.
3. Post to the following accounts in the General Ledger: Drawings, Debtors
Control, Petty Cash, Postage, Stationery, Repairs and Donations.
4. Post to the account of B Slax in the Debtors Ledger.
5. Show how the transactions on the following dates affect the accounting
equation: 1, 5, 6, 23 and 30.

01 The bookkeeper cashed cheque no. 14 for R150 for petty cash for
the month.
05 Bought stamps for R34. Petty cash voucher no. 01 was used.
06 The owner took R20 from petty cash for her own use.
10 Bought pens from PNA for R24,50.
13 Paid postage on parcels, R32,80.
19 Paid Compu-fix R42,20 for a minor repair to the computer.
22 The petty cashier requested a further R150 for the petty cash.
Cashed cheque no. 31.
23 Paid R34 on behalf of a debtor, B Slax, to Fast Move to deliver goods
to him.
30 Donated R20 to the local high school’s fundraising drive. The
bookkeeper cashed cheque no. 28 to restore the petty cash imprest.
3.4 Internal control for petty cash

Now that you have a better understanding of how to record transactions
involving petty cash, let’s revisit the internal controls for petty cash
that were discussed in Chapter 4. Remember that the internal control
process for petty cash should ensure that petty cash is used only for
proper purposes, is adequately safeguarded and is recorded properly.
The following checklist shows some of the procedures that should be
adhered to.
b
144 chapter 9 •

Controls for petty cash
• Petty cash should be safeguarded physically against theft and loss. 
• Petty cash should be kept and used separately from the cash float. 
• Petty cash should only be used when payment cannot be made

by cheque. 
• Access to petty cash should be limited to one person

(called the custodian). 
• Supporting documentation should be required for all petty cash

payments. 
• A voucher should be filled out and signed by the custodian for all
payments from petty cash. 
• There should be a limit to the amount that can be reimbursed from

petty cash. 
• Periodical unannounced counts of petty cash should be made by

someone other than the custodian. 
• The petty cash should be a reasonable, predetermined amount

that is restored when the petty cash is low. 
• When petty cash is restored, invoices, receipts and

vouchers should be reconciled with the petty cash
balance by someone other than the custodian. 
• Any cash shortages identified must be

reported promptly. 
Use the following information to show the Petty cash account of Munro
Butchery for the three months March 2018 to May 2018. Leave 16 lines open for
the account.
b
• chapter 9 145

Transactions
2018
March 01 The petty cashier received R130 from the bookkeeper for the petty
cash imprest.
19 Cashed a cheque for R60 and paid this into petty cash.
31 According to the Petty Cash Journal, total payments for the
month amounted to R164. Cashed a cheque to restore the petty
cash imprest amount.
April 22 Cashed a cheque for R80 and paid this into petty cash.
30 According to the Petty Cash Journal, total payments for the
month amounted to R176. Cashed a cheque to restore the petty
cash imprest amount.
May 18 Cashed a cheque for R80 and paid this into petty cash.
31 According to the Petty Cash Journal, total payments for the month
amounted to R188. The petty cashier increased the imprest amount
to R160. A cheque for the imprest amount was handed to him.
4. Credit card transactions

As you know, many payments today are made by credit card because it is
a convenient and safe method of payment, and it means you don't have
to carry much cash with you. How do credit card payments work?
• As soon as the sales transaction is made and the client uses a
credit card to pay the amount owing, the amount is automatically
transferred from the bank account of the client to the bank account of
the business.
• From this it is clear that the credit card transaction is a cash
transaction, since the money is immediately transferred to the
business's bank account.
• Credit card transactions are therefore recorded in the Cash Receipts
Journal and are treated exactly the same as cash sales transactions.
Client
4 1
Bank Client pays bank Buys items and pays
with credit card Business
Bank pays amount due 3
2 Requests money from bank
b
146 chapter 9 •

Example
Extract of transactions in the books of Diamond Traders for
September 2018:
01 Cash sales according to cash register roll, R900 (cost price, R600).
02 Credit card sales, R1 500 (cost price, R1 000).
Cash Receipts Journal of Diamond Traders – September 2018 CRJ9

Doc. Day Details Analysis of Bank Sales Cost of Sales
no. Receipts
CRR 01 Cash 900 00 900 00 900 00 600 00
CRR 02 Cash 1 500 00 1 500 00 1 500 00 1 000 00
2 400 00 2 400 00 1 600 00
Double entry in the General Ledger:

1. Debit Bank
Credit Sales
2. Debit Cost of Sales
Credit Trading Stock
The effect on the accounting equation is:

+1 500 Bank +500 Profit gained
increased
– 1 000 Trading stock
decreased
Activity 9.3
Natasha is the owner of a shoe shop, Shu-biz. You have been asked to assist the
new bookkeeper.
Required
1. Enter the following transactions in the Cash Receipts Journal of Shu-biz for
February 2019, using columns for Analysis of Receipts, Bank, Sales, Cost of
Sales, Debtors Control and Discount Allowed.
2. Post to the accounts below in the General and Debtors Ledgers.
3. Indicate the effect of the transactions of 7 February on the
b
• chapter 9 147

Balances on 1 february 2019
general Ledger debtors Ledger
The number in brackets Trading Stock (B6) R12 450 (2) V Jacobs R420
indicates how many lines to Debtors Control (B7) R1 860 (2) n mpemeng R560
leave open for each account. Bank (B8) R23 689 (3) R marais R880
Sales (n1) R30 210 (3)
Cost of Sales (n2) R15 105 (3)
Discount Allowed (n5) R240 (3)
(You do not have to balance the accounts.)

02 Cash sales according to cash register roll, R4 320 (cost price, R2 160)
including R2 800 in credit card sales.
05 V Jacobs settled her account as on 1 February 2019 with a cheque for
R399. Issued receipt no. 14.
07 Sales according to cash register roll, R5 680 (cost price, R2 840).
Included are credit card sales for R2 860.
N Mpemeng settled his account of R560 and the business allowed a
5% discount (receipt no. 15).
14 Received R836 from R Marais in settlement of his account, after R44
discount was allowed (receipt no. 16).
5. dishonoured cheques
What does it mean when a cheque is dishonoured? It means that the bank
i Refer to drawer is
abbreviated as RD. does not authorise the transfer of money from the account of the drawer
to the account of the payee. The dishonoured cheque is then returned to
the payee marked as “refer to drawer”.
A bank may refuse to honour a cheque for various reasons:
• The amount in words differs from the figure.
• The cheque is not signed.
• The cheque is older than six months.
• The cheque is post-dated.
• A mistake has been made on the cheque.
• The drawer of the cheque does not have sufficient funds in the bank.
• The drawer of the cheque has died.
Before we look at how dishonoured cheques are entered, we should look
at what the original entry looked like when the cheque was first received.
When a cheque is received from a debtor, it is entered in the CRJ. Bank
is debited and Debtors Control is credited with the amount received.
Therefore, the reasoning is that Bank increased and Debtors Control has
decreased. But this receipt has now been refused by the bank, so what do
we do?

148 chapter 9 •

The original entry has to be cancelled. Bank must be credited
(decreased) and the debtor's debt must be increased again. This entry is
therefore made in the CPJ.
The source document that is used is the debit slip, which was sent
back with the dishonoured cheque to the business.
Example
Transaction for September 2018
12 The bank returned a cheque for R120, previously received from
P Paulse in settlement of his account, marked refer to drawer.
Cash Payments Journal of Diamond Traders – September 2018 CPJ9

Doc. Day Name of payee Fol. Bank Debtors
no. Control
D/S 12 P Paulse (cheque dishonoured) D3 120 00 120 00
B7 B6
Posting to General Ledger

2018
Sep 30 Bank CPJ9 120 00
Dr Bank (A) B7 Cr
2018
Sep 30 Total payments CPJ9 120 00
Posting to Debtors Ledger

P Paulse D3
Date Details Fol. Debit Credit Balance
2018
Sep 12 Dishonoured cheque CPJ9 120 00 120 00
b
• chapter 9 149

example continued
Transaction Assets Owner’s equity Liabilities

Received +120 Bank
cheque in increased
settlement of
account
–120 Debtors
decreased
Received the –120 Bank
dishonoured decreased
cheque from
the bank
+120 Debtors
increased
Activity 9.4
natasha, the owner of Shu-biz, has asked you to complete these transactions.
Required
1. Enter the following source documents in the Cash Payments Journal for
march 2019 with analysis columns for Bank, Debtors Control, Creditors
Control and Discount Received.
2. Post the transactions below to the accounts in the General, Creditors and
Debtors Ledgers.
3. Show the effect of the transactions of 2 and 12 march on the
(Accounts do not have to be balanced.)
Balances on 1 March 2019

general Ledger
Debtors Control (B6) R4 810 (3)
Bank (B7) R12 870 (2)
The number in brackets Creditors Control (B9) R6 200 (2)
indicates how many lines to Discount Received (n6) R680 (3)
Creditors Ledger
Redemption Leather Co. (C1) R2 340
Trendy Shoes Ltd (C2) R3 860
debtors Ledger
G Xoseka (D4) R285

150 chapter 9 •

Source documents: Cheque counterfoils
Date: 2 March 2019 Date: 8 March 2019

To: Redemption Leather Co. To: Trendy Shoes Ltd.
For: Account settlement For: Account settlement
R117 discount received R193 discount received
Amount: R 2 223 Amount: R 3 667
No. 132 No. 133
The following cheque is returned by the bank on 12 March 2019.

The cheque was received from G Xoseka in settlement of his account.
XYZ BANK
Date: 28 February 2019
REFER TO DRAWER
Pay or Bearer
Betaal Shu-biz of toonder
The sum of
Die som van Three hundred and forty rand only
R 340,00
0080: 252 966 134 : 02 4500 0147 G Xoseka
Activity 9.5
Wayne mafule owns a business, The Camping Spot; he trades in camping

equipment. The business makes a profit of 50% on the cost price.
Required
1. Enter the following transactions in the correct journals for march 2019.
Create columns as follows:
• CRJ: Analysis of Receipts, Bank, Sales, Cost of Sales, Debtors Control, The number in brackets
Discount Allowed and Sundry Accounts (8) indicates how many lines to
• CPJ: Bank, Trading Stock, Wages, Debtors Control, Creditors Control, leave open for each account.
Discount Received and Sundry accounts (8)
• DJ: Sales and Cost of Sales (4)
• CJ: Creditors Control, Trading Stock, Stationery and Sundry accounts (5).

• chapter 9 151

2. Post entries to the following accounts with the given opening balances on
1 March 2019:
Creditors Control (B9) R7 910 (5)
Discount Received (N5) R342 (4)
Discount Allowed (N6) R255 (4)
3. Post entries to the following accounts in the Debtors Ledger:
J King (balance on 1 March 2019, R360) and F Louw (balance on
1 March 2019, R430).
4. Post transactions to the account of Outdoor Warehouse in the Creditors
Ledger (balance on 1 March 2019, R2 670).

03 Cash sales according to the cash register roll, R6 900. Included are
credit card sales of R2 400.
Issued receipt no. 56 for R200 to debtor F Louw for payment of
his account.
05 Paid Outdoor Warehouse R2 537 and received a discount of R133,
cheque no. 256.
06 Sold trading stock on credit to J King, R390 (invoice no. 68) and
T Makaba, R843 (invoice no. 69).
09 Bought stationery for R240 and advertising posters for R350 printed
on credit by ND Printers (invoice renumbered 98).
13 Cashed a cheque and paid wages, R1 600.
14 Paid the telephone account to Telkom, R583.
16 Cash sales according to the cash register roll, R9 510.
J King settled his account of R360 as on 1 March and the business
allowed 5% discount.
18 Received an invoice for R1 340 from Marais Motors for repairs to the
delivery vehicle.
19 The cheque received on 3 March from F Louw was returned by the
bank, marked refer to drawer as a result of insufficient funds.
21 Cash sales of trading stock, R7 338.
Issued a receipt for R323 to debtor T Makaba after allowing a
R17 discount.
24 Bought trading stock on credit from Outdoor Warehouse, R4 780.
28 Issued a cheque to Marais Motors in settlement of the account received
on 18 March and received a discount of 5%.
30 Paid R8 700 to Tents Ltd for trading stock.
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152 chapter 9 •

Activity 9.6
Show the effect of the following transactions on the accounting equation.
Transactions
1. Credit card sales, R2 400 (cost price, R1 800).
2. Debtor T Yawa made a payment on his account of R560 with a cheque
for R532.
3. Issued a cheque for R3 458 to Atlas Wholesalers in settlement of the
account of R3 640.
4. The bank returned a cheque for R287, received from F Louw in
settlement of his account, marked refer to drawer.
6. interest on current account

If the business has money in the bank, the bank must pay interest to the
business on that particular balance. The bank will calculate the interest
and simply add it to the business’s account.
The source document is the bank statement and the entry is made
i The amount is never entered
in the analysis of receipts,
since this amount is paid directly
in the Cash Receipts Journal. The interest on the current account is an
into the bank account.
income for the business.
How does a bank statement work? A bank statement is a document
the bank sends to the business every month that shows all amounts by
which the business’s bank account has increased or decreased; in other
words, all deposits, cheques drawn and other transactions that we will
look at later. However, it is important to note that an entry on the bank
statement (debited/credited) is opposite to an entry in the bank account
of the business’s books. A receipt in the business’s books results in a debit
entry in the bank account – but on the bank statement a receipt is shown
as a credit. In the business’s books a payment results in a credit entry in
the bank account – but on the bank statement a cheque that was cashed is
shown as a debit.

• chapter 9 153

Example
30 Received the bank statement on which the interest earned on the
current account was shown as R235.

Doc. Day Details Fol. Bank Sundry accounts
no. Amount Details Fol.
B/S 30 Top Bank 235 00 235 00 Interest on current account

Dr Bank (A) B7 Cr
2018
Sep 30 Interest on current account CRJ9 235 00
Dr Interest on Current Account (OE/i) N21 Cr

2018
Sep 30 Bank CRJ9 235 00

+ 235 Bank + 235 Interest
increased on current
account –
income
7. Bank charges
When a business opens an account with a commercial bank, the business
naturally makes use of the various services offered by the bank. The
business, as the bank’s client, has to pay for these services. These services
are known as bank charges. Bank charges differ from bank to bank.
The services include:
• keeping the business’s account up to date in the books of the bank
• sending out monthly statements
• printing cheque books
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154 chapter 9 •

• printing deposit books
• collecting credit card payments
• processing stop orders and debit orders
• processing tax levies on transactions.
These costs appear on the bank statement, which the bank sends to
the client at the end of each month. When the bank statement (source
document) is received, the entry must be made in the Cash Payments
Journal, since the bank has already deducted these costs from the
business’s account.
These accounts are all added and simply entered as a single amount
called bank charges in the books of the business. Bank charges are an
expense to the business.
Example
30 Received the bank statement from the bank (Top Bank) on which
the following costs are debited: commission R25; cheque book R15;
deposit book R25.
Doc Day Name of payee Fol. Bank Sundry accounts
B/S 30 Top Bank 65 00 65 00 Bank charges

Balance Sheet account
Dr Bank (A) B7 Cr
2018
Sep 30 Bank charges CPJ9 65 00
Nominal account
Dr Bank charges (OE/e) N22 Cr
2018

– 65 Cash – bank – 65 Bank charges
decreased – expense
b
• chapter 9 155

i No entry is made when 8. Bank overdraft and interest on
an overdraft facility is
arranged with the bank. If the overdrawn account
business uses the overdraft facility, Most businesses have an arrangement with their banks that allows them
all that happens is that the bank to overdraw their account to a certain credit limit. The bank offers the
account now has a credit balance, business an overdraft facility. What does this mean? It is simply an
because this money has to be repaid
agreement with the bank that the business may continue to write out
to the bank. So the bank account is
no longer an asset, but a liability. cheques even if there is no money left in the bank account, but to a limit,
such as R10 000. In other words, it is similar to a short-term loan, but the
bank does not give the business the whole R10 000; the business uses only
gAAp flash
as much as it needs and its account is then overdrawn by that amount.
It is important to note that, even Although the overdrawn account is not a loan, it is still the bank’s
though the interest on your money that the business is using for a time and therefore the business
overdraft is an expense charged
by the bank, the amount for
must pay interest. The bank calculates the interest on the daily amount
interest on overdraft is always owing at the current interest rates, and automatically subtracts it from
recorded in its own account and the business’s cheque account. There is no physical payment of the
never included as part of the bank interest by cheque or cash.
charges expense. The reason for this How does the business know how much interest has been paid?
stems from the GAAP principle of
The source document is the bank statement which is received from the
materiality, which provides that
all significant information must be bank at the end of every month. Then, at the end of the month, this
included in the accounting records. transaction is entered in the CPJ as interest on overdrawn account and is
If the interest on overdraft amount an expense for the business.
was included in the Bank Charges
account, then it would be difficult
to determine how much it cost
example
the business to use the overdraft Transaction for September 2018
facility. This could be significant 30 Received the bank statement from the bank (Top Bank), showing the
information for the management of
interest on the overdrawn account for the month as R124.
the business who may, as a result
of this information, look to pursue Cash payments Journal of diamond Traders – september 2018 CpJ9
cheaper financing options.
Doc. Day Name of payee Fol. Bank Sundry accounts
B/S 30 Top Bank 124 00 124 00 Interest on overdraft
posting to general Ledger

Balance sheet account
Dr Bank (L) B7 Cr
2018
Sep 30 Interest on overdrawn account CPJ9 124 00

156 chapter 9 •

example continued
nominal account
Dr Interest on Overdrawn Account (OE/e) N21 Cr
2018
Effect on the accounting equation:

– 124 Interest on +124 Bank
overdraft – overdraft
expense increased
9. stop orders and debit orders

One of the services a commercial bank makes available to its clients
is the monthly payment of, for example, insurance premiums on the
client’s behalf. The client must give the bank written instructions
(the stop order/debit order is completed), after which the bank
automatically deducts the amount from the client’s account and pays it i A stop order is an instruction
to your bank to pay a fixed
into the account of the beneficiary. amount into someone’s account at a
This also appears on the bank statement (source document) and certain time every month.
when the bank statement is received it must be entered in the Cash
Payments Journal, since the amount has already been deducted by the
bank and transferred.
i A debit order is an
authorisation you give to a
creditor to deduct either a fixed or
Stop orders cost much less than writing out a cheque for the same
a variable amount from your bank
amount every month. More and more clients are making use of this option. account each month.
The costs incurred are payable to the bank and are a part of bank charges.
example
Transactions for September 2018
30 The bank statement shows two stop orders: the first to Insure Co.
for short-term insurance of the building, R500; the second for the
owner’s children’s school fees, payment to Best School, R250.
Cash payments Journal of diamond Traders – september 2018 CpJ9

S/O 30 Insure Co. 500 00 500 00 Insurance
S/O Best School 250 00 250 00 Drawings

• chapter 9 157

Activity 9.7
Natasha, the owner of Shu-biz, has an arrangement with her bank, Best Bank,
which allows her account to be overdrawn up to R8 000.
Required
1. Enter the following transactions in the Cash Payments Journal of Shu-biz
for April 2019 with columns for Bank and Sundry accounts (7 lines each),
and in the Cash Receipts Journal with columns for Analysis of Receipts,
Bank, Debtors Control and Sundry accounts (4 lines each).
2. Post transactions to the following accounts in the General Ledger: Interest
on Bank Overdraft (2 lines), Interest on Current account (2 lines) and Bank
Charges (2 lines).
3. Show the effect of these transactions on the accounting equation.

30 Received a bank statement showing the following:
Debits (deductions/payments)
• The following bank charges were deducted from the business’s account:
cheque book, R13; service charges, R23; cash handling levy, R46.
• The business’s bank account was overdrawn for a portion of the month and
the interest on this came to R67.
• A stop order for the business’s insurance to Allsure Insurance for R560.
• A debit order to the municipality for the business’s water and electricity, R489.
Credits (receipts)
• Interest earned on the current account, R29.
• A debtor, F Wheatley, deposited an instalment of R340 from his account
directly into the business’s account.
Activity 9.8
Nicka Engelbrecht, the owner of Hokoa Sports Shop, received the bank
statement on the next page from XYZ Bank for the month of February 2016.
Required
1. Make the necessary entries in the Cash Payments Journal for February 2016,
with columns for Bank, Debtors Control and Sundry accounts
(7 lines each) and the Cash Receipts Journal with columns for Analysis of
Receipts, Bank, Debtors Control and Sundry accounts (5 lines each).
2. Post to the following accounts in the General Ledger: Interest on Current
Account and Bank Charges.
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158 chapter 9 •

XYZ BANK
To: Hokoa Sports Shop
Bank statement for the period 1 February 2016 to 29 February 2016
Date Debit Credit Balance
Balance brought forward 01/02 24 112,00 CR
Municipality for water and electricity 07/02 446,00
………………….
Direct deposit by debtor S du Plessis 09/02 680,00
Allsure for insurance 10/02 620,00
Cheque of debtor M Karsten dishonoured 11/02 450,00
………………….
Cash handling fee 18/02 112,00
Cheque book fee 19/02 30,00
…………………
Direct deposit for rent income by E Baard 26/02 1 670,00
Interest 29/02 94,00
Service fee 29/02 153,00 21 779,00 CR
10. Carriage on purchases

When a business buys trading stock, the stock is often transported to
the business premises by a transport business. However, payment for
transport is not regarded as an expense; it is seen as an increase in the cost
of trading stock. Why is this?
Let’s look at a practical example. Wayne August trades in canoes
and oars, which he purchases from Knysna Racing Kayaks. He bought a
canoe for R3 100, but it cost him a further R200 to have it transported to
Port Elizabeth, where his business is located. He would like to make a
profit of R500 on a canoe – what should he sell it for? R3 800, of course,
because the canoe actually cost him: R3 100 + R200 = R3 300.
Carriage on purchases increases the value of trading stock, and
therefore it increases assets.
Example
Wayne August sells canoes, oars and other rowing equipment and his
business is called Paddlers’ Paradise. Below are two of his transactions
for March 2019.
03 Bought canoes and oars from Knysna Racing Kayaks for R7 600
and paid with cheque no. 348.
04 Paid Coastal Couriers R220 to transport the goods cheque no. 349.
b
• chapter 9 159

Example continued
Cash Payments Journal of Paddlers’ Paradise – March 2019 CPJ3

Doc. Day Name of payee Fol. Bank Trading stock
no.
348 3 Knysna Racing Kayaks 7 600 00 7 600 00
349 4 Coastal Couriers 220 00 220 00
7 820 00 7 820 00
Bank Trading Stock

Trading stock 7 820 Bank 7 820

03 +7 600 Trading stock
increased
–7 600 Bank decreased
04 +220 Value of trading
stock increased
–220 Bank decreased
Activity 9.9
Steven Hall owns a sports shop, Sportman’s Den.
b
160 chapter 9 •

Required
1. Enter the following transactions in the Cash Payments Journal of Sportman’s
Den for March 2019: open columns for Bank, Trading Stock and Sundry
accounts (leave 5 lines open).
2. Show the effect of the transactions on the accounting equation.
3. If Steven has a profit mark-up of 50% on the cost price of his items, at what
price should he sell the goods he bought on 6 March?
Transactions
06 Purchased cricket bats and other stock items from Kookaburra Ltd and
issued cheque no. 245 for R2 550.
Paid Blits Transport with cheque no. 246 for the delivery of the
goods, R150.
10 Purchased a desk and chairs for office use from Gerber Furniture for
R4 780 and paid with cheque no. 247.
11 Issued cheque no. 248 for R100 to JJ Couriers for the delivery of the
office furniture purchased on 10 March.
Activity 9.10
Joanne Conradie sells sunglasses that she imports from Europe. She purchased
200 pairs of sunglasses from her supplier for R52 000, and paid an additional
R4 000 for customs duties. She wants to make a profit of 60%.
1. What is the actual cost price per pair of sunglasses?

2. Calculate the selling price.
11. Fixed deposits

When a business has sufficient money in their current account to pay
all their operational expenses and still have extra money left over, the
business may decide to invest that extra money in a fixed deposit.
Why would the business want to do this? The interest received on a
fixed deposit is better than that on an ordinary savings or cheque account.
The business decides for how long the money should be invested, for
example, one year or five years. Interest is receivable once a year, every
six months, every quarter or monthly.
What happens when such an investment is made? Money is taken out fixed deposit
of the current account, so a cheque would be written out and deposited Money placed in a special bank
into the account of the fixed deposit. For this reason a fixed deposit is account at a higher interest rate,
and where you need to give
still an asset to the business. The interest the business earns on the fixed
30, 60 or 90 days’ notice before
deposit goes to the Interest on Fixed Deposit account, is entered in the withdrawing (it could be longer)
Cash Receipts Journal, and is an income for the business.
b
• chapter 9 161

Example
The following cheque counterfoil appears in the cheque book of
Diamond Traders:
Date 7 September 2018

To Grow Bank
For Fixed deposit
Bal.
Dep.
Amount R 30 000,00
Bal.
No. 202

no. Amount Details
202 07 Grow Bank 30 000 00 30 000 00 Fixed deposit: Grow Bank
Notes
• Only the entry for the cheque issued, to withdraw the money from
the current account and then deposit it into another account, is
entered in the Cash Payments Journal.
• The entry for the interest to be received will only be made once
the interest is actually received, and the entry will be made in the
Cash Receipts Journal.
Example
Transaction for December 2018
07 Received a cheque for R1 200 from Grow Bank for the quarterly
interest on the fixed deposit. Issued a receipt for the amount (no. 711).
Cash Receipts Journal – December 2018 CRJ12

Doc. Day Details Fol. Bank Sundry accounts
no. Amount Details
711 07 Grow Bank 1 200 00 1 200 00 Interest on fixed deposit
b
162 chapter 9 •

Example continued
Note
• The account in the General Ledger is interest on fixed deposit.
This is an income, and should not be entered in the asset account
for fixed deposit.

Dr Fixed Deposit: Grow Bank (A) B6 Cr
2018
Sep 07 Bank CPJ9 30 000 00
Nominal account
Dr Interest on Fixed Deposit (OE/i) N6 Cr
2018
Dec 07 Bank CRJ 12 1 200 00
The effect on the accounting equation is shown below.

+ 30 000 Fixed deposit
increases
– 30 000 Cash
decreased
+ 1 200 Cash + 1 200 Interest on
increases fixed deposit
– income
12. When a fixed deposit matures

When a fixed deposit matures, the business receives a cheque from the
investment institution. This cheque usually includes the amount of the
investment as well as the last interest amount.
b
• chapter 9 163

Example
07 The fixed deposit at Grow Bank matures today. Received a cheque
from them for this amount, plus the interest of R1 200 for the last
quarter. Issued a receipt for the amount (no. 2121).

Doc. Day Details Fol. Analysis of Bank Sundry accounts
no. Receipts Amount Details
2121 07 Grow Bank 31 200 00 31 200 00 30 000 00 Fixed dep: Grow Bank
1 200 00 Interest on fixed deposit

Dr Fixed Deposit: Grow Bank (A) B8 Cr
2019 2019
Sep 01 Balance b/d 30 000 00 Sep 07 Bank CRJ9 30 000 00
Nominal account
Dr Interest on Fixed Deposit (OE/i) B8 Cr
2019
Sep 07 Bank CRJ9 1 200 00

– 30 000 Fixed deposit
decreased
+ 30 000 Cash
increased
+ 1 200 Cash + 1 200 Interest on
increased fixed deposit
– income
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164 chapter 9 •

Activity 9.11
Steven Hall, the owner of Sportman's Den, needs the following to be completed.
Required
1. Enter the following transactions in the Cash Payments Journal (2) (columns The number in brackets
for Bank and Sundry accounts) and Cash Receipts Journal (5) (columns for indicates how many lines to
Analysis of Receipts, Bank and Sundry accounts) of Sportman's Den for leave open for each account.
April 2019.
3. open the following accounts in the General Ledger and post: Fixed deposit –
Best Bank (balance on 1 April 2019, R10 000) (3), Fixed Deposit – AB Bank (3),
Interest on Fixed Deposit (4).
Transactions
01 The fixed deposit at Best Bank expired. Received a cheque for R10 800.
This is the fixed deposit as well as a year's interest of R800
(receipt no. 58).
02 Invested R8 000 of the above money with AB Bank at 7,5% interest
per annum (cheque no. 261).
30 Received a month's interest from AB Bank on the fixed deposit of
R8 000 at 7,5% interest per annum (receipt no. 59).
13. interest on fixed deposit capitalised

In Mathematics in Grade 9, you learnt about compound interest. This
means that the interest that the investor receives on his investment is not
paid out to him monthly or annually, but is rather reinvested. In other
words, the interest earned on the fixed deposit is added (debited) to the
fixed deposit and not banked, and the investor will then earn interest on
the interest as well as the amount invested.
The formula used when calculating compound interest is:
( r
A = P 1 + ___
100 )
n
if P rand is invested at r % compound interest for n years.

The investor will receive a statement from the institution where the
investment is made that explains the interest received. We will learn more
about this later.

• chapter 9 165

14. Loans
A business regularly needs capital if it wants to expand, to purchase
equipment or perhaps a vehicle. Often the business does not have its own
capital, and so the money can be borrowed in the long term from a bank
or financial institution. Before the bank or financial institution allows a
loan, however, it will determine whether the business is creditworthy; in
other words, whether it will be able to repay the loan. The business must
provide surety in the form of property, insurance policies, and so on.
When a loan is made, the money is transferred from the financial
institution to the current bank account of the business. However, this
money is owed to the bank or financial institution, so it is a liability. It
long-term liability is a long-term liability, because it will be paid back over more than
A loan that is repayable over a 12 months. Repaying the loan usually takes the form of regular instalments.
period longer than 12 months The business must also pay interest on the money borrowed.
This is taken over to the Interest on Loan account and it is an expense
for the business.
Example
Transaction for October 2018
01 Diamond Traders borrowed R50 000 from Debt Bank
(receipt no. 212). The loan must be repaid in instalments of R10 000
on 31 December each year and the interest rate is 17% per annum.
The interest is payable every three months.
Cash Receipts Journal of Diamond Traders – October 2018 CRJ10

no. receipts Amount Details
212 01 Debt Bank 50 000 00 50 000 00 50 000 00 Loan: Debt Bank
Only the entry for the cheque received, for the amount of the loan, is
made. The instalment and the interest payments will only be entered
when the payments are made.
• Payment of the instalment is entered in the Cash Payments Journal
and the Loan account will be debited by R10 000, which means that
the liability decreases.
• Payment of the interest on the loan is also entered in the Cash
Payments Journal and will be debited to the Interest on Loan
account, which means it is an expense.
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166 chapter 9 •

Example continued
Transaction for December 2018
31 Issued cheque (no. 186) for the instalment on the loan, as well as
interest for the past three months.
Cash Payments Journal of Diamond Traders – December 2018 CPJ12

no. Amount Details
186 31 Debt Bank 12 125 00 10 000 00 Loan: Debt Bank
2 125 00 Interest on loan
Calculation
R50 000 × 17% × __ 3   = R2 125
 12

Dr Loan: Debit Bank (L) B10 Cr
2018 2018
Dec 31 Bank CPJ12 10 000 00 Dec 01 Balance CRJ9 50 000 00
Balance c/d 40 000 00
50 000 00 50 000 00
2019
Jan 01 Balance b/d 40 000 00
Nominal account
Dr Interest on Loan (OE/e) N7 Cr
2018
Dec 31 Bank CPJ12 2 125 00

Transaction Effect Reason Effect Reason Effect Reason
Making the + 50 000 Bank + 50 000 Loan
loan increased increased
Repayment of – 10 000 Bank – 10 000 Loan
loan decreased decreased
Payment of – 2 125 Bank – 2 125 Interest
interest on decreased on loan –
the loan expense
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• chapter 9 167

Activity 9.12
nkosana mpemeng owns a secondhand furniture shop, nkosana Furniture.
The number in brackets Required

indicates how many lines to 1. Enter the following transactions in the Cash Payments Journal (3) (columns for
leave open for each account. Bank and Sundry accounts) and Cash Receipts Journal (2) (columns for Analysis
of Receipts, Bank and Sundry accounts) of nkosana Furniture for April 2019.
3. open the following accounts in the General Ledger and post transactions:
Loan: Wk Bank (balance on 1 April 2019, R20 000) (5); Loan: XYZ Building
Society (2); Interest on Loan (2).

02 Issued cheque no. 556 for R5 750 to WK Bank. This is an instalment
on the loan of R5 000 and three months' interest at 15% per annum.
28 Received R50 000 from XYZ Bank and issued receipt no. 78. This is a
further loan, which the business made to build a packing store.
Activity 9.13
The following transactions took place in the books of Francia Traders.
Required
Post the following transactions directly to the Loan account and the
Interest on Loan account in the General Ledger for the period 1 march 2016
to 28 February 2019.
Transactions
2016
Mar 01 The business successfully applied for a loan of R80 000 from
AB Bank. The amount of R80 000 is deposited in the business’s
bank account. The loan agreement stipulates that the loan is
repaid annually in instalments of R10 000 on 28 February, and
that interest on the loan is 15% p.a., also due on 28 February.
2017
Feb 28 Paid the instalment on the loan as well as the interest on the loan.
2018
2018
Aug 01 The business applied for an additional R40 000 on the loan, as
they want the expand the land and buildings. The additional loan
is granted and the business receives the money. The instalment on
the loan that is payable on 28 February increases to R12 000.
2019

168 chapter 9 •

15. interest on loan capitalised
In the world of business, interest on a loan is charged directly to the
Loan account. Interest on Loan is therefore debited and the Loan account
credited. As you can see, the Bank account is not affected at this stage.
We will discuss this later.
Activity 9.14
Beverley Valentine has a gift shop, La Cotte, which she opened a month
previously on 1 march 2018. She has a profit mark-up of 60% on the cost price.
Enter the following transactions in the Cash Journals of La Cotte for April 2018.
Required
1. Cash Receipts Journal with columns for Analysis of Receipts, Bank, Sales, The number in brackets
Cost of Sales, Debtors Control, Discount Allowed and Sundry accounts (9) indicates how many lines to
2. Cash Payments Journal with analysis columns for Bank, Wages, Trading leave open for each account.
Stock, Debtors Control, Creditors Control, Discount Received and
Sundry accounts (22).
The following balances appear in the books on 1 April 2018:
debtors List Creditors List

o Wyngaardt R640 Gifts Galore R2 870
T munro R326 TJ Creations R3 880

01 Borrowed R60 000 from Unity Bank at an interest rate of 16% per
annum, payable at the end of every month. The money is paid directly
into the current bank account.
02 Purchased from Asterix Ltd and paid by cheque no. 443:
a desk and chairs, R2 760, and installation of shelves, R980.
03 Ordered merchandise from South Suppliers, R8 400, less 10% trade
discount and 5% cash discount, and sent a cheque for the amount due.
04 Issued a cheque to Rapid Transport Service for R120 for transporting
these goods.
05 Issued receipt no. 109 to O Wyngaardt for R608 in settlement of her
account of R640.
Sales according to cash register roll, R7 280.
08 Sent a cheque for R430 to Print Right for printing pamphlets for an
advertising campaign, R230, and stationery, R200.
09 Issued a cheque for R2 726 to Gifts Galore, a creditor, after receiving a
discount of R144.
10 Received a cheque for R326 from T Munro in settlement of his account
and issued a receipt.
Sold merchandise for cash, R5 824.

• chapter 9 169

11 Cashed a cash cheque to pay wages, R2 500.
12 T Munro’s cheque for R326 is dishonoured by the bank and sent back
due to insufficient funds.
13 Sent a cheque to TJ Creations to settle the account and received
5% discount.
14 Paid the owner’s newspaper account at The Argus, R96.
19 Cash sales, R5 856.
Received a cheque for R600 from J Makaba, who hires a packing shed
on the premises.
25 Cashed a cash cheque to pay wages, R2 500.
26 Purchased merchandise from TJ Creations and paid by cheque, R5 219.
27 Issued a cheque for R150 to Supafast for the delivery of the merchandise.
28 Purchased a computer and printer from Computron for R8 900 and
paid by cheque.
29 Issued a cheque for R50 to Supafast for delivery of the computer
and printer.
Issued a cheque to Unity Bank for the month's interest, as well as an
instalment of R2 000.
30 Received a bank statement from NOG Bank that showed the following:
Debits
• cheque book, R12; service charges, R56; cash handling levy, R79
• debit order to municipality for water and electricity, R446
• stop order to Tamsan Ltd for the insurance of the business, R600.
Credits
• interest, R68.
Activity 9.15
Tanya King has a sweet shop called Heavenly Sweets. She makes a profit mark-
up of 80% on the cost price of her sweets.
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170 chapter 9 •

Required The number in brackets
1. Enter the transactions for may 2019 in the following journals: indicates how many lines to
• Cash Receipts Journal with analysis columns for Analysis of Receipts, leave open for each account.
Bank, Sales, Cost of Sales, Debtors Control, Discount Allowed and Sundry
accounts (12).
• Cash Payments Journal with analysis columns for Bank, Wages, Trading
Stock, Debtors Control, Creditors Control, Discount Received and Sundry
accounts (21).
2. Post transactions to the above accounts in the General Ledger, Debtors
Ledger and Creditors Ledger. First write in the balances as on 1 may 2019.
(Accounts do not have to be balanced.)
Balances extracted on 1 May 2019

Drawings (B2) R2 890 (3)
Equipment (B4) R7 000 (3)
Trading stock (B5) R8 126 (3)
Debtors control (B6) R6 122 (3)
Bank (Cr) (B7) R1 800 (3)
Creditors control (B9) R9 100 (2)
Fixed deposit: XYZ Bank (B10) R10 000 (2)
Loan: AB Bank (B11) R– (2)
Sales (n1) R82 080 (3)
Cost of sales (n2) R45 000 (3)
Interest on fixed deposit (n3) R400 (3)
Water and electricity (n4) R3 870 (3)
Telephone (n5) R3 441 (3)
Discount received (n6) R1 445 (3)
Discount allowed (n7) R1 338 (3)
Rent income (n8) R2 500 (3)
Wages (n9) R19 000 (3)
Insurance (n10) R5 000 (3)
Interest on overdraft (n11) R59 (3)
Bank charges (n12) R631 (3)
Delivery costs (n13) R– (4)
Interest on loan (n14) R– (2)
extracted from the debtors and Creditors Ledgers:

debtors Ledger
L Campher (D1) R1 560 (4)
u Waneza (D2) R840 (4)
G Fourie (D3) R775 (4)
Creditors Ledger
The Sweet Factory (C1) R2 180 (4)
Chocco Ltd (C2) R1 860 (4)

• chapter 9 171

Transactions
01 The fixed deposit with XYZ Bank matured. Received the deposit of
R10 000 together with the interest for six months at 8% per annum.
This was paid directly into the business’s bank account.
02 AB Bank deposited R80 000 in the business’s current bank account.
This loan was approved at 15% interest per annum, payable monthly.
03 Cash sales amount to R4 590.
Issued receipt no. 162 to L Campher for R1 482 after discount of
R78 was allowed.
05 Purchased merchandise from Cookie & Co. for R1 539 cash and
received 10% trade discount and 5% cash discount (cheque no. 331).
06 Issued a cheque to Supafast Transport for the delivery of above
goods, R87.
10 Issued a cheque to The Sweet Factory to pay the business’s account as
on 1 May 2019 and received 5% discount.
11 Cash sales, R6 048.
Received a cheque for R480 from debtor G Fourie as an instalment on
his account.
14 Issued a cheque for R560 to Telkom. R290 was for the business’s telephone
account and the rest for the owner’s personal telephone account.
15 Cashed a cheque to pay the wages, R3 200.
20 Cash sales of merchandise, R6 264.
Received a cheque from U Waneza in settlement of her account of
R840 and allowed 5% discount.
21 Purchased equipment from HH Furniture for R5 600 and paid by cheque.
Paid Supafast a further R120 to deliver the equipment to the business.
23 The cheque of 11 May from G Fourie was dishonoured by the bank and
returned due to insufficient funds.
24 Settled the account of R1 860 with Chocco Ltd with a cheque
for R1 767.
25 Purchased merchandise for cash, R3 468, from The Sweet Factory.
26 Paid R110 to Rapid Transport to deliver this merchandise.
28 Issued a cheque for R3 000 to AB Bank. This is the instalment on a
loan as well as one month’s interest.
31 Received a bank statement from SA Bank that showed:
Credits
• a deposit of R500 paid irectly into the current account from tenant,
B Nel
Debits
• The account was overdrawn for a portion of the month, for which
the interest amounts to R56.
• service charges, R34; cash handling levy, R55
• debit order for water and electricity, R289, to the municipality
• stop order for insurance to Allsure Insurance, R600.
b
172 chapter 9 •

Activity 9.16
Show the effect, with reasons, of the transactions below on the accounting
equation. Accept throughout that there is a favourable bank balance, unless
stated otherwise.
Transactions
01 Credit sales of merchandise, R1 020, to F Farao (profit mark-up of 50%
on the cost price).
02 F Farao returned goods with a marked price of R120 (cost price, R80)
because they were not according to sample.
03 Debtor F Farao settled his account of R900 and the business allowed
5% discount.
04 Debtor H Lawrence’s cheque for R340 was dishonoured by the bank
and returned, marked as refer to drawer.
05 Purchased merchandise on credit from BB Wholesalers for R5 680.
06 Received an invoice for R150 from Speedy Couriers for the delivery of
this merchandise.
07 The business settled its account with BB Wholesalers with a cheque for
R5 112, after R568 discount was received.
08 Received a bank statement from the bank indicating the following:
ABC BANK Bank Statement no. 67 April 2019

Description Debit Credit Balance
S/O: Allsure Insurance R360 R4 230
Cheque book R15 R4 215
Cash handling levy R124 R4 091
Interest R79 R4 170
09 A fixed deposit with Unity Bank matured today. Received

the fixed deposit of R10 000 and interest of R800 for the year from
the bank.
10 Borrowed R50 000 from EC Bank and received a cheque for
the amount.
11 The bank account was overdrawn. The bank statement indicated
interest to the amount of R107.
b
• chapter 9 173

informal assessment 9.2
Show the effect, with a reason, for each of these transactions on the
1. Debtor H nel settled his account of R280 and the business allowed
5% discount.
2. Issued a cheque for R2 340 to koch Suppliers, after a R120 discount
was received.
3. Debtor P du Toit settled his account of R350 the previous month, but his
cheque was returned by the bank, marked refer to drawer.
4. Invested R10 000 as a fixed deposit with Top Bank at 8% interest
per annum.
5. made a payment of R3 800 on the business’s loan with Gold Bank;
R3 000 was the loan instalment and the rest interest.
6. Paid R108 to Speedy Transport for the delivery of merchandise.
Activity 9.17
1. Enter the following transactions of Jouba Traders for march 2018 in the
correct journals:
The number in brackets • CRJ3: Analysis of Receipts, Bank, Sales, Cost of Sales, Debtors Control,
indicates how many lines to Discount Allowed and Sundry accounts (11)
leave open for each account. • CPJ3: Bank, Wages, Trading Stock, Debtors Control, Creditors Control,
Discount Received and Sundry accounts (18)
• DJ3: Sales and Cost of Sales (7)
• DAJ3: Debtors Allowances and Cost of Sales (4)
• CJ3: Creditors Control, Trading Stock, Stationery, Equipment, Packaging
and Sundry accounts (5)
• CAJ3: Creditors Control, Trading Stock, Stationery, Equipment, Packaging
and Sundry accounts (4).

01 Received a cheque for R342 from E Coetzee in settlement of his debt
i The business makes use of a
60% profit mark-up on the of R360. Issued receipt no. 46.
cost price. Cash sales of merchandise, R5 344 (cost price, R3 340).
03 Received a cheque from SB Bank. This is a fixed deposit of R5 000,
plus six months’ interest at 16% per year.
04 Paid R1 386 to Joubert & Co. in settlement of the business’s debt after
10% discount was allowed; cheque no. 182.
05 B Muller’s cheque for R135, which he had issued the previous month
to settle his debt, was dishonoured by the bank and returned, marked
refer to drawer. Received a cheque of R10 000 from ND Bank. This loan
was made so that the business could buy additional equipment.

174 chapter 9 •

06 Purchased the following from Brandt Ltd and paid by cheque:
equipment, R3 800; trading stock, R2 350; packaging, R120.
A 20% trade discount and a further 10% cash discount was allowed.
07 Paid the wages for the week, R1 680.
Purchased the following on credit from Du Toit Traders:
stationery, R124; trading stock, R1 380 (invoice no. 302).
08 Issued invoice no. 138 to R Human for merchandise sold to him on
credit, R416.
09 Returned the following to Du Toit Traders, together with debit note
no. 24: stationery, R28; trading stock, R210.
Received an invoice from Vermeulen Ltd for merchandise purchased,
R3 800, less 20% trade discount.
10 Paid Rapid Transport Ltd R80 for the delivery of the merchandise.
11 Credit sales of merchandise to the following:
R Human, R608; R Malan, R352; C Toua, R224.
12 Sent credit note no. 15 to R Human for merchandise not according to
sample, R128.
13 Cashed a cash cheque for R1 800. Wages amount to R1 680 and the
rest is for the owner’s own use.
14 Received a cheque for R200 from R Human in partial settlement of
his debt.
16 Sent a debit note to Vermeulen Ltd for an over-supply on the invoice
(9 March), R160 less 20% trade discount.
17 The bank returned R Human’s cheque, which was received on
14 March, due to insufficient funds.
18 Issued a credit note to C Toua. He returned goods with a selling price
of R64 because they were damaged.
19 Issued an invoice for R832 to N Lombard for goods sold on credit.
20 Cashed a cheque for R1 680 for wages.
21 Paid Du Toit Traders R2 247 in settlement of the debt of R2 496.
24 Purchased merchandise, R1 320, on credit from Vermeulen Ltd and
paid R40 to Rapid Transport for its delivery.
25 Received a cheque for R1 086 from R Human in settlement of his debt,
after R120 discount was allowed.
Cash sales of merchandise, R5 664 (credit card).
29 Sent a cheque for R2 400 to AL Bank in repayment of a loan, plus one
year’s interest at 20% per annum.
31 Received a bank statement from the bank (ND Bank) reflecting
the following:
Debits
• cash handling levy, R24; service charges, R41; stop order to Allsure
Insurance for the business’s insurance R250
• debit order to Telkom for the telephone account, R182.
Credits
• interest, R124.
b
• chapter 9 175

2. Post transactions to the following:
• Debtors Ledger: R Human (balance on 1 march 2018, R310)
• Creditors Ledger: Du Toit Traders (balance on 1 march 2018, R1 230).
The number in brackets general Ledger: Balances on 1 March 2018

indicates how many lines to Trading Stock R4 820 (7)
leave open for each account. Debtors Control R2 120 (6)
Sales R18 080 (5)
Cost of Sales R11 300 (4)
Debtors Allowances R810 (4)
Discount Allowed R105 (4)
Discount Received R280 (4)
Bank Charges R127 (4)
Interest on Current Account R89 (4)
Interest on Loan R– (2)
Enter the following transactions in the Cash Receipts Journal and Cash
Payments Journal of Basson Traders (owner F Basson). The business uses
a profit mark-up of 50% on the cost price.
Transactions for July 2020

01 Received a cheque from H Bergh for R180 and allowed him a discount
of R10. Receipt no. 120 was issued.
Cash sales of merchandise, R1 200.
03 Purchased merchandise from Theron Distributors and paid with
cheque no. 234, R670.
Paid Vermaak Transport R45 to transport merchandise.
06 Settled account of R680 with Nel & Co. and sent the cheque after a
discount of 10% was received.
08 The owner increased his capital contribution by depositing R6 000 into
the business’s current bank account.
09 Received stationery and paid Roux Traders by cheque, R345.
11 Issued a receipt to A van Blerk for R130 received in payment of
her account.
14 The fixed deposit of R30 000 with Diamond Bank matured today.
Received a cheque for the fixed deposit and the interest, at 20% per
annum, earned for six months.
17 The bank returned A van Blerk’s cheque, marked refer to drawer.
22 Paid the owner’s telephone account, R298.

176 chapter 9 •

25 Issued a cheque to ND Bank in settlement of the loan, R6 000 plus
interest for the last six months, R780.
30 According to the bank statement, the following debits apply to the
business’s account:
• cheque book R6 • interest R12
• service charges R17 • cash handling levy R15
Activity 9.18
The following information was taken from the books of Danjo Traders. use it
when posting transactions to the following accounts in the General Ledger of
Danjo Traders:
Trading Stock, Debtors Control, Creditors Control, Loan: Gold Bank, Sales, Cost
of Sales, Debtors Allowances, Stationery, Discount Received, Interest on Loan,
Bank Charges (balance all the Balance Sheet accounts).
Balances of the accounts on 1 March 2018: The number in brackets

Trading Stock R25 800 (7) indicates how many lines to
Debtors Control R8 730 (6) leave open for each account.
Loan: Gold Bank R12 000 (5)
Sales R386 080 (4)
Cost of Sales R241 300 (4)
Debtors Allowances R4 560 (3)
Stationery R1 860 (4)
Discount Received R1 883 (3)
Interest on Loan R230 (3)
Bank Charges R1 657 (3)
Column totals of the journals on 31 March 2018:
Cash Receipts Journal CRJ3

Bank Sales Cost of Sales Debtors Control Discount Allowed Sundry accounts
30 580 22 720 14 200 7 250 640 1 250
Cash payments Journal CpJ3

Bank Trading Stock Stationery Debtors Control Creditors Discount Sundry
Control Received accounts
36 669 ? 420 560 10 450 987 12 426
Included in Sundry accounts are the following amounts:

• on 18 march a cheque of R6 800 was paid to Gold Bank. This was
a down-payment on the loan of R5 000 and the rest was interest on the loan.
• on 31 march a bank charge of R340 appeared on the bank statement.

• chapter 9 177

Creditors Journal CJ3
14 112 8 932 ? 2 870 1 667
Creditors Allowances Journal CAJ3

3 594 1 876 210 1 028 480
debtors Journal dJ3 debtors Allowances Journal dAJ3

Bank Sales Discount Allowed Sundry accounts
30 580 22 720 640 1 250
Activity 9.19
1. Enter the following transactions in the account of C kriel in the Debtors

Ledger of Danjo Traders.
2. Enter the following transactions in the account of Joubert Suppliers in the
Creditors Ledger of Danjo Traders.

01 The following accounts appeared in the subsidiary ledgers on
1 March 2018:
• Debtors Ledger: C Kriel, R2 340
• Creditors Ledger: Joubert Suppliers, R4 890.
03 Issued invoice no. 341 to C Kriel for goods sold to him on credit, R896.
05 The business received invoice no. 997 (renumbered to 562) from Joubert
Suppliers for the purchase of stock, R2 870, and equipment, R1 850.
08 C Kriel settled his account as at 1 March 2018 and the business
allowed him a discount of 5% (receipt no. 397).
10 Sent stock for R470 back to Joubert Suppliers (document no. 87).
12 C Kriel returned goods, R110, to the business because they were not
according to sample (issued document no. 112).
21 Paid R2 880 on the account with Joubert Suppliers (cheque no. 1542)
after 10% discount was allowed.
use the following information from the subsidiary journals of our Shop
i The journals consist of extracts
and are not complete. and post the appropriate information to the accounts in the General Ledger
as indicated. only balance the Balance Sheet accounts properly on 31 July 2018
and show all folio numbers.

178 chapter 9 •

Balances on 1 July 2018
Debtors Control R3 825
Loan: XY Bank R80 000
Sales R8 500
Cost of Sales R4 250
Repairs R520
Discount Allowed R110
Discount Received R285
Debtors Journal of Our Shop – July 2018 DJ7

Doc. Day Debtors Fol. Sales Cost of Sales
no.
9 530 00 4 765 00
Debtors Allowances Journal of Our Shop – July 2018 DAJ7

Doc. Day Debtors Fol. Debtors Allowances Cost of Sales
no.
620 00 310 00
Cash Receipts Journal of Our Shop – July 2018 CRJ7

Doc. Day Details Fol. Analysis of Bank Sales Cost of Debtors Discount Amount Fol. Details
no. Receipts Sales Control Allowed
120 3 O Oosie 2 200 2 200 Capital
122 17 S Strauss 580 580 580 Rental
income
12 890 6 300 ? 3 810 141 2 780
Cash Payments Journal of Our Shop – July 2018 CPJ7

Doc. Day Name of Fol. Bank Trading Stationery Creditors Discount Debtors Amount Fol. Details
no. payee Stock Control Received Control
213 27 OB Traders 2 100 2 100 Equipment
Loan:
217 31 XY Bank 20 000 20 000 XY Bank
41 159 9 142 706 5 820 345 211 22 204
b
• chapter 9 179

Creditors Journal of Our Shop – July 2018 CJ7
Doc. Day Creditors Fol. Creditors Trading Stationery Packaging Equipment Amount Fol. Details
no. Control Stock
103 3 SA Repairs 481 481 Repair work
112 25 Toyota SA 5 310 5 310 Vehicles
20 613 12 887 491 32 1 412 5 791
Creditors Allowances Journal of Our Shop – July 2018 CAJ7

Doc. Day Creditors Fol. Creditors Trading Stationery Packaging Equipment Amount Fol. Details
no. Control Stock
87 14 SA Repairs 287 287 Repair work
968 410 84 13 174 287
b
180 chapter 9 •

Chapter 10
The General Journal
• understand the use of the General Journal and record the transactions
• post the General Journal to the General Ledger, Debtors Ledger and
Creditors Ledger
• interpret the transactions in the General Journal.
Key concepts
• cancellation of discount • interest of overdue accounts
• writing off bad debts • bad debts recovered • withdrawal of goods by
the owner • correction of errors
b o o k k eepi n g o f a s o le trader – the G e n eral J o u r n al • c h a p t e r 1 0 181

1. Why have a general Journal?
Until now you have learnt that every transaction must first be entered in
a journal and then posted to the ledgers.
The journals we have discussed thus far are:
• Cash Receipts Journal (CRJ) for money received
• Cash Payments Journal (CPJ) for all cheque payments
• Petty Cash Journal (PCJ) for small cash payments
• Debtors Journal (DJ) for credit sales of merchandise
• Creditors Journal (CJ) for all credit purchases
• Debtors Allowances Journal (DAJ) for all returns of merchandise
by debtors
• Creditors Allowances Journal (CAJ) for all returns of purchases
to creditors.
We see that all the journals above are used for a specific purpose.
i Remember that the General
Journal is only used for non- However, there are certain transactions or corrections that will not fit in
cash transactions. any of the journals above. But, as you know, all transactions must first
be entered in a journal and then posted to the ledger. For this reason the
General Journal is created, in which all these transactions can be entered.
2. How does the general Journal work?

narration First, the source document for the General Journal is a journal narration
A written explanation of why the or journal voucher. This is a short explanation below the entry about the
entry was made reason for the entry. Since there is such a wide variety of transactions
entered in the General Journal, the journal narration is necessary as an
explanation, for the bookkeeper as well as for auditors.
Many transactions that are entered in the General Journal need
authorisation from a senior member of staff. A journal voucher is then
used and can also serve as a source document.
So how does the General Journal work? As you already know, one of
the basic principles of accounting is the double entry – for every debit
entry there must be a credit entry. That is exactly what is done in the
General Journal.
Every journal entry shows which account must be debited and which
account must be credited. The transactions that we will talk about in this
chapter that are entered in the General Journal are:
• cancellation of discount on a dishonoured cheque from a debtor
• interest charged on the overdue account of a debtor
• interest charged on the overdue account of a creditor
• writing off bad debts (irrecoverable debts)
• bad debts recovered (entered in the Cash Receipts Journal (CRJ))
• withdrawal of goods by the owner
• correction of errors.
182 chapter 10 • BookkEEPInG oF A SoLE TRADER – THE GEnERAL JouRnAL

The General Journal has the following format.
General Journal of FEM Traders – October 2018 GJ10
Doc. Day Details Fol. Debit Credit Debtors Control 4 Creditors Control 5
no. 1 2 3 Debit Credit Debit Credit
JV1 01 J Juta 7 D1 20 20
Discount allowed 8 N9 20
(Cancel discount on dishonoured cheque) 9
20
B6
6
Notes
1 This column is only used if there is a journal voucher, otherwise the
journal narration serves as a source document.
2 The account that must be debited is always written first and the
amount entered in the debit column.
3 The account that must be credited is written second and the amount
entered in the credit column.
4 If the account that is debited or credited is a debtor, the amount must
also be entered in the Debtors Control column.
5 If the account that is debited or credited is a creditor, the amount
must also be entered in the Creditors Control column.
6 The totals of the Debtors Control and Creditors Control columns
are posted to the Debtors Control and Creditors Control accounts in the
General Ledger as journal debits and journal credits.
7 This entry will be posted to the account of J Juta in the Debtors
Ledger. All entries for debtors and creditors are thus posted directly to
the Debtors and Creditors Ledgers.
8 This entry is posted directly to the credit side of the Discount Allowed
account in the General Ledger.
9 The journal narration explains the transaction that has been recorded.
3. Cancellation of discount allowed

In Chapter 9, the dishonouring of a debtor’s cheque was discussed. If
a debtor’s cheque is dishonoured by the bank, it is entered in the Cash
Payments Journal and the amount on the cheque is added back to the
debtor’s account. What happens when the business has allowed discount
to the debtor for early payment, and the cheque is then dishonoured?
This discount must now be added to the debtor’s account because the
business did not receive this money.
So the discount allowed must be cancelled. However, the transaction
cannot be entered in the Cash Payments Journal as the dishonoured

cheque, since it is not a cash transaction. Therefore it is entered in the
General Journal. The debtor’s account and Debtors Control must now
be debited, since the debtor now owes the full amount again. Discount
Allowed must be credited and the discount must be cancelled since the
debtor has now failed to settle his account on time.
Example
01 The bank returned S Salamon’s cheque, marked refer to drawer, as a
result of insufficient funds, R150. The cheque was in settlement of his
account of R170.
To cancel the dishonoured cheque:

Cash Payments Journal of FEM Traders – October 2018 CPJ10
Doc. Day Name of payee Fol. Bank Debtors
no. Control
D/N 01 S Salamon (cheque RD) D1 150 00 150 00
To cancel the discount:

Doc. Day Details Fol. Debit Credit Debtors Control Creditors Control
no. Debit Credit Debit Credit
JV1 01 S Salamon D1 20 00 20 00
Discount allowed N9 20 00
(Cancel discount on dishonoured cheque)
20 00
B10
2018
Oct 01 Bank (cheque RD) CPJ10 150 00
31 Journal debits GJ10 20 00
Nominal account
Dr Discount Allowed (OE/e) N9 Cr
2018
Oct 01 S Salamon GJ10 20 00
184 c h a p t e r 1 0 • b o o k k eepi n g o f a s o le trader – the G e n eral J o u r n al

example continued
debtors Ledger of feM Traders

s salamon d1
2018 01 Debit note (cheque dishonoured) CPJ10 150 00 150 00
Oct Journal voucher no. 1 (discount allowed) GJ10 20 00 170 00

+ 170 Debtors + 20 Discount
increased allowed is
cancelled
– 150 Bank
decreased
4. interest on overdue accounts of debtors

Every business should have a credit policy in which it describes how long
a debtor’s account may be outstanding. The business needs to encourage i Internal control
over debtors
debtors to pay within the period and therefore they will allow discount To ensure that debtors settle their
for early payment. If the debtor’s account is overdue, the business will accounts within 30 days, the
business can do the following:
charge interest on the overdue amount.
This interest is an income to the business and is entered in the Interest • charge overdue accounts
with interest
Received account. The interest must be added to the debt of the debtor
• allow discount for early
and thus the debtor’s account and Debtors Control must be debited with payments
the interest amount. Interest Received is credited, since it is an income for • send accounts regularly
the business – so owner’s equity increases. • set a credit limit.
example
01 Charge the overdue account of S Salamon, R170, with 10% interest per
annum for three months.
Calculation
3
R170 × 10% × __
12 = R4,25
BookkEEPInG oF A SoLE TRADER – THE GEnERAL JouRnAL • chapter 10 185

Example continued
The entries below show how to enter the interest.

JV2 01 S Salamon D1 4 25 4 25
Interest received N8 4 25
(Charge interest at 10% per
annum for three months)
4 25
B10

2018
Oct 31 Journal debits GJ10 4 25
Nominal account
Dr Interest Received N8 Cr
2018
Oct 01 S Salamon/Debtors control GJ10 4 25
Debtors Ledger of FEM Traders

S Salamon D1
2018
Oct 01 Debit note (cheque dishonoured) CPJ10 150 00 150 00
Journal voucher no. 1 (discount allowed) GJ10 20 00 170 00
Journal voucher no. 2 (interest received) GJ10 4 25 174 25
Notes
• It is clear from the example that the interest charged increases the
debtor’s account.
• The interest charged is an income to the business and therefore it is
credited in the General Ledger.

Example continued

+ 4,25 Debtors + 4,25 Interest
increased received –
income
5. Interest on overdue accounts of creditors

The same principle that applies to interest on the overdue account of a
debtor, applies to the overdue account of a creditor. In other words, if
the business is late in paying their account to a creditor, the creditor will
charge interest on the overdue amount. The account used with overdue
creditors is Interest Paid and it is an expense for the business.
The debt to the creditor increases and the Creditors Control account
and the creditor’s account must be credited. Interest paid is an expense
and must be debited.
Example
01 Mager & Co. charged our overdue account, R1 200, with 5% interest
per annum for two months.
Calculation
R1 200 × 5% × __ 2   = R10
 12
The entries below show how to enter the interest.

JV3 01 Interest paid N7 10 00
Mager & Co. C1 10 00 10 00
(Interest charged at 5% per annum for
two months)
10 00
B12
Dr Creditors Control B12 Cr
2018
Oct 31 Journal credits GJ10 10 00

Example continued
Nominal account
Dr Interest Paid (OE/e) N7 Cr
2018
Oct 01 Mager & Co. GJ10 10 00
Creditors Ledger of FEM Traders

Mager & Co. C1
2018
Oct 01 Account rendered 1 200 00
Journal voucher no. 3 (interest paid) GJ10 10 00 1 210 00

– 10 Interest paid + 10 Creditors
– expense increased
Activity 10.1
Work with a partner. Discuss what needs to be done and then work on your
own to record your answers.
Required
1. Enter the transactions below in the General Journal of Pepler & Co. for
March 2020.
2. Post transactions from the General Journal to the following accounts in
the General Ledger: Debtors Control; Creditors Control; Discount Allowed;
Interest Received; Interest Paid (2 lines each).
3. Show the account of W Smith in the Debtors Ledger (balance on
1 March 2020, R345) and the account of SS Wholesalers in the Creditors
Ledger (balance on 1 March 2020, R1 067).

01 Cancel the discount on a dishonoured cheque from W Smith, R15.
03 Charge the overdue account of W Smith of R360 with 10% interest per
annum for three months.
14 SS Wholesalers charged the overdue account of Pepler & Co. with
R32 interest.

Activity 10.2
Below are the transactions of This ’n That Home Industries for April 2018.
Required
1. Enter the following transactions in the Cash Payments Journal with
columns for Bank and Debtors Control (2 lines), as well as in the General
Journal (15 lines).
2. Post transactions to the following ledger accounts (accounts do not have
to be balanced). Leave four lines open in each account:
Balances on 1 April 2018

General Journal
Debtors Control (B6) R2 890
Creditors Control (B7) R4 089
Discount Allowed (N5) R430
Interest Received (N6) R168
Interest Paid (N7) R273
Debtors Ledger
J Myburgh R240
H Steyn R110
Creditors Ledger
Adami Wholesalers R1 860

gAAp flash Transactions for April 2018
06 Debtor H Steyn’s cheque for R225, received during March 2018 in
Prudence principle: When a
debtor’s debt cannot be collected, it settlement of R250 on her account, was dishonoured by the bank,
can no longer be shown as an asset marked refer to drawer.
in the business’s books. 07 Charge H Steyn’s overdue account with 10% interest per annum for
three months.
12 Adami Wholesalers charged the overdue account of This ’n That Home
Industries with 10% interest per annum for two months.
23 J Myburgh’s account is already six months overdue. Charged his
account with 10% interest per annum for six months.
6. Writing off bad debts

A debtor is an asset to the business, since it is something that changes
into money when the debtor settles a debt. It sometimes happens that
the business cannot collect a debtor’s debt. Reasons for this could be that
debtors that are insolvent or cannot be traced. This debtor is then no
longer an asset to the business and the amount owed is now a loss.
It makes no sense to keep such debtors on the books of the business
and they must be removed from the accounting records. When this
happens, the debt is written off as irrecoverable.
The transaction takes place as follows:
• Debtors Control and the debtor’s account in the Debtors Ledger must
be credited, since the business must deduct it.
• The contra-entry is that Bad Debts must be debited. Bad debts is an
expense to the business, therefore owner’s equity decreases and the
account is debited.
example
01 A debtor, C Carelse, is insolvent and his account of R150 must be
written off as irrecoverable.
The entries below show how to write off a bad debt.

general Journal of feM Traders – october 2018 gJ10
JV4 01 Bad debts N10 150 00
C Carelse D2 150 00 150 00
(Account written off as irrecoverable)
150 00
B10

Example continued

2018
Nominal account
Dr Bad Debts (OE/e) N10 Cr
2018
Oct 01 C Carelse GJ10 150 00

C Carelse D2
2018 Account rendered
Oct 01 Journal voucher no. 4 (bad debts) GJ10 150 00 150 00
Notes
• From the example it is clear that writing off bad debts decreases the
debtor’s account.
• The Bad Debts account must be debited since it is an expense that
will decrease the owner’s equity.

– 150 Debtors – 150 Bad debts –
decreased expense
It happens sometimes that when a debtor is insolvent, all his assets

are sold and then part of his debts can be paid. In other words, the
business does not lose the whole amount, but only that part that still
cannot be paid.

Example
01 C Carelse, a debtor, is insolvent and his estate can pay 50c in the rand.
Issued receipt no. 010 for the amount and wrote off the rest
as irrecoverable.
50c in the rand: What does this mean?

It means that for every rand the debtor owes, he can only pay 50c.
His debt of R150 must thus be multiplied by R0,50 to determine how
much he can pay.
Calculation
R150 × 0,50 5 R75
The rest of the debt, R150 – R75 5 R75, must be written off as
irrecoverable.
The part for which cash was received is shown below.
Cash Receipts Journal of FEM Traders – October 2019 CRJ10
Doc. Day Details Fol. Analysis of Bank Debtors
no. Receipts Control
010 01 C Carelse D3 75 00 75 00 75 00
The entries below show how to write off the bad debts.
JV5 01 Bad debts N10 75 00
C Carelse D2 75 00 75 00
(Account written off as irrecoverable)
75 00
B10
2019
Oct 01 Bank CRJ10 75 00
31 Journal credits GJ10 75 00

Example continued
Nominal account
Dr Bad Debts (OE/e) N10 Cr
2019
Oct 01 C Carelse GJ10 75 00

C Carelse D2
2019 Account rendered 150 00
Oct 01 Receipt no. 010 CRJ10 75 00 75 00
Journal voucher no. 5 (bad debts) GJ10 75 00 0 00

– 150 Debtors – 75 Bad debts –
decreased expense
+ 75 Bank
increased
7. Bad debts recovered

It sometimes happens that the debt of a debtor that has been written off
as irrecoverable is later collected. The business therefore receives money
already written off as an expense from a debtor who has been removed
from the business’s books.
One entry is certain and that is that Bank is debited since money has
been received. What is the contra-entry? It is clear that the Debtors Control
cannot be credited, since this debtor has already been removed from the
books of the business. When this debtor was written off as irrecoverable,
his account was credited.
We therefore create a new account, Bad Debts Recovered, which will be
credited since it is an income for the business.
This transaction is therefore a cash transaction and must be entered in the
Cash Receipts Journal (CRJ).

Example
01 Received R100 from a debtor, E Erwee, whose account has previously
been written off as irrecoverable. Issued receipt no. 014.
The entries below show bad debts that are recovered.
Cash Receipts Journal of FEM Traders – October 2019 CRJ10

no. Receipts Amount Details Fol.
014 01 E Erwee 100 00 100 00 100 00 Bad debts recovered N10
100 00 100 00
B6

Dr Bank (A) B6 Cr
2019
Oct 31 Total receipts CRJ10 100 00
Nominal account
Dr Bad Debts Recovered (OE/i) N10 Cr
2019
Oct 01 Bank CRJ10 100 00

+ 100 Bank + 100 Bad debts
increased recovered –
Income

Activity 10.3
Required
1. Enter the transactions below in the following journals of Pepler & Co. for
March 2020:
• Cash Receipts Journal: Analysis of Receipts, Bank, Debtors Control,
Sundry accounts (4 lines each)
• General Journal (12 lines).
2. Post from the General Journal to the following accounts in the General
Ledger: Debtors Control (B6), Bank (B7), Bad Debts (N9), Bad Debts
Recovered (N10).
3. Show the account of D Malan in the Debtors Ledger (balance on
1 March 2020, R580).

16 Debtor C Tilsley has been missing for the last four months.
He appears to have moved overseas. Write off his debt of R197
as irrecoverable.
21 K Roux’s debt of R235 was written off as irrecoverable during
January 2020, since she could not be found. However, she posted a
cheque for the amount to the business. Issued receipt no. 34.
28 D Malan, who owes the business R580, was declared insolvent.
His estate paid 40 cents in the rand and the rest must be written off
as irrecoverable.
Activity 10.4
The transactions of CAT Traders for April 2018 appear below.
Required
1. Enter the transactions below in the following journals with columns:
• Cash Receipts Journal: Analysis of Receipts, Bank, Sales, Cost of Sales,
Debtors Control, Discount Allowed, Sundry accounts (7 lines each)
• Cash Payments Journal: Bank, Trading Stock, Debtors Control, Creditors
Control, Discount Received, Sundry accounts (7 lines each)
• General Journal (22 lines).

The number in brackets 2. Post to the following ledger accounts (accounts don’t need to be balanced):
indicates how many lines to
leave open for each account. Balances on 1 April 2018
general Ledger
Interest Received (n6) R112 (3)
Interest Paid (n7) R347 (3)
Bad Debts (n8) R850 (3)
Bad Debts Recovered (n9) R340 (3)
debtors Ledger:
S du Toit (D1) R660 (7)
D Collett (D2) R420 (4)
Creditors Ledger:
EC Traders (C1) R2 300 (3)

02 A debtor, J Holmes, who owes R256 cannot be found. He appears to
have moved. Write off his debt.
03 S du Toit settled her debt of R660 and the business allowed 5%
discount (receipt no. 67).
05 Debtor P Goosen paid R270 off on her account during March 2018
and the business allowed a further R30 discount. This transaction was
correctly entered and posted, but the cheque was dishonoured by the
bank, marked refer to drawer.
13 EC Traders charged the business’s overdue account with 12% interest
per annum for the past three months.
14 S du Toit’s cheque (see 3 April) was dishonoured by the bank, marked
refer to drawer.
15 Charged S du Toit’s overdue account with R12 interest.
22 Debtor D Collett was declared insolvent. The estate paid 30 cents in
the rand and the rest must be written off as irrecoverable.
25 A Viljoen’s debt was written off as irrecoverable in December 2017. He
has returned from overseas and has now paid R389 to the business.
Activity 10.5
In groups, discuss the effect of the transactions in Activity 10.4 on the

accounting equation. Copy the table below to record your decisions.

No. Effect Reason Effect Reason Effect Reason

8. Withdrawal of goods by the owner gAAp flash
It is important to realise that when
You learnt about drawings in Grade 9, but that was when the owner recording transactions between
withdrew money or used a business cheque to pay private expenses. Just the business and its owner, the
as owners can use cash from the business for their private expenses, they business entity concept is being
can also use any other asset or possession of the business for private use. applied. Remember that, according
to this GAAP principle, the financial
Let’s look at a few possibilities: affairs of a business must be kept
separate from the financial affairs
• The owner takes trading stock. of its owner.
The owner will always take goods at cost price. Trading Stock, an Therefore all transactions involving
asset, will decrease and must be credited. Remember, Drawings is the owner should be recorded in
either the Capital account or the
always debited, because it decreases the owner’s equity. Drawings account to maintain a
clear record of this separation.
• The owner takes a fixed asset.
The owner can also take a vehicle or equipment from the business for
personal use. The same principle as above will apply, since the asset
will decrease and must be credited, while Drawings is debited.
• The owner takes consumable goods.
The owner can also take stationery or packaging or any other similar
consumable goods for own use. This is, however, an expense account,
but it must still be credited, which indicates that the value of this
expense decreases and Drawings is once again debited.
• The owner makes a donation.
When the owner donates goods or consumable goods on behalf of
the business, the relevant account will be credited and Donations will
be debited.
However, if the owner donates goods belonging to the business
in his private capacity, the relevant account is still credited, but then
Drawings is debited once again.
• The owner returns goods that he has taken.
The owner can also return goods (assets or consumable goods) that he
has taken. The entry will be the opposite of the original transaction.

Below is a summary of the withdrawal of goods by the owner.
Transaction Journal Account Account A O L
debited credited
Owner took goods at cost price for own use GJ Drawings Trading Stock – – 0
Owner took equipment for own use GJ Drawings Equipment – – 0
Owner took stationery for own use GJ Drawings Stationery 0 –+ 0
Owner donated goods from trading stock GJ Donations Trading Stock – – 0
Owner donated stationery in his personal capacity GJ Drawings Stationery 0 –+ 0
Owner returned goods previously taken for own use GJ Trading stock Drawings + + 0
Owner drew a cheque for own use CPJ Drawings Bank – – 0
Owner paid private expenses with a business cheque CPJ Drawings Bank – – 0
Business bought merchandise on credit on behalf of the owner CJ Drawings Creditors Control 0 – +
Owner gave personal vehicle to the business GJ Vehicles Capital + + 0
Example
01 The owner took goods at cost price for own use, R550.
The owner donated stationery to the local primary school on behalf
of the business, R200.
The owner gave his personal computer for use in the office of the
business, R12 000.
In the General Journal:

JV6 01 Drawings B2 550
Trading stock B6 550
(Owner took goods at cost price for own use)
JV7 01 Donations N15 200
Stationery N16 200
(Owner donated stationery on behalf of the business)
JV8 01 Equipment B5 12 000
Capital B1 12 000
(Owner gave equipment)

Example continued

Dr Capital (OE) B1 Cr
2018
Oct 01 Equipment GJ10 12 000 00
Dr Drawings (OE) B2 Cr
2018
Oct 01 Trading stock GJ10 550 00
Dr Equipment (A) B5 Cr
2018
Oct 01 Capital GJ10 12 000 00

2018
Oct 01 Drawings GJ10 550 00
Nominal accounts
Dr Donations (OE/e) N15 Cr
2018
Oct 01 Stationery GJ10 200 00
Dr Stationery (OE/e) N16 Cr

2018
Oct 01 Donations GJ10 200 00

example continued

– 550 Trading stock – 550 Drawings
decreased by owner
– 200 Donations
– expense
+ 200 Stationery
– expense
decreased
+ 12 000 Equipment + 12 000 Capital
increased contribution
increased
Activity 10.6
1. Enter the following transactions in the General Journal of Pepler & Co. for
march 2020.
2. Post from the General Journal to the following accounts in the
General Ledger: Capital (2), Drawings (7), Equipment (2), Trading Stock (4),
Stationery (2) and Donations (2).
The number in brackets 3. Show the effect of the transactions on the accounting equation.
leave open for each account. Transactions for March 2020
02 The owner took stock for his own use, selling price R350 (profit mark-
up of 40% on cost price is used).
09 The owner donated blankets from stock to a disaster relief fund on
behalf of the business, R5 700.
14 The owner’s daughter needed stationery for school and she took
stationery worth R62 from the office stationery of the business.
18 The owner’s son plays soccer for the local club and in her private
capacity the owner donated refreshments from stock for a tournament,
R2 540.
19 The son returned stock that was not sold during the tournament, R310.
25 The owner gave a computer and other appliances to the business for
use in the office, R5 400.

Activity 10.7
The following information was taken from the books of Duzi Stores for
may 2018. open the following accounts in the General Ledger and use the
given information to complete the accounts.
Drawings (B2) R5 410 (5) The number in brackets

Trading Stock (B5) R36 000 (8) indicates how many lines to
Stationery (n5) R315 (3)
Discount Allowed (n6) R1 086 (3)
Discounts Received (n7) R1 554 (4)
(Balance only the Balance Sheet accounts.)
Cash Receipts Journal – May 2018 CRJ5

Bank Sales Cost of sales Debtors Discount Sundry
Control Allowed accounts
31 508 25 280 15 800 5 240 262 1 250
Cash payments Journal – May 2018 CpJ5

Bank Trading Debtors Creditors Discount Sundry
Stock Control Control Received accounts
31 584 18 830 630 9 310 466 3 280
debtors Journal dJ5 debtors Allowances Journal dAJ5

Sales Cost of Sales Debtors Allowances Cost of Sales
9 952 6 220 1 728 1 080
Creditors Journal CJ5

12 855 8 330 435 3 200 890
Creditors Allowances Journal CAJ3

965 630 115 – 220
general Journal gJ5

46 210 88 116

The following transactions must still be recorded in the General Journal before
entries are posted:
31 The owner took stock and donated it, in his private capacity, to his
daughter’s hockey team, cost price R578.
The owner took stationery for his own use, R56.
Debtor G Malan’s debt of R426 must be written off as irrecoverable.
The discount on a cheque from G Hlazo that was returned by the bank must
be cancelled, R18.
Charged the overdue account of G Hlazo with R14 interest.
Mondi Ltd charged the business’s overdue account with R21 interest.
9. Correction of errors
The General Journal is often used to correct errors. Remember that most
accounting processes nowadays are done by computer. If a transaction
is keyed in incorrectly, the computer will post it accordingly. The way to
correct it is with a journal entry.
These are examples of errors that can occur and how to correct them:
• An amount is posted to the correct side of the wrong account.
This account must be cancelled and the correct one recorded.
• An incorrect amount is posted to the correct account. The difference
must be recorded in the relevant account.
• An amount is posted to the wrong debtor’s/creditor’s account. The
incorrect entry must be cancelled and the correct entry recorded.
It is not possible to explain all the errors in the example. You will have
to read very carefully to identify an error and then make opposite or
supplementary entries to correct it.
Example
Transactions for October 2018
01 Stationery purchased for office use was incorrectly posted to the
Trading Stock account, R125.
Credit sales to H M Melck, R550, was incorrectly posted to the
account of R H Melck.
Credit purchases from Aztec, a creditor, R876, was incorrectly posted
to the credit side of Azure, a debtor.

Example continued
Let’s look at how to correct these errors.
Doc. Day Details Fol. Debit Credit Debtors control Creditors control
JV8 01 Stationery N15 125
Trading stock B6 125
(Correction of error)
JV9 01 H M Melck D6 550 550
R M Melck D7 550 550
JV10 01 Azure D8 876 876
Aztec C7 876 876
1 426 550 876
B8 B8 B10

2018
Oct 01 Stationery GJ10 125 00

2018 2018
Oct 31 Journal debits GJ10 1 426 00 Oct 31 Journal credits GJ10 550 00
Dr Creditors Control (L) B10 Cr

2018
Nominal account
Dr Stationery (OE/e) N15 Cr
2018
Oct 31 Trading stock GJ10 125 00

Activity 10.8
1. Enter the transactions below in the General Journal of Pepler & Co. for
march 2018.
2. Post entries from the General Journal to the following accounts in the
The number in brackets General Ledger: Equipment (2), Creditors Control (2), Trading Stock (2),
indicates how many lines to Stationery (2), Repairs (2). (The accounts need not be balanced.)
leave open for each account. Debtors Ledger: J Conradie (D1) (balance on 1 march, R740)
D J Conradie (D2) (balance on 1 march, R380)
n koch (D3) (balance on 1 march, R34).
Creditors Ledger: koch Ltd (C1) (balance on 1 march, R110)
Jakes Repairs (C2) (balance on 1 march, R650).

05 Stationery purchased for office use, R165, was incorrectly posted to the
Trading Stock account.
09 Trading stock purchased for R2 690 was recorded as equipment and
posted as such.
10 Credit sales to J Conradie for R380 was erroneously posted to the
account of D J Conradie.
15 Credit purchases from Koch Ltd, a creditor, for R876 was mistakenly
posted as a credit entry in debtor N Koch’s account.
21 On 23 February 2018 repairs were done to the equipment of the
business for R560. However, the transaction was recorded and posted
as follows:
Creditors Journal – february 2018

Doc. Day Creditor Fol. Creditors Repairs
no. Control
Jake’s Repairs C4 650 00 650 00
Activity 10.9
In groups, first discuss the transactions below, and then analyse them according
to the following columns.
general Ledger
No. Journal Source Account to Account to Amount
document debit credit

Transactions
1. Received R228 from T Xoseka in settlement of his account and allowed
him R12 discount.
2. T Xoseka’s cheque (see transaction no. 1) was dishonoured by the bank,
marked refer to drawer.
3. Charged T Xoseka’s overdue account of R240 with R24 interest.
4. PAN Brothers charged the business’s overdue account of R3 800 with
12% interest per annum for three months.
5. Wrote off D Dawn’s account of R256 as irrecoverable.
6. Debtor P Marais, who owes R560, was declared insolvent. The business
received 20 cents in the rand and the rest must be written off as irrecoverable.
7. Received R249 from G Malan, whose debt was previously written off
as irrecoverable.
8. The owner took stock with a cost price of R970 for own use.
9. The owner gave a secondhand vehicle to the business to use for delivery
purposes, R40 000.
10. Equipment purchased for R2 570 was accidentally recorded as trading stock.
11. The owner donated stock worth R875 to the local retirement home on
behalf of the business. However, this was recorded as drawings.
Activity 10.10
Use the transactions below and show the effect, with reasons, of the transactions
on the accounting equation.
1. The bank returned M Kriel’s cheque for R324, marked RD due to insufficient
funds. The cheque was to settle her account of R340.
2. Charged M Kriel’s overdue account with interest at 10% p.a. for three months.
3. Botes & Co. charged the business overdue account of R2 400 with interest of
5% per annum for four months.
4. Debtor J Dippenaar is insolvent and her account of R478 must be written off
as irrecoverable.
5. Debtor H du Toit owed R460 and was declared insolvent. Her insolvent
estate paid 40 cents in the rand and the business issued receipt no. 104.
Write off the rest as irrecoverable.
6. Debtor F Muller, whose debt was written off as irrecoverable in January
2013, now paid R210. Issued receipt no. 105.
7. The owner took goods at cost price, R256, for own use.
8. The owner donated trading stock worth R678 to the local children’s home
on behalf of the business.
9. The owner gave a secondhand truck worth R32 000 to the business as
capital contribution.
10. Stationery purchased for office use, R230, was recorded as trading stock.
11. Credit purchases from De Vries Ltd for R2 567 was mistakenly posted to the
account of De Villiers Ltd.

Case study 10.1
Katie Rossouw is a Matric learner at Klein Nederburg

Secondary. She recognised a need to supply
sandwiches to businesses and calls her business
Katie’s Sandwiches. She has an agreement with the
local bakery Munch-a-lot and the butchery Meat
Market to buy on credit. Some of her clients buy on
credit, but she then charges R2 more per sandwich. If
these people pay their debt within a week, she
returns the R2 as discount. She opened a cheque
account on 2 February 2019 with a capital
contribution of R500. Katie does not, however, take
Accounting as a subject and records all her transactions on a calendar.
She has asked you to help her.
1. Design a poster, which will be used as a cover for your case study, to
advertise Katie’s business, reflecting her products and prices.
2. Enter the transactions below in the following journals:
• Cash Receipts Journal with columns for: Analysis of Receipts, Bank, Sales,
• Cash Payments Journal with columns for: Bank, Trading Stock, Debtors
Control, Creditors Control, Discount Received and Sundry accounts
• Creditors Journal with columns for: Creditors Control, Trading Stock,
Stationery, Packaging and Sundry accounts
• General Journal
• Debtors Journal.
3. Rewrite the following rubric and paste it on the front of the case study.
Case study: Chapter 10 Name and surname:

Criteria Total marks out of 20:
Presentation Exceptional Neat Acceptable Untidy
4 2 1 0
Behaviour, attitude, Exceptional Good Acceptable Weak
cooperation in class 3 2 1 0
Cover design Exceptional Good Acceptable No effort
7 5 3 0
Accuracy 70%+ 50%–69% 35%–49% 0%–34%
6 4 2 0

February 2019
Mon 02 Tues 03 Wed 04 Thurs 05 Fri 06 Sat 07
Bought on credit: Bought an invoice Had posters printed Banked R80,40 for Credit sales to G Louw, Cash sales at sports
Bread from Munch- book and receipt book at Print Right, with cash sales for the R12,60 (invoice no. day, R161,46 (sold all
a-lot, R9,10 (inv. 1); on credit from Colours, products and prices, week (cost price, 01) (cost price, R7); the stock bought on
Ham, salami from R48. to advertise at the R40,10). K. Zondani, R15,80 6 February).
Meat Market, R24,30. businesses, R90 (cost price, R8,70).
Cash purchases from (cheque no. 02). Bought stock for cash
Fruit & Veg (cheque at Pick n Pay, R89,70.
no. 1.): tomatoes,
lettuce, etc. R22,40.
Bought on credit: Bank R205,38 cash Paid Munch-a-lot G Louw paid R10,60 Bank R317,34 for
Bread from Munch- from sales (cost price, R31,40 on the (R2 discount). cash sales (sold all
a-lot, R22,30; Ham, R97,70). Credit sales: account. K Zondani paid stock bought on
salami from Meat K. Zondani, R16,80 Paid Meat Market R28,60 by cheque 11 February).
Market, R46,20. Cash (cost price, R 9,30), R63,50 and received (R4 discount).
purchases from Fruit L. Nel R12,80 (cost R7 discount.
& Veg, tomatoes, price, R7,10 ). Purchased stock from
lettuce, etc. R45,60. Pick n Pay, R176,30.
Bought on credit: K Zondani’s cheque Bank R201,87 for Donated stock of Bank R207,54 Sales at Sports Day,
Bread from Munch- was dishonoured by cash sales (cost price, R89,40 to sister for cash sales R166,94. Used leftover
a-lot, R22,30; Ham, the bank because the R112,15). Purchased Marilyn for market (cost price, R115,30). stock for the family,
salami from Meat date was incorrect. stock from Pick n Pay, day at primary school. All stock bought on R32,47 (stock bought
Market, R34,25. Cash Paid R110 for a Pay-as- R204,70. Paid R40 to mom, 18 February was on 20 February).
purchases from Fruit you-go voucher for cell Mrs H Rossouw, for sold. Bought stock by
& Veg, tomatoes, phone to Vodacom. petrol for delivery of cheque from Fruit &
lettuce etc. R55,60. sandwiches. Veg, R124,80.
Paid Munch-a-lot, L Nel has moved and Purchased stock from Bought a Snackwich Bank R357,20 for cash
R22,30, and Meat has not paid his debt. Pick n Pay, R198,40. King to make the sales (all stock sold).
Market, R34,25. Write it off. snackwiches, on credit Bank statement (AB
from JJ Electrics, R165. Bank) shows bank
charges of R45,60
and interest received,
R6,40.

Chapter 11
Reconciliation of control accounts
and Debtors and Creditors Lists
• discuss internal control measures with regards to debtors
and creditors
• discuss procedures with regards to control accounts and
subsidiary ledgers
• compare control accounts with Debtors and Creditors Lists to ensure
good internal control and accuracy.
Key concepts
• Debtors Control account • Creditors Control account • Debtors Ledger
• Creditors Ledger • Debtors List • Creditors List • source documents
• journals • returns • bad debts • dishonoured cheques • credit sales
• credit purchases • discount • interest
Sam, Mr Naidoo says that his payment

for R4 500 will clear his account, but
I'm not so sure. Our record says he
still owes R4 650! Have you
reconciled his
account yet?
208 c h a p t e r 1 1 • R ec o n ciliati o n o f c o n tr o l acc o u n ts a n d debt o rs a n d credit o rs lists

1. Introduction
In Grade 9 and in previous chapters, you were introduced to the Debtors
Control and Creditors Control accounts in the General Ledger, as well
as to the Debtors Ledger and the Creditors Ledger, also known as the
subsidiary ledgers. In this chapter we are going to look at the purpose of
these accounts and ledgers, as well as at transactions, omissions and the
correction of errors that you have not previously done.
2. Internal control over debtors and creditors

It is very important that a business should have good control over their
debtors and creditors. A business with good control measures will have
better cash flow, entries in the business’s books will be correct and this
will prevent fraud. Internal control procedures were discussed on page 32.
3. Procedures with regards to control accounts

and subsidiary ledgers
• An individual account is kept for each debtor in the Debtors Ledger
and each creditor in the Creditors Ledger.
• A summary of all transactions with debtors and creditors are made in
the control accounts; that is, the Debtors Control and Creditors Control
accounts in the General Ledger.
• A Debtors List is compiled from the balances of the debtors’
individual accounts in the Debtors Ledger. To ensure these balances
are correct, the total of the Debtors List is then compared to the
balance of the Debtors Control account in the General Ledger. The
same procedure applies to creditors.
The diagram on the next page explain these procedures:
R ec o n ciliati o n o f c o n tr o l acc o u n ts a n d debt o rs a n d credit o rs lists • c h a p t e r 1 1 209

Transactions with debtors
Credit sales Duplicate invoice DJ
Payment by debtor and discount allowed Duplicate receipt CRJ
Returns by debtor Credit note DAJ
Transactions with debtors and Dishonoured cheque Bank statement CPJ
creditors take place on a daily Interest received, discount cancelled, bad debts Journal voucher GJ
basis. These are recorded on
Transactions with creditors
source documents and then in the
subsidiary journals. Credit purchases Original invoice CJ
Payment to creditor and discount received Cheque counterfoil CPJ Daily
Returns to creditor Debit note CAJ
Interest paid, correction of errors Journal voucher GJ
Subsidiary Journals
Posting from the subsidiary journals
ledger posted
to the individual accounts in the
Debtors and Creditors Ledgers Debtors Ledger DJ, DAJ, CRJ, CPJ, GJ Daily
takes place on a daily basis to ensure
that accounts are kept up to date. Creditors Ledger CJ, CAJ, CPJ, GJ
Posting to the control accounts in Control Journals

the General Ledger takes place on account posted
a monthly basis, as it is a summary Debtors Control DJ, DAJ, CRJ, CPJ, GJ Monthly
of all the debtors’ and creditors’
transactions for that month. Creditors Control CJ, CAJ, CPJ, GJ
Compile a Debtors List and Creditors List at the end of each month, using the balances in the subsidiary ledgers. Compare the list totals
Monthly
with the balances in the Debtors Control and Creditors Control accounts in the General Ledger.
Activity 11.1
The Debtors Ledger and Creditors Ledger of Morgan Bay Traders are
provided below.
Required
1. Use the information in the Debtors Ledger to prepare the Debtors Control
2. Use the information in the Creditors Ledger to prepare the Creditors Control
3. Compile a Debtors List and a Creditors List as at 31 May 2018.

Information
Debtors Ledger for Morgan Bay Traders
T Naidoo D1
2018
May 1 Account rendered 2 230 00
3 Interest on overdue account GJ 43 00 2 273 00
16 Receipt CRJ 1 200 00 1 073 00
31 Bad debts GJ 1 073 00 – –
M de Villiers D2
2018
5 Invoice DJ 987 00 2 654 00
7 Credit note DAJ 230 00 2 424 00
15 Receipt CRJ 1 500 00 924 00
Discount allowed CRJ 167 00 757 00
21 Cheque dishonoured CPJ 1 500 00 2 257 00
Discount cancelled GJ 167 00 2 424 00
P Davin D3
2018
May 1 Account rendered (cr) 180 00
12 Invoice DJ 2 340 00 2 160 00
13 Credit note DAJ 210 00 1 950 00
Note
• P Davin returned goods to the business during the previous month
after she settled her account, so she has a credit opening balance. This
should be subtracted from the other balances to calculate the balance
of the Debtors Control account at the beginning of the month.

Creditors Ledger for Morgan Bay Traders
Abrahams Dealers C1
2018
12 Invoice CJ 1 230 00 10 195 00
13 Interest on overdue account GJ 124 00 10 319 00
Collett Suppliers C2
2018
9 Invoice CJ 3 447 00 7 439 00
11 Debit note CAJ 450 00 6 989 00
28 Cheque counterfoil CPJ 2 000 00 4 989 00
Botha & Co. C3

2018
5 Cheque counterfoil CPJ 4 500 00 4 721 00
Discount received CPJ 250 00 4 471 00
overcast 4. Comparing the control accounts to

To ‘cast’ is too add, so too much the Debtors and Creditors Lists and
was added.
correcting errors
undercast As mentioned earlier, the totals of the Debtors and Creditors Lists are
Too little was added. compared to the balances of the Debtors Control and Creditors Control
accounts in the General Ledger at the end of each month. If there are
differences, an investigation will be done and all errors and omissions will
be corrected.
The following page shows a list of errors and omissions and how each
one should be treated.

Error/Omission Example Correction
An invoice issued to debtor D Zama was Both the control account and the Debtors List will be incorrect.
overcast by R240 and entered as such in Deduct R240 from Sales on the debit side of the Debtors Control account
Errors on source the DJ. and deduct R240 from the account of D Zama in the Debtors List.
documents or in A credit note issued to debtor S Sindiwe was Both the control account and the Debtors List will be incorrect.
journal entries entered as R200 instead of R150 in the DAJ. Deduct R50 from Debtors Allowances on the credit side of the
Debtors Control account and add R50 to the account of S Sindiwe in the
Debtors List.
An amount of R1 240 in the CJ was posted as Only the account on the Creditors List is incorrect, not the Creditors
R1 420 to the account of Ranjit Traders – it is Control account. The difference is R1 420 – 1 240 = R180. So R180 should
the correct account, but incorrect amount. be deducted from the account of Ranjit Traders in the Creditors List.
A debit note of R210 issued to Lomu Suppliers Only the accounts of Lomu Suppliers and Le Roux Suppliers in the
Incorrect posting
was entered correctly in the CAJ, but posted Creditors List are incorrect. R210 was incorrectly deducted from the
to the account of a
to the account of Le Roux Suppliers in the account of Le Roux Suppliers. Correct the mistake by adding R210 to Le
debtor or creditor
Creditors Ledger – the amount is correct but Roux Suppliers and deducting R210 from Lomu Suppliers in the Creditors
the account is incorrect. List. Even though the Creditors Control account is correct, the correction
will be made in the GJ, which will have an influence on journal debits and
journal credits.
A column total in The sales column in the DJ was undercast Only the Debtors Control account in the General Ledger is incorrect.
one of the subsidiary by R200. Correct the error by adding R200 to the Sales amount on the debit side of
journals was the Debtors Control account. The Debtors List is correct.
incorrectly added.
Example
The Debtors Control account and the Debtors List of Westwood
Traders do not balance. The debtors clerk was asked to check source
documents, journal entries and ledgers to find the mistakes and to
reconcile the Debtors Control account to the Debtors List.
General Ledger of Westwood Traders

Dr Debtors Control Cr
2015 2015
May 1 Balance b/d 10 530 00 May 31 Bank and discount allowed CRJ 16 104 00
31 Sales DJ 17 318 00 Debtors allowances DAJ 100 00
Bank CPJ 120 00 Journal credits GJ 70 00
Journal debits GJ 250 00 Balance c/d 11 944 00
28 218 00 28 218 00
2015
Jun 1 Balance b/d 11 944 00

Example continued
Debtors List on 31 May 2015

Debtor Debit Credit
D Anthony 2 170 00
M Achmat 1 900 00
T Behardien 100 00
J Kaoma 8 505 00
D van der Linde – –
A Shin – –
TOTAL 12 575 00 100 00
The following errors and omissions were discovered upon investigation:

1. The account of D Anthony was overcast by R100.
2. The total of the Debtors Allowances Journal was undercast by R10.
3. An invoice issued to D Anthony for R1 054 was correctly entered in
the Debtors Journal, but was posted to his account as R1 045.
4. An invoice for R400 issued to D van der Linde was incorrectly
posted to the account of J Kaoma.
5. A receipt issued to M Achmat for R830 was correct in the Cash
Receipts Journal, but was posted as R380 to his account.
6. The account of M Achmat must still be charged with R45 interest.
7. The bank returned A Shin’s dishonoured cheque marked RD. This
cheque was for R300 and R30 discount was allowed to him. This
entry has not yet been made.
8. The credit balance on the account of T Behardien occurred when he
paid his account which had been written off as irrecoverable. This
was entered in the Debtors control column in the CRJ by mistake.
Solution
General Ledger of Westwood Traders
2015 2015 Bank and discount allowed
May 1 Balance b/d 10 530 00 May 31 (16 104 – 100) CRJ 16 004 00
31 Sales DJ 17 318 00 Debtors allowances (100 + 10) DAJ 110 00
Bank (120 + 300) CPJ 420 00 Journal credits GJ 70 00
Journal debits (250 + 45 + 30) GJ 325 00 Balance c/d 12 409 00
28 593 00 28 593 00
2015
Jun 31 Balance b/d 12 409 00

Example continued
Debtors List on 31 May 2015

Debtor Debit Credit
D Anthony (2 170 – 100 + 9) 2 079 00
M Achmat (1 900 – 450 + 45) 1 495 00
T Behardien – –
J Kaoma (8 505 – 400) 8 105 00
D van der Linde 400 00
A Shin 330 00
TOTAL 12 409 00 – –
Activity 11.2
The information on the following page was taken from the books of Nika Traders.

Required
1. Draw up an adjusted Debtors Control account on 31 August 2016, after the
errors and omissions have been taken into account.
2. Calculate the correct total of the Debtors List. Show all accounts.
3. List four main points for good internal control over debtors.
General Ledger of Nika Traders

2016 2016
Aug 1 Balance b/d 47 280 00 Aug 31 Bank and discount allowed CRJ 128 754 00
Bank CPJ 135 00 Journal credits GJ 288 00
183 252 00 183 252 00
2016
Sep 1 Balance b/d 53 645 00
Debtors List on 31 August 2016

Debtor Debit Credit
C Naidoo 8 980 00
S Godlo 9 955 00
W Mbeki 9 101 00
V Buhrman 6 230 00
V Beukman 8 691 00
H Labuschagne 7 202 00
T Viljoen 90 00
TOTAL 50 159 00 90 00
An investigation was ordered because the total of the Debtors List did not
agree with the balance on the Debtors Control account. The following errors and
omissions were brought to light:
1. C Naidoo’s cheque for R135 was returned by the bank marked “insufficient
funds”. Naidoo has previously settled his debt of R150 with this cheque. No
entry has been made to record the difference as yet.
2. H Henderson, a debtor, is insolvent and the balance of R180 on his account
must be written off as a bad debt. Although no entry has been made of this,
Henderson’s balance does not appear on the Debtors List.
3. The Debtors Journal was overcast by R3 000.
4. An entry of R234 in the Debtors Allowances Journal was posted to debtor
W Mbeki’s account as R534 by mistake.

5. A credit note for R252 in respect of goods returned by V Buhrman was
recorded in the Debtors Allowances Journal correctly, but posted to the
account of V Beukman by mistake.
6. A debtor, T Viljoen, with a credit balance of R90, must be carried over to the
Creditors Ledger.
7. S Godlo’s account was undercast by R100.
8. A receipt for R544 issued to H Labuschagne in payment of her account,
but was incorrectly recorded in the CRJ as R455 and posted to the ledgers
as such.
Activity 11.3
At the end of May 2016, the bookkeeper of MacRoos Traders pencil-totalled

the journals and drew up a Debtors List. However, he has since picked up some
errors and omissions that still need to be corrected.
Required
Prepare the following:
1. The Debtors Control account as it would have appeared had the extra
information been correctly recorded in the relevant journal in the first place.
Folios must be shown and amounts and additions should be shown in
brackets in order to earn partial marks.
2. The correct Debtors List as at 31 May 2016.
Information
1. Balance on 1 May 2016: Debtors Control, R 20 257
2. Before taking into account the errors and omissions listed below, the
following provisional totals were extracted from the journals for May 2016:

Bank R464 000 00
Debtors Control: Receipts R110 400 00
Debtors Control: Discount Allowed R4 264 00
Sales R304 000 00
Cost of Sales R190 000 00
Sundry accounts R49 600 00

Bank R448 000 00
Creditors Control: Payments R100 000 00
Creditors Control: Discount Received R1 920 00
Trading Stock R332 000 00
Sundry accounts R15 900 00
Debtors Journal
Sales R122 760 00
Cost of Sales R76 720 00
Debtors Allowance Journal

Debtors Allowances R9 280 00
Cost of Sales Allowances R5 800 00
General Journal
Debtors Control: Debit R418 00
Debtors Control: Credit R140 00
3. Debtors List on 31 May 2016 (before the adjustments were taken

into account):
Debtor Debit Credit

J Kotze 6 486 00
C Du Toit 5 864 00
R Hewitt 1 968 00
AM Suppliers 5 680 00
B Basson 561 00
A Muller 400 00
4. Errors and omissions were noticed and still need to be corrected in the
appropriate journal before posting:
• The Debtors Receipts column in the Cash Receipts Journal was overcast
by R104.
• The bank returned a cheque for R388 marked RD, which had originally
been received from R Hewitt in payment of his debt of R400. No entry
was made of this.
• A credit note for R200 given to J Kotze for goods he returned has
incorrectly been recorded in the journal and the Debtors Ledger as a
sale of goods bought by him.

• A receipt issued to C du Toit for R1 631 was recorded correctly in the
Cash Receipts Journal but was posted to his account as R1 136.
• An invoice issued to B Basson was incorrectly posted to his account as
R998 instead of R889.
• The sales assistant wrote R1 120 instead of R2 120 on an invoice issued
to A Muller for goods that he bought during May.
• AM Suppliers is also a creditor of MacRoos Traders. Their balance of
R1 300 (CR) in their account in the Creditors Ledger must be transferred
to their account in the Debtors Ledger.
• Stock sold on credit to R Hewitt for R670 has been wrongly posted to the
account of J Kotze.
Activity 11.4
The net total of the Creditors List, extracted from the Creditors Ledger of Latief
Traders on 30 September 2019, did not correspond with the balance of their
Creditors Control account:
Required
Take into account all the information provided in order to reconstruct the
following, showing how they would have appeared if the errors and omissions
had not occurred.
1. The correct Creditors Control account
2. The correct Creditors List
3. The owner of Latief Traders is concerned that the bookkeeper could be
defrauding the business through the creditors system. List two of the
internal control procedures that must be applied in a business to maintain
control over creditors.
Information
1. On 1 September 2019 the Creditors Control account has a
balance of R19 017.
2. On 30 September the following amounts were posted to the
Creditors Control account:
• Total of the Creditors Journal R64 050
• Total of the Creditors Allowances Journal R10 662
• Totals of the Cash Payments Journal:
Payments to creditors R45 300
Discount received from creditors R2 520
• Totals of the General Journal:
Debits R5 280
Credits R1 950

3. Creditors List on 30 September 2019:
Debit Credit
Welsh Stores 8 665 00
Loubser Stores 2 443 00
Lawrence Traders 8 997 00
CJ Motors 4 460 00
Mbekwa Traders 350 00
TOTAL 350 00 29 881 00
4. The following errors and omissions appeared:

• An invoice for R2 700 received from Loubser Stores was posted to the
account of Lawrence Traders in the Creditors Ledger.
• Latief Traders decided to transfer the account of Mbekwa
Traders to the Debtors Ledger. No entry has been made in the
General Journal.
• An invoice for R3 600 for goods bought on account from Welsh Stores
was incorrectly entered in the Creditors Journal as R6 300.
• Vehicle parts to the value of R1 450 were returned to CJ Motors. This was
correctly recorded in the Creditors Allowances Journal, but when posted
to the account of CJ Motors it was posted as a credit purchase.
• The total of the Creditors Journal was overcast by R60.
• Latief Traders buys goods from and sells goods to Welsh Stores. The
debit balance of R300 on Welsh Stores’ account in the Debtors Ledger
must be transferred to their account in the Creditors Ledger. No entry
has been made in the books.
Activity 11.5
1. The owner of Bergriver Traders is concerned that the bookkeeper could be

defrauding the business through the creditors system.
List two of the internal control procedures that must be applied in a
business to maintain control over creditors.
2. Calculate the correct balance for the Creditors Control account in the General
Ledger. Show all calculations.
3. Draw up an adjusted Creditors List, after the errors and omissions have been
taken into account.

Bergriver Traders
Reconciliation of the Creditors Control account and the Creditors Ledger
on 31 August 2018
R
Incorrect balance according to the Creditors Control account 16 389 00
Balances according to the Creditors Ledger

A de Jongh & Co. 2 150 00
Dreyer Ltd 6 980 00
Theron CC 5 400 00
Marais Distributors 2 887 00
17 417 00
Errors and omissions

1. An invoice for R780, received from Marais Distributors, was correctly entered
in the CJ, but incorrectly posted to their account as R708.
2. Theron CC’s account was incorrectly balanced. The balance should be
R4 500 and not R5 400.
3. A cheque for R3 240, issued to Dreyer Ltd in part payment of the account,
was not entered in the CPJ at all. Discount of R360 was received for
prompt payment.
4. The total of the Creditors Control column of the CAJ was overcast by R200.
5. A debit note of R730, issued to A de Jongh & Co. for goods returned, has not
been entered at all.
Activity 11.6
An inexperienced bookkeeper of King Traders asks you to help him with

the following problem. The balance of the Debtors Control account on
31 August 2017 is R15 030, whereas the total of the Debtors List is R14 947.
While checking his books, you found a number of errors and omissions.
Required
Determine whether all the errors and omissions have been found by
determining whether the balance of the Debtors Control account and the total
of the Debtors List agree after the errors and omissions are taken into account.
Use the tables below to do your calculations.
No. Debtors Control Debtors List

Debit Credit Debit Credit

1. The total of the Sales column in the Debtors Journal was overcast by R20.
2. A sales transaction for R600 was entered in the Debtors Journal but was not
posted to the debtor’s account.
3. The credit balance of R102 on a debtor’s account was entered as a debit
balance in the list of balances of debtors.
4. A cheque for R440 was received from a debtor on 12 August 2017 in
settlement of his debt of R464 and was deposited the following day. On
15 August, the cheque was returned by the bank marked RD. No entry was
made on 15 August or since that date.
5. The total of the Debtors Allowances column in the DAJ is R648, but was
posted as R684.
6. An amount of R90 was posted from the Debtors Allowance Journal to the
debit side of the account of the debtor concerned.
7. Debtor R Perry was charged 10% per annum interest for three months on his
debt of R600. An entry was made directly on R Perry’s account, but no other
entry was made.
8. A receipt for R640 was issued to debtor E Potgieter. The amount was entered
as R460 in the subsidiary journal concerned and posted as such.
The following two accounts of Mgluwa Traders were drawn up by an

inexperienced bookkeeper on 30 November 2014.
Required
1. Take the two control accounts as well as the additional information into
consideration and draw up the correct control accounts. (28)
2. Calculate the correct total for the Debtors and Creditors Lists. The opening
balances were verified as correct. (12)
2014 2014
Nov 1 Balance b/d 42 300 00 Nov 31 Credit sales DJ 121 400 00
30 Creditors allowances CAJ 2 350 00 Bank (dishonoured cheques) CPJ 430 00
Bank (total of Debtors column) CRJ 98 430 00
Cash sales CRJ 76 400 00
Bad debts GJ 900 00 Balance c/d 98 550 00
220 380 00 220 380 00
Dec 1 Balance b/d 98 550 00

Dr Creditors Control Cr
2014 2014
Nov 30 Purchases CJ 142 890 00 Nov 1 Balance b/d 67 400 00
30 Returns DAJ 6 300 00
Discount column CRJ 2 340 00
Balance c/d 66 710 00 Bank ( total of creditors column) CPJ 133 560 00
209 600 00 209 600 00
Dec 1 Balance b/d 66 710 00
In addition to the errors the bookkeeper made in the control accounts, an
investigation revealed the following:
• The total of the Debtors List on 30 November 2014 according to the Debtors
Ledger was R59 340.
• The total of the Creditors List on 30 November 2014 according to the
Creditors Ledger was R74 295.
• An amount of R1 721 the Creditors Journal was incorrectly posted to the
account of Droomer & Co. as R127.
• The Creditors Journal was overcast by R40.
• A credit note for R200 was issued to L Brink in respect of merchandise
returned by her, but no entry had as yet been made.
• The total debtors’ receipts of R98 430 included an amount of R120 recovered
from a debtor T Malan, whose account had been written off in the previous
financial year.
• Debtor L Mans still has to be charged R89 interest on his overdue account.
• An entry in respect of sales returns of R360 was correctly entered in the
Debtors Allowances Journal but was posted to the debit side of debtor
A Kleynhans’s account by mistake.

Chapter 12
Combined bookkeeping activities
• identify the unique transactions of a sole trader
• determine which source documents are used for which transactions
• know into which subsidiary journals the various transactions
are entered
• know how to enter opening balances into the ledger accounts
• post from the subsidiary journals to the General Ledger, Debtors
Ledger and Creditors Ledger
• understand the double-entry principle
• draw up a Trial Balance
• understand the accounting cycle
• complete the accounting equation.
This is a consolidation chapter that reinforces all the work done in the
previous chapters. You can use this chapter as extra practice before tests
and examinations. Ask your teacher to either mark your work once you
have completed a question or to make the answers available to you.
It is important to know and understand the bookkeeping process,
since it forms the foundation for further study in Accounting.
224 c h a p t e r 1 2 • C ombined bookkeeping acti v ities

Activity 12.1 source documents, journals, ledgers and the
Trial Balance
R Warren is the owner of Dizzy Daizy nursery. The following balances and totals
appeared in the books of the business on 1 August 2020.
general Ledger debtors Ledger

Capital (B1) R43 642 (4) k Joubert (D1) R1 648 The number in brackets
Drawings (B2) R8 630 (5) L Truter (D2) R780 indicates how many lines to
Vehicles (B3) R40 000 (4) D Conradie (D3) R560
Equipment (B4) R9 630 (6)
Trading Stock (B5) R13 790 (9) Creditors Ledger
Debtors Control (B6) R2 988 (7) George Hardware (C1) R1 460
Bank (B7) R5 670 (5) Forest Wholesalers(C2) R4 230
Petty Cash (B8) R72 (6) DJ Printers (C3) R654
Loan: XY Bank (B10) R20 000 (5)
Sales (n1) R46 200 (5)
Cost of Sales (n2) R28 875 (6)
Debtors Allowances (n3) R560 (4)
Discount Received (n4) R1 340 (4)
Wages (n8) R2 400 (4)
Telephone (n9) R670 (4)
Water and Electricity (n10) R789 (4)
Insurance (n11) R440 (4)
Stationery (n12) R263 (6)
Bank Charges (n13) R217 (4)
Interest on Loan (n14) R1 600 (4)
Interest on Current Account (n16) R200 (4)
Bad Debts Recovered (n17) R112 (4)
Advertising (n18) R0 (2)
ComBInED BookkEEPInG AC TIVITIES • chapter 12 225

1. Enter the transactions in the following subsidiary journals:
• Cash Payments Journal with columns for Bank, Trading Stock,
Wages, Debtors Control, Creditors Control, Discount Received and
Sundry accounts (18)
• Cash Receipts Journal with columns for Analysis of Receipts, Bank,
Sales, Cost of Sales, Debtors Control, Discount Allowed and Sundry
accounts (11)
• Creditors Journal and Creditors Allowances Journal with columns for
Creditors Control, Trading Stock, Stationery, Equipment and Sundry
accounts (7 each)
• Debtors Journal and Debtors Allowances Journal (5 each)
• Petty Cash Journal with columns for Petty Cash, Trading Stock,
Stationery and Sundry accounts (5)
• General Journal (23).
2. Enter the balances in the correct ledgers and post the journals to the
respective ledgers.
3. Draw up the Trial Balance.
Notes
• Folio numbers and document numbers must be used.
• A profit mark-up of 60% on the cost price is used.
Invoices received from suppliers
Day Doc. no.
04 112 Forest Wholesalers Plants, fertilisers and so on R3 890, less 20%
trade discount
13 113 George Hardware Equipment, R1 867
23 114 Forest Wholesalers Merchandise of R4 220, subject to 20% trade
discount, and equipment, R2 334
28 115 DJ Printers Stationery, R230, and posters for advertising
campaign, R1 450
Debit notes issued

Day Doc. no.
06 56 Forest Wholesalers Trading stock of R504, after the trade discount
had been deducted
16 57 George Hardware Overcharge on invoice for equipment, R334
29 58 DJ Printers Incorrect printing on stationery, R107
Invoices issued to customers

Day Doc. no.
02 104 D Conradie R480
15 105 K Joubert R896
24 106 E Wilken R1 032

Credit notes issued
Day Doc. no.
17 23 K Joubert R88, goods returned
25 24 E Wilken R72, plants damaged
Receipts issued
Day Doc. no.
02 144 L Truter R741, in settlement of account
08 145 J Jacobs R365, in settlement of account that was
previously written off as irrecoverable
10 146 K Joubert R1 566, in settlement of account as at 1 August
29 147 D Conradie Settled full account, R1 052
Cash register rolls

Day
02 R6 736
08 R8 368
10 R3 632
27 R6 848
Petty cash vouchers

Day Doc. no.
05 32 Milk Stores Stock, R88
19 33 Makro Printer paper and pens, R62
25 34 Wages Paid casual labour for day, R40
Cheque counterfoils
Day Doc. no.
01 188 Cash Restore petty cash imprest, R200
04 189 George Hardware In settlement of account on 1 August; the
business received 5% discount
06 190 Forest Wholesalers R4 019 in settlement of account
14 191 Cash R6 400 for wages and R180 for fuel for the
owner’s car
15 192 Municipality R569, water and electricity
16 193 Piet’s Farm R6 887 for merchandise
17 194 JJ the Handyman R3 626 for installation of display shelves
20 195 Cash R6 400 for wages
21 196 Telkom R621 for telephone account
27 197 DJ Printers Paid the full account, R670
C o m bi n ed b o o k k eepi n g activities • c h a p t e r 1 2 227

Bank statement
The bank statement received on 31 August showed the following items:
• debits
Stop order by XY Bank for an instalment on the loan, R2 000, as well as
R250 interest
Stop order by Allsure Insurers for the business insurance of R540
Bank charges of R320
Debtor L Truter’s cheque was dishonoured by the bank due to insufficient
funds (see 2 August).
• Credits
Interest, R223
other information
01 The owner gave a secondhand truck to the business for delivery. The vehicle
was valued at R50 000.
05 The owner's wife took plants worth R560 for own use.
09 DJ Printers charged the business overdue account with R16 interest.
16 Charged D Conradie’s overdue account with R12 interest.
31 Debtor L Truter was declared insolvent. Write off the account as
irrecoverable.
Stationery purchased for the business was accidentally recorded as
trading stock, R210.
Activity 12.2 subsidiary journals only
Enter the transactions of GIm Traders for the month of June in the following
subsidiary books:
The number in brackets
• Cash Receipts Journal with columns for Analysis of Receipts, Bank, Sales, Cost
indicates how many lines to of Sales, Debtors Control, Discount Allowed and Sundry accounts (16)
leave open for each account. • Cash Payments Journal with columns for Bank, Trading Stock, Wages,
Debtors Control, Creditors Control, Discount Received and Sundry
accounts (19)
• Debtors Journal (4)
• Debtors Allowances Journal (4)
Stationery, Packaging and Sundry accounts (8)
• Creditors Allowances Journal with columns for Creditors Control,
Trading Stock, Stationery, Packaging and Sundry accounts (6)
• Petty Cash Journal with columns for Petty Cash, Trading Stock, Stationery
and Sundry accounts (7)
• General Journal.
228 chapter 12 • COMBINED BOOKKEEPING AC TIvITIES

The business uses a profit mark-up of 50% on cost price.
The following list of balances appeared in the Debtors and Creditors Lists on
31 May 2018:
List of debtors’ balances List of creditors’ balances
K Koen R3 200 AB Traders R4 300
S Smit R1 800 XYZ Suppliers R850
A Arp R2 760 MB Ltd R980
F Field R2 400
Transactions for June 2018

01 Received a credit invoice (renumbered 231) from AB Traders for pencils
and pens, R280, and goods, R4 310.
Restored the petty cash imprest amount by cashing cheque no. 83
for R120.
02 Received an account from H Herbst for repairs to the vehicle and paid
by cheque, R1 200.
A cheque received from G Vorster during May was dishonoured by the
bank, R1 500. He received R100 discount on the payment.
04 Cash sales according to cash register, R3 480.
Received R1 650 from S Smit in settlement of his account to date.
(Receipt no. 173 was issued.)
05 A cheque received from P Visagie during April, R450, was incorrectly
credited to the account of P Visser.
07 Drew a cash cheque for cash float, R120, and to pay the owner’s
telephone account of R612.
Paid R2 000 by cheque to AB Traders and received their receipt which
indicated that R100 discount was given.
Bought stock from petty cash, R75 (voucher no. 57).
08 Issued debit note no. 98 to AB Traders for damaged items returned:
goods, R125, and pens, R16.
Bought goods on account from DP Suppliers, R4 800, with terms less
10% trade discount and 5% cash discount if paid within 30 days.
09 Issued a receipt to P Langenhoven for rent paid for the month, R1 000.
Bought an office chair for R180, merchandise for R2 150 and
stationery for R60 as per invoice A336 from Allsorts.
10 Received R3 000 from K Koen in settlement of his account as at
1 June.
Received a credit note from Allsorts, since they omitted to give 10%
trade discount on the purchase on 9 June (on trading stock).
11 Received a cheque from AB Bank for interest on the fixed deposit of
R15 000 at 5% per annum for the past six months.
Drew a cash cheque and paid for merchandise, R1 800, and wages, R1 150.
Bought tea, coffee, sugar (consumables) using petty cash, R92.

12 Paid R300 by cheque to Van Services for delivering merchandise
bought on 11 June to the storeroom.
Paid XYZ Suppliers by cheque in settlement of our account as at
1 June after R30 discount was deducted.
13 Returned stationery, not according to the order, to Allsorts, R13.
14 Sold goods as per invoice no. 58 to S Smit, R2 700.
Stationery bought on credit from AB Traders for R85 was incorrectly
recorded as packaging and posted as such.
16 Sold merchandise on credit to K Koen, R1 230.
Paid the insurance premium by cheque to Insure, R200.
Bought stationery using petty cash, R85.
17 The owner donated goods from stock to the Red Cross as a personal
donation, selling price, R120.
Repairs were done to the buildings in March for R6 000. The
contractors were paid by cheque, but the amount was accidentally
posted to the Land and Buildings account.
19 Sent a credit note to K Koen for goods returned, R180.
The owner took a computer that was used in the office for own use,
cost price, R2 500.
20 S Smith claimed an allowance for destroyed goods. A credit note was
issued to him, R135.
Sales as per cash register, R5 130.
Invested R10 000 at RSA Bank for ten years at 16% interest per
annum. Issued a cheque for the amount.
21 Bought printer paper for R211 and packaging material (in which to
wrap stock) for R163 on credit from Waltons.
Bought merchandise on credit from AB Traders for R5 198.
23 Rent for the owner’s private home was paid by cheque to All Prop but
was posted to the rent expense account, R5 800. Correct the error.
The owner took stationery to use in his office, cost price, R80, but
Drawings was accidentally debited.
Paid MJ Transport from petty cash for delivery of trading stock to
premises, R120.
24 Received a cheque from A Arp for R1 360. The rest of his debt must be
written off as irrecoverable.
Received a credit note from Waltons for R11, because the price of the
printer paper was incorrectly calculated.
26 Bought a vehicle on credit from Toyota SA, R155 800.
R Roberts, whose debt was written off as irrecoverable last month,
apologised for disappearing without paying his debt of R175. He paid
the debt in full with cash.
27 Received a cheque from K Koen for R1 000 and allowed him
R50 discount.
Sent a cheque to DP Suppliers in settlement of account (see 8 June).

28 Received a cheque from S Smith in settlement of his account after
R130 discount was allowed.
Paid for postage from petty cash, R15.
30 Charged F Field’s overdue account with 20% interest per annum for
three months.
According to the loan agreement, R4 000 must be paid off on the loan.
Issued a cheque for the instalment plus interest on the loan at 18% p.a.
for the past six months. The loan from Top Bank is currently R10 000.
Paid the secretary, Mrs Poggenpoel, her salary by cheque, R12 800.
G Vorster was declared insolvent (see 2 June). Received a dividend of
20c in the rand from his insolvent estate and wrote the balance off
as irrecoverable.
Received a bank statement from AB Bank and saw that the bank has
debited the current banking account with the following amounts:
• interest R17
• service fees R39
• cheque book fee R13
• deposit book fee R20
Received R1 400 from A Arp whose account had been written off as
irrecoverable on the 24th. Issued a receipt.
A creditor, MB Ltd, charged the overdue account of the business with
R34 interest.
Activity 12.3 general Ledger
on 30 September 2018 the information given below appeared in the books of

Vuyo Traders:
Balances on 1 september 2018

Bank (overdraft) R4 930
Petty Cash R400 (imprest amount)
note
• Goods are sold to give a profit of 25% on cost price.
Required
use the information to draw up and balance the following accounts in the
General Ledger:
• Debtors Control (7) The number in brackets
• Trading Stock (7) indicates how many lines to
• Creditors Control (6) leave open for each account.
• Bank (4)
• Petty Cash Control (5).
ComBInED BookkEEPInG AC TIVITIES • chapter 12 231

Bank Sales Cost of Sales Debtors Discount Sundry
? 75 000 60 000 68 440 3 146 34 000
Cash payments Journal

Bank Trading Wages Debtors Creditors Discount Sundry
Stock Control Control Received accounts
? 104 000 42 000 1 500 60 250 4 090 29 460
The following amounts are included in the Sundry accounts column of the CPJ:
• R200 withdrawn on the 15th to supplement petty cash
• R360 withdrawn on 30th to restore the petty cash imprest amount.
petty Cash Journal
Petty cash Trading Wages Debtors Stationery Sundry
Stock Control accounts
560 147 150 95 40 128
debtors Journal debtors Allowances Journal

Sales Cost of Sales Debtors Cost of Sales
Allowances
85 000 ? 8 575 4 800
Creditors Journal
Creditors Trading Equipment Stationery Packaging Sundry
Control Stock accounts
65 000 42 000 14 500 6 500 700 1 300
Creditors Allowances Journal

Bank Sales Cost of Sales Debtors Discount Sundry
5 780 800 1 000 200 80 3 700
general Journal
Debtors Control Creditors Control
Debit Credit Debit Credit
1 200 700 200 600
Activity 12.4 debtors and Creditors Ledgers
The transactions below were taken from the books of B & B Traders.
Required
1. Show the account of Spectra Creations in the Creditors Ledger of
indicates how many lines to B & B Traders (6).
leave open for each account. 2. Show the account of B Logan in the Debtors Ledger of B & B Traders (9).
Show all folio references.
232 chapter 12 • COMBINED BOOKKEEPING AC TIvITIES

Balances on 1 April 2019
Spectra Creations in Creditors Ledger R4 570
B Logan in Debtors Ledger R1 346

04 Issued doc. no. 231 to B Logan for goods sold to her on credit,
R1 256.
05 During March, the bookkeeper entered a payment of R625 made to
SP Creations into the ledger of Spectra Creations. Correct the error
(doc. no. 28).
07 Paid R3 150 to Spectra Creations and received R350 discount
(doc. no. 446).
10 B Logan returned goods not according to sample to the business
(selling price, R540; cost price, R360) (doc. no. 87).
11 Bought trading stock, R1 380 and packaging, R48 from Spectra
Creations and received their invoice (no. 226).
16 B Logan bought on credit, R340 (doc. no. 243).
20 Returned the packaging bought from Spectra Creations on 11 April,
since it was not correct (doc. no. 67).
21 Received a cheque for R1 235 from B Logan as payment on her
account after R65 discount was allowed (doc. no. 227).
28 Received B Logan’s cheque back from the bank marked RD
(insufficient funds).
29 Charged B Logan’s overdue account with R15 interest.
Informal assessment 12.1 General Ledger
On 1 November 2019 the ledger accounts of Du Toit Traders showed the

following balances, among others:
Trading Stock R10 400,00 Sales R5 150,00

Debtors Control R742,50 Stationery R700,94
Equipment R12 205,00 Discount Received R132,00
Creditors Control R3 508,10 Debtors Allowances R807,00
Required
1. Open the accounts in the ledger with the given balances.
2. Post entries to the given accounts.
3. Balance only the Debtors Control account.
Information
The column totals of the subsidiary journals in the books of Du Toit Traders on
30 November 2019 were as follows:

Cash Receipts Journal CRJ1 Cash Payments Journal CPJ1
Bank R15 450 Bank R15 275
Sales R8 800 Trading Stock R3 225
Cost of Sales R5 500 Creditors Control R5 980
Debtors Control R3 200 Discount Received R299
Discount Allowed R80 Debtors Control R127
Sundry accounts R3 530 Wages R2 930
(Included in the amount is (Included in the amount is
R200 for bad debts recovered R520 for stationery purchased on
from a debtor, R Kruger.) 20 November.)
Creditors
Allowances Journal CAJ1 Creditors Journal CJ1
Creditors Control R1 030 Creditors Control R21 513
Trading Stock R310 Trading Stock R6 240
Equipment R237 Equipment R2 370
Packaging R48 Packaging R455
Sundry accounts R410 Stationery R318
(Included in the amount is R180 Sundry accounts R12 130
for stationery that cannot be used,
returned on 14 November.)
Debtors
Allowances Journal DAJ1 Debtors Journal DJ1
Debtors Allowances R560 Sales R12 480
Cost of Sales R350 Cost of Sales R7 800
General Journal GJ1

Debtors Control Debit R27,40
Credit R75,00
Creditors Control Debit R32,00
Credit R350,00
Informal assessment 12.2 Debtors Ledger
Enter the following transactions of Swartland Ltd in the account of S Swart, a

client of the business. Provide appropriate folio references and calculate the
balance for each line. Codes and document numbers may be ignored.

01 S Swart owes Swartland Ltd R245,60.
03 S Swart paid his account of R100, and R5 discount was allowed.
08 Discovered that goods sold on credit to S Swart for R220,50 last month
were incorrectly recorded in the account of P Swart. Correct the error.
10 Sold trading stock to S Swart on credit, R450.
S Swart asked that Swartland deliver the goods to his premises.
Paid R45 out of petty cash to The Transport Company on behalf of
S Swart and charged this amount to his account.
12 Issued a note to S Swart for goods (selling price, R120) returned by
him, since they were not according to the sample.
15 The bank returned S Swart’s cheque marked RD (see 3 April).
21 Charged Swart’s account with interest, R8.
25 Swart was declared insolvent. His estate paid 60 cents in the rand.
Write the rest off as irrecoverable.
30 Swart paid R150 cash as part of his original debt and promised that,
when possible, he would pay the rest.
Informal assessment 12.3 Transactions analysis
Enter the transactions below according to the following columns:
No. Subsidiary Journal Source document Equation General Ledger Amount

A OE L Account Account
debited credited
Transactions
1. Sold goods on credit to T Yawa for R685 (cost price, R428).
2. T Yawa settled his account of R685 with a cheque for R653.
3. T Yawa’s cheque (transaction no. 2) was dishonoured by the bank due to
insufficient funds.
4. Charged the overdue account of T Yawa with R12 interest.
5. The owner took stock with a cost price of R780 for own use.
6. The business account of R3 600 with Nkosana & Son was charged with
10% interest per annum for two months.
7. Received a cheque for R448 from T Richards whose account had
previously been written off as irrecoverable.
8. Paid off R2 000 on the business account with John’s Hardware and
received R180 discount.
9. Returned unsatisfactory packaging, R687, to HS Packaging.
10. Debtor D Rabie, who owes R620, was declared insolvent. The business
received 40 cents in the rand and the rest must be written off as irrecoverable.
11. Equipment purchased from Golden Gate Furnishers for R3 150 was
accidentally entered as trading stock.

Chapter 13
Value-added tax (VAT)
By the end of this chapter, you should be able to:
• understand the basic principles of VAT
• understand the difference between VAT-exempt items and
zero-rated items
• know the difference between input tax and output tax
• perform basic VAT calculations.
Key concepts
• VAT • vendors • effects of VAT • SARS • adding value • calculations
That will be R342 including

VAT, please.
Thank you, I really found some

nice bargains at your sale!
236 c h a p t e r 1 3 • val u e - added tax ( vat )

1. Introduction
Value-added tax, commonly known as VAT, is an extremely important
source of revenue in the South African National Budget. In fact, in the
2010/2011 budget, expected revenue from VAT was estimated at over
R180 billion, approximately 25% of the total budget revenue.
2. Basic principles of VAT

In general terms, value-added tax is tax that is charged whenever goods
are sold or services are rendered by a registered VAT vendor. There are a
few exceptions, mentioned later, but for the purpose of this chapter we
will focus on the basic principles of VAT.
2.1 Who charges VAT?

Any business enterprise registered as a VAT vendor that sells goods
(trading enterprise) or renders services (service enterprise) is required to
charge its customers VAT.
2.2 What is a registered VAT vendor?

A registered VAT vendor is a vendor (business enterprise) that is
registered for VAT. There are two categories of registration:
• compulsory registration – any business whose annual income
exceeds R1 million is required to register as a VAT vendor
• voluntary registration – any business whose annual income is less
than R1 million may voluntarily register as a VAT vendor, provided
that the annual income is in excess of R50 000.
2.3 How is VAT calculated?

In general, VAT is charged at 14% (in 2011) of the normal selling price
of the goods or services. This rate is known as the standard rate. There
are, however, certain goods and services that are exempt from VAT
altogether, while for others VAT is charged at 0% (zero-rated).
2.3.1 Exempt items

Exempt items are goods or services on which VAT is not charged at
either the standard rate or zero-rate. The following are examples of
exempt items:
• financial services
• rental of a private residence
• the transportation of people by road or rail
• educational services when supplied by the state.
val u e - added tax ( vat ) • c h a p t e r 1 3 237

2.3.2 Zero-rated items
Zero-rated items are goods or services that are taxed at a rate of 0%.
These items consist mainly of basic foodstuffs and certain exports. The
following are examples of zero-rated items:
• brown bread, maize products and rice
• milk, milk powder, milk blends
• fruit and vegetables
• lentils, dried beans and legumes
• vegetable oil
• eggs
• canned pilchards
• export of movable goods
• petrol and diesel
• international transport of passengers and goods.
2.4 Who pays VAT?

Since VAT is included in the selling price (or service price) charged to
the customer, it is ultimately the customer who pays VAT. It follows that
whenever you purchase something from a registered VAT vendor you are
also paying VAT. The VAT is collected by the business on behalf of the
South African Revenue Services (SARS).
The following example shows how a business would calculate the
price to charge its customer inclusive of VAT.
Example
Close Shave Hairdressers, a registered VAT vendor, wants to generate
an income of R20 per haircut. How much must they charge a customer
for a haircut?
Solution
Price charged to customer (including VAT) = R20 × 114% = R22,80.
(VAT calculations are explained in greater detail later in this unit.)
Notes
• The business charges R22,80, which includes VAT of R2,80.
• The customer pays the full amount of R22,80 of which R20 is
income for the business while R2,80 is for VAT.
• The VAT of R2,80 is collected by the business on behalf of SARS.

2.5 Accounting basis
2.5.1 Invoice basis (automatic)
VAT is declared or claimed when the invoice is issued or received.
2.5.2 Payments basis (on application to SARS with motivation)

VAT is declared when payment for goods or services is received or made.
Activity 13.1
Squeaky Clean Laundromat, a registered VAT vendor, wants to generate an

income of R50 for every load of laundry they wash.
1. What must they charge a customer for washing a load of laundry?

2. What will the customer pay for the load of laundry?
3. How much VAT is collected by Squeaky Clean Laundromat for every load of
laundry they wash?
3. The effect of VAT on a business

It is important to realise that in many of its transactions, the business is
actually the customer. This is illustrated in the following example.
Example
Close Shave Hairdressers purchases hair products from Golden Glow
Wholesalers for R1 140. How much VAT did Close Shave Hairdressers pay?
Solution
VAT paid = R1 140 × ___14   % = R140
 114
Notes
• Close Shave Hairdressers is the customer in this example – they
pay VAT.
• Golden Glow Wholesalers receives R1 140 of which R1 000 is
income for the business, while R140 is VAT collected on behalf
of SARS.
A business can therefore be both a payer of VAT and a charger of VAT.

The terms ‘input tax’ and ‘output tax’ are used to distinguish between
these two types of VAT:
• Input tax is the VAT paid by a registered VAT vendor on its purchases
from another registered VAT vendor.
• Output tax is the VAT charged by a registered VAT vendor to
its customers.

3.1 Input tax
Input tax is charged to or paid by a business when they acquire goods or
services from another VAT vendor. The input tax is included in the cost
of the goods or services.
The business will be charged input tax when it purchases trading
stock, stationery, packaging, equipment, and so on. Input tax is also
charged for services received by the business, such as repairs, legal fees
and telephone bills.
3.2 Output tax

Output tax is charged by a business when it sells goods or renders
services. The price that the customer is charged for the goods or services
includes the output tax.
The following example illustrates the difference between input tax
and output tax.
Example
The following transactions relate to Tiger Forest’s Golf Shop
(a registered VAT vendor).
1. Bought stationery for R342 (including R42 VAT)
2. Sold golf balls for R57 (including R7 VAT)
3. Bought trading stock (golf shirts) for R2 850 (including R350 VAT)
4. Sold a set of golf clubs for R6 840 (including R840 VAT)
5. Paid the telephone bill, R855 (including R105 VAT)
Construct a table showing input tax and output tax from these
transactions.
Solution
Transaction Input tax Output tax
1 R42
2 R7
3 R350
4 R840
5 R105
Total R497 R847

Activity 13.2
meg A Bytes (a registered VAT vendor) sells computer equipment. The following
are some of its business transactions during october:
1. Bought packaging for R912 (including R112 VAT)
2. Sold a computer for R5 700 (including R700 VAT)
3. Paid the electricity bill, R798 (including R98 VAT)
4. Bought trading stock (ten keyboards) for R1 140 (including R140 VAT)
5. Sold a computer screen for R1 710 (including R210 VAT)
Construct a table showing input tax and output tax from these transactions.
Also show the total amount for each tax.
3.3 VAT payable to sARs

The essence of VAT is that tax is collected throughout the production
and distribution chain. In order to avoid double taxation (paying tax i A refund is usually paid to
the vendor if the input tax
twice), any registered VAT vendor within the chain claims his input tax exceeds output tax for any period.
against his output tax. In other words, the amount of VAT that must be However, SARS often awards the
business a credit which can be
paid to SARS by the business is calculated by subtracting the input tax
deducted from the next period’s
paid from the output tax charged. In equation form: VAT payable.
VAT payable = output tax – input tax
example
Use the results from the previous example to calculate the amount of
VAT payable by Tiger Forest’s Golf Shop to SARS.
solution
VAT payable = output tax – input tax
= R847 – R497
= R350
Activity 13.3
use your answer from Activity 13.2 to calculate the amount of VAT that
meg A Bytes should pay to SARS.
V A L u E - A D D E D TA X ( V AT ) • c h a p t e r 1 3 241

4. Value added
In order to gain a better understanding of why this tax is called value-
added tax, we will look at the following example that shows how VAT is
collected at each stage of the production and distribution chain.
Example
Manufacturer B buys raw materials for R228 (including R28 VAT)
from Supplier A and uses the raw materials to produce a product. He
then sells the product to Wholesaler C for R684 (including R84 VAT).
Wholesaler C in turn sells the product to Retailer D for R855 (including
R105 VAT). Retailer D then sells the product to a customer for R1 140
(including R140 VAT).
Calculate the amount of VAT payable by each business.
(Assume that all the businesses are registered VAT vendors.)
Solution
Business Input tax Output tax VAT payable to SARS
Supplier A 0 R28 R28
Manufacturer B R28 R84 R56
Wholesaler C R84 R105 R21
Retailer D R105 R140 R35
Total VAT payable to SARS R140
4.1 Adding value

In the above example, Wholesaler C pays R684 for the product, of which
R84 is VAT, so the cost of the product excluding VAT is R600. He sells
the product to Retailer D for R855 (including VAT of R105), so his selling
price is R750 excluding VAT. It therefore follows that his mark-up is R150
(R750 – R600).
The R150 can be seen as the value that Wholesaler C adds to the
product. If we calculate 14% of R150 we get R21, which is the actual
amount of VAT that Wholesaler C must pay to SARS (as shown in the table
in the example). Thus the amount of VAT that Wholesaler C is actually
responsible for is equal to 14% of the value he adds to the product.
4.2 How does SARS benefit from this system?

The benefit of this system to SARS is that they don’t have to wait for
the product to be sold to the end customer before receiving tax. Tax is
collected and passed on to SARS as the product is sold from Supplier A to
Manufacturer B to Wholesaler C to Retailer D and finally to the customer.

5. VAT calculations
There are two types of VAT calculations that you should be able to do.
5.1 Calculating the price inclusive of VAT from the price

exclusive of VAT
Here you are given the selling price of a product (or the price of a
service) before VAT has been added. You are required to calculate the
price inclusive of VAT. There are two methods you can use.
• The two-step approach – first calculate the VAT at 14% and then add
it to the price (excl. VAT). i The abbreviation for
excluding – excl. – is
often used on invoices and in
Step 1: Calculate the VAT from the price (excl. VAT) using the advertisements. The abbreviation
following formula: incl. for including is also used.
VAT = price (excl. VAT) × 14%

Step 2: Calculate the price (incl. VAT) by adding VAT calculated in
the first step to the price (excl. VAT):
Price (incl. VAT) = price (excl. VAT) + VAT
The advantage of this method is that the amount of VAT included is
determined. This method relies less on mathematical knowledge.
example
Calculate the price inclusive of VAT, given the price of R300 exclusive
of VAT. Use the two-step approach.
solution
VAT = Price (excl. VAT) × 14% (Step 1)
= R300 × 14%
= R42
Price (incl. VAT) = price (excl. VAT) + VAT (Step 2)
= R300 + R42
= R342
• The one-step approach – calculate the price (incl. VAT) directly from
the price (excl. VAT), using the formula below:
Price (incl. VAT) = price (excl. VAT) × 114%
Although this method is quicker, it requires greater mathematical
knowledge.
V A L u E - A D D E D TA X ( V AT ) • c h a p t e r 1 3 243

example
Calculate the price inclusive of VAT, given the price of R300 exclusive
of VAT. Use the one-step approach.
solution
= R300 × 114%
= R342
5.2 Calculating the price exclusive of VAT from the price

inclusive of VAT
You are given the selling price of a product (or the price of a service)
including VAT and you are required to calculate the price excluding VAT.
The method used to perform this calculation is derived from the formula
used in the one-step approach.
By manipulating this equation, you can make the price (excl. VAT) the
subject of the formula:
price (incl. VAT)
Price (excl. VAT) = ______________
114%
To calculate the amount of VAT included in the price (incl. VAT), simply
subtract the price (excl. VAT) from the price (incl. VAT).
VAT = price (incl. VAT) – price (excl. VAT)
example
The price of a product is advertised at R342 (incl. VAT).
i It is very important to
understand the logic used in
developing these formulae, rather 1. Calculate the price (excl. VAT).
than just memorising them. 2. Calculate the amount of VAT included in the advertised price.
solution
price (incl. VAT)
1. Price (excl. VAT) = _____________
114%
R342
= _____
114%
= R300
2. VAT = price (incl. VAT) – price (excl. VAT)
= R342 – R300
= R42
244 c h a p t e r 1 3 • V A L u E - A D D E D TA X ( V AT )

Activity 13.4
Mshoeshoe Shoe Shop sells two products: running shoes and soccer boots. The
selling price of their running shoes is R400 excluding VAT, and the soccer boots
are sold for R500 excluding VAT. Calculate the selling price of the running shoes
and the soccer boots inclusive of VAT.
Activity 13.5
A friend from Australia, Bruce Williams, is visiting South Africa on holiday. You
take him shopping at the Westgate Mall where he sees two pairs of sunglasses
that he likes, the Oak-bans selling for R969 and the Rayleys priced at R1 026.
Being a foreign tourist, Bruce gets a VAT refund at the airport when he
leaves South Africa. He asks you to calculate the price of each pair of sunglasses
exclusive of VAT.
Calculate the price (excl. VAT) as well as the amount of VAT included in the
selling prices for each pair of sunglasses.
Activity 13.6
You want to buy a new computer monitor and receive the following price list
from Limpopo Computer Dealers:
Computer monitor Price (excl. VAT) Price (incl. VAT)

AP 2000 – 15 inch R789
SQ 3200 – 15 inch R964
AP 2200 – 17 inch R2 806
SQ 4500 – 17 inch R3 504
Make a copy of the table and fill in the last column by calculating the price
of each computer monitor inclusive of VAT. Round off your answers to the
nearest rand.

Activity 13.7
Work with a partner and discuss what needs to be done. Then work on your
own and record your answers.
Study the following cash sales slips from nemo’s Pet Shop:
nemo’s pet shop nemo’s pet shop nemo’s pet shop

Cash sales slip no. 001 Cash sales slip no. 002 Cash sales slip no. 003
Total (excl. VAT) R12,86 Total (excl. VAT) ? Total (excl. VAT) ?
VAT @ 14% ? VAT @ 14% ? VAT @ 14% R4,90
Total (incl. VAT) ? Total (incl. VAT) R25,73 Total (incl. VAT) ?
The calculation required for Make a copy of the cash slips and fill in the missing figures indicated by
cash sales slip no. 003 is the question marks (?). Round off your answers to the nearest cent.
quite challenging!
6. ethics
VAT is a vital source of government revenue and accounts for about
25% of the National Budget. Like most other forms of taxation, VAT
is vulnerable to evasion and fraud. Furthermore, with its credit and
refund mechanism, the VAT process offers unique opportunities for
abuse. Although VAT fraud can often involve quite complex and intricate
schemes, this type of fraud is normally based on the following unethical
and illegal practices:
• exceeding an annual income of R1 million but not registering as
VAT vendor
• charging and receiving VAT (output tax) but not paying all or some of
it over to SARS
• claiming VAT refunds on fictitious invoices.
SARS is very conscious of these types of practices and is committed
to ensure everyone complies with tax laws. In September 2006, SARS
appointed a special task team to work closely with other law enforcement
agencies, after various forms of tax refund fraud were identified by SARS
investigators. SARS now also runs a national Fraud and Anti-Corruption
Hotline to assist in its fight against all forms of fraud and corruption,
both inside and outside the organisation.
246 c h a p t e r 1 3 • V A L u E - A D D E D TA X ( V AT )

Case study 13.1
Read the extract below and then answer the questions that follow.
Tax fraud syndicate bust fictitious businesses as VAT vendors with SARS
with the sole purpose of claiming fraudulent
The South African Revenue Service (SARS) refunds,” SARS said.
has uncovered a R12,5-million VAT refund “When investigators suspected
fraud scam. irregularities and stopped refunds to these
Five Ivory Coast nationals were arrested entities, attempts were made to recruit and
in Kimberley on Monday for their alleged bribe SARS officials to authorise the pay-out of
involvement in the VAT fraud syndicate, SARS these fraudulent refund claims.”
said in a statement on Tuesday. “It is alleged The charges against the accused would
that the suspects, through at least 50 fictitious include fraud, corruption and racketeering. They
businesses, claimed millions in fraudulent were due to appear in the Kimberley Magistrate's
refunds from SARS,” the statement said. Court on Wednesday for a bail hearing.
The arrest of the five men followed a five- In a statement, SARS said that they had
month investigation by SARS, the organised “recently significantly tightened procedures
crime unit of the South African Police Service around registration of entities as VAT vendors as
and the National Prosecuting Authority. a measure to combat VAT refund fraud.”
“Members of the syndicate allegedly registered
Extracted from an article appearing on Brand South Africa website, 18 February 2009
Questions
1. What specific type of tax fraud did SARS uncover?
2. What was the value of this fraud?
3. Briefly explain what this fraud scam entailed.
4. What action did SARS investigators take when they first suspected
irregularities?
5. What did the suspects attempt to do in order to counter the actions of SARS
investigators mentioned in question 4?
6. What charges are to be brought against the accused?
7. What measure has SARS recently taken to combat VAT refund fraud?

Read the information given below and answer the questions that follow.
1. Nomsa wants to buy a new watch. She phones Always-on-Time Traders

(a retailer) and Timekeepers Warehouse (a wholesaler) and receives the
following quotations for the same watch.
Business Quotation
Always-on-Time Traders R513 incl. VAT
Timekeepers Warehouse R480 excl. VAT
Use VAT calculations to determine from which business Nomsa should

buy the watch. Assume that she will buy the cheaper watch. (5)
2. A TV set is advertised for R3 990 inclusive of VAT. Calculate the price

excluding VAT and the amount of VAT included in the price. (6)
3. If the selling price for a calculator is R120 excluding VAT, calculate the
selling price of the calculator inclusive of VAT. (4)
Assessment task: Research project

Value-added tax
Aim
Research the basic concepts and principles of value-added tax (VAT).
Most of the information you will need is available from a SARS office (on
the VAT 404 information document) or go to the website www.sars.gov.za
for more information.
Required
Research VAT and report on the following:
1. Explain the importance of tax.
2. Identify the different types of tax.
3. Give the history of VAT in one paragraph.
4. Explain exempt and zero-rated items and analyse a cash slip register. Use
labels to identify at least one item that is tax exempt and one that is zero-
rated.
5. Make a diagram to explain the following:
• the meaning of value-added
• input tax
• output tax.

6. Investigate registration for tax. Explain when and how a business should
register for VAT and discuss the ethical aspects concerning paying VAT.
7. Discuss at least one other interesting fact you discovered when doing
research on VAT.
Requirements
1. Your project should have a title page, table of contents introduction,
conclusion and bibliography.
2. A copy of the assessment rubric below must be included with your project.
3. The pages in your project must be stapled together neatly – they do not
have to be bound in a special way. You may not use a flip file.
4. Your project must consist of a minimum of four typed or six hand-written
A4 pages.
5. The project must be your own work.
Assessment rubric: Research project – VAT
Name:
Criteria Excellent Good Adequate Not achieved Mark
The importance of tax Excellent explanation (4) Good explanation (3) Average explanation Vague or confusing
(2) explanation (1)
Different types of tax Excellent explanation (4) Good explanation (3) One or two types of At most one type of
tax excluded from tax explained (1)
explanation (2)
The history of VAT Excellent, interesting Good, most facts Average, there are Very little information
information (4) covered (3) gaps in explanation (2) given; confusing (1)
Exempt and zero-rated Excellent explanation, Good explanation, Explanation partly Explanation confusing,
items very good examples, till examples, till slip correct, analysis of till analysis of till slip
slip analysed very well analysed well (3–4) slip incomplete (2–3) vague or no till slip
(5–7) analysed (1)
Diagram to explain: Excellent diagram that Good diagram that Diagram confusing Diagram confusing;
• value-added tax helps explain the three helps explain the two in places; one of the none of the concepts
• input tax concepts (6–9) of the three concepts concepts explained explained acceptably (1)
• output tax very well (3–5) quite well (2–3)
Registration for VAT Excellent work (4) Good work (3) Average work (2) Vague and confusing
and ethical aspects attempt (1)
of tax
Technical quality of Excellent project (4) Good project (3) Average project (2) Little or no effort put
project into project (1)
Sources (bibliography) Excellent variety of A few good sources (3) One source (1) No sources (0)
sources (4)
Total: /40

Chapter 14
Salaries and wages
• know the difference between salaries and wages
• understand the meaning of deductions and employer’s contributions
• complete a Salaries Journal and Wages Journal
• post from the Salaries Journal and the Wages Journal to the
General Ledger.
Key concepts
• salaries • wages • gross • net • deductions • employer’s contribution
• the journals • entries • posting
Busi, when do we get our

You mean your
wages this month?
salaries, Bronwyn.
Mmm, I don't think I really

understand the difference
between wages and salaries.
250 c h a p t e r 1 4 • salaries a n d wages

1. Introduction
People who work for a business are called employees. The business is
referred to as the employer. The money paid to the employees by the
employer is called a salary or a wage. Large businesses may employ
hundreds of people and the salaries and wages paid to their employees
usually form a large part of their operating expenses. It is therefore
extremely important that these expenses are monitored carefully and
recorded accurately. The journals used to record this information are
called the Salaries Journal and the Wages Journal.
1.1 Differences between salaries and wages

The main difference between salaries and wages is that salaries are
paid monthly, while wages are usually paid weekly. The following table
outlines a few of the differences.
Wages Salaries
Wages are usually paid weekly. Salaries are paid monthly.
Wages are usually paid in cash. Salaries are usually paid by cheque
or transferred directly into a bank
account.
The amount is determined using A fixed predetermined monthly
time-work or piece-work rates. amount is paid.
Wage earners receive additional Salary earners may receive
remuneration for working benefits such as a bonus or
overtime. housing subsidy.
1.2 Normal time and overtime

• Normal time is an employee’s normal working hours, which are
usually stipulated in the contract of employment. Normal working
hours are regulated by the Basic Conditions of Employment Act 75
of 1997 and currently, the maximum normal working time allowed is
45 hours per week.
• Overtime is the amount of time an employee works beyond normal
working hours. Working overtime is voluntary and must be agreed
upon by both the employer and employee. For working overtime,
employees must be paid one-and-a-half times their normal wage rate,
except for on Sundays and public holidays when they must be paid
twice their normal wage rate.
salaries a n d wages • c h a p t e r 1 4 251

1.3 Time-work rates and piece-work rates
• Time-work rates – employees are paid an hourly rate for the number
of hours worked; this includes normal time and overtime.
• Piece-work rates – employees are paid for each completed item, such
as basket of fruit picked or a garment completed.
1.4 Time recorders

Time recorders are used by businesses to record the time each wage
earner worked. Time recorders consist of two components: a time clock
and a clock card (see the photograph bottom left).
The wage earners insert their clock card into the time clock whenever
they start or stop working. These times are entered automatically by the
time clock on the clock card. At the end of the week, the clock card is
used to calculate the hours each wage earner worked by recording the
times on a time sheet (see photograph bottom right).
A time clock and clock cards A weekly time sheet
1.5 Salary scales

Businesses often use fixed salary scales that set out the predetermined
future earnings of their employees. These salary scales are normally based
on employees’ qualifications and/or years of experience. The scales usually
start with a minimum salary that increases on an annual basis until the
maximum salary is reached. The various salary levels are called notches,
and the starting salary is therefore also called the starting notch.

Example
The salary scale for the financial manager of KP Manufacturers is set
out as follows:
Year 1 2 3 4 5 6 7
Starting salary (annual) R180 000 R180 000 R192 000 204 000 R216 000 R231 000 R246 000
Increase – R12 000 R12 000 R12 000 R15 000 R15 000 R15 000
Maximum annual salary R180 000 R192 000 R204 000 R216 000 R231 000 R246 000 R261 000
We can see the following in the table above:

• The starting salary is R180 000 per annum (R15 000 per month).
• In the first year there is no increase.
• In the second year an increase of R12 000 is implemented. This means
that the salary increases to R192 000 per annum (R16 000 per month).
• This annual increase of R12 000 will take place over three years,
until the employee earns R216 000 per annum (R18 000 per month).
• As from the fifth year, the increase is raised to R15 000 per annum.
• The maximum salary according to this notch is R261 000 per annum
(R21 750 per month).
The information in the table above is often set out using the following
shortened notation:
Notch: R180 000 × R12 000 – R216 000 × R15 000 – R261 000
This shows a starting salary of R180 000 with an annual increase of

R12 000 until the annual salary reaches R216 000. Then an annual
increase of R15 000 comes into effect and is continued until the
maximum salary of R261 000 is attained. At this point, the salary may
be renegotiated and a new salary scale drawn up.
Activity 14.1
Palesa Ndlovu was appointed as the bookkeeper at Nixon Ltd on 1 January 2008.
Her salary scale is as follows.
Notch: R84 000 × R3 000 – R93 000 × R4 000 – R105 000
Required
1. Use the salary scale above to complete a copy of the following table:
Year 2008 2009 2010 2011 2012 2013 2014

Starting salary (annual) R84 000
Increase
Maximum annual salary

2. What will Palesa’s monthly salary be in 2010?
3. What will Palesa’s monthly salary be in 2014?
2. gross salary (gross wage)

Below is an example of a newspaper advertisement for a job.
HEAD CHEF
Required for popular lunch-time restaurant
Minimum 5 years’ experience

Fluent in English and Xhosa
Own transport essential
Salary R10 000 per month
Fax CV to (041) 456 3322
The salary of R10 000 per month shown on the advertisement is known
as the gross salary. This, however, is not the actual amount of money
that the employee will take home each month. The reason for this is
that certain payments are first made by the employer on behalf of the
employee. These payments are deducted from the gross salary and are
appropriately called deductions. The amount the employee receives is
called the net salary.
The gross wage of wage earners is the amount determined using
time-work or piece-work rates. The net wage is the amount of money
wage earners actually take home. The net wage is the amount that
remains after the deductions have been subtracted from the gross wage.
3. deductions
Deductions are the payments that are made by the employer on behalf
of the employee. These deductions include payments to the employee’s
pension fund, medical aid fund, Unemployment Insurance Fund (UIF)
and union membership fees. The employer is also required by law to
deduct income tax from the gross salary of his employees. This tax is
called Pay-As-You-Earn (PAYE) and is paid directly to SARS.
254 c h a p t e r 1 4 • S A L A R I E S A n D WA G E S

3.1 Compulsory deductions
The law prescribes that the following deductions are compulsory:
3.1.1 PAYE (Pay-As-You-Earn)

The employer must deduct income tax from its employees according to
i You can download the
latest tax tables from
www.sars.gov.za
the PAYE system. The amount is determined according to tax tables that
set out the percentage of tax to be deducted for various income brackets.
The tax tables are revised each year. The employer must pay the amount
deducted from the gross salary or wage to SARS within seven days after
the end of the month.
3.1.2 Unemployment Insurance Fund (UIF)

The Unemployment Insurance Fund provides employees with insurance
against loss of employment. The amount deducted is calculated using
a fixed percentage of the gross salary or wage, which in 2012 was 1%
of gross earnings.The employer is compelled to make an additional
contribution of the same percentage.
3.2 Voluntary deductions

In addition to the compulsory deductions, employers may choose to
deduct the following:
3.2.1 Pension fund

Pension funds are used to save money for the retirement years. Usually
only permanent workers contribute towards pension funds. The payments
are normally calculated by taking a fixed percentage of the gross salary
or wage. In most cases, the employer makes an additional contribution
towards the employee's pension fund. (This additional employer’s
contribution is over and above the amount deducted from the employee’s
gross salary or wage and is an additional expense to the business.)
3.2.2 Medical aid

A medical aid provides the employee with medical insurance. Usually
the employee has a choice about whether or not to belong to a medical
aid. The amount contributed towards a medical aid fund is influenced
by the number of dependants (family members) of the employee who
are also on the medical aid. This fixed amount is then deducted monthly.
The employer can also make a voluntary contribution over and above the
amount deducted from the employee’s gross salary or wage.
S A L A R I E S A n D WA G E S • c h a p t e r 1 4 255

3.3 Staff associations or unions
Staff associations and unions are organisations that represent employees
in labour disputes with the employer. In some businesses, it is
compulsory to be a member of a staff association or union. Usually this
deduction is a fixed monthly amount.
Teachers, for example, can belong to SADTU (South African
Democratic Teacher’s Union) or to NUE (National Union of Educators).
4. Net salary (net wage)

The amount an employee receives is called the net salary and is equal to
the gross salary less the deductions.
Net salary = gross salary – total deductions
Similarly, the net wage received by a wage earner is equal to the gross
wage less the deductions.
Net wage = gross wage – total deductions
5. Employer’s contributions
As mentioned previously, the employer often makes additional
contributions towards the employee's pension fund, medical aid and
UIF. These contributions are made by the business for the benefit of
the employee and are paid in addition to the deductions. It is very
important to understand that the employer’s contributions are
additional expenses to the business. Another employer’s contribution
is the Skills Development Levy.
5.1 Skills Development Levy (SDL)

The Skills Development Levy is a special levy payable by employers
to help fund education and training so that employees’ skills can be
improved and developed. This is a compulsory levy for all employers
who have an annual payroll of R500 000 or more. The amount payable
for SDL is determined at 1% of the monthly gross salaries and wages
register, and is payable monthly to SARS. The SDL forms part of the
employer’s contributions and is therefore an expense to the business.

Example
The following information relates to the salary of Thomas Mponya for
November 2016.
• His gross salary is R10 000 per month.
• Deductions: PAYE R3 200
Pension R600
Medical aid R800
Calculate the total deductions and the net salary for Thomas Mponya
for the month.
Solution
Total deductions: PAYE + pension + medical aid
= R3 200 + R600 + R800
= R4 600
Net salary: gross salary – total deductions
= R10 000 – R4 600
= R5 400
Activity 14.2
Paul Pakka works in a fruit-packing factory. He earns wages based on the

number of hours he worked during the week. The following information relates
to Paul’s wages for the week ended 15 September 2016.
• Paul worked 40 hours during the week and earned R20 per hour.
• Deductions: PAYE R250
Pension R40
UIF R10
Required
Calculate the following for the week ended 15 September 2016:
1. Paul’s gross wage
2. Paul’s total deductions
3. Paul’s net wage.
6. Salaries Journal
The Salaries Journal is used to record the gross salaries, deductions, net
salaries and employer’s contributions. As salaries are paid monthly, the
Salaries Journal is drawn up at the end of the month and posted to the
General Ledger.

Example
The following information applies to the Salaries Journal of
Langa Traders for the month ended 30 September 2016.
Langa Traders employs three salary earners: X Xolo, Y Yama and
Z Zuma. They earn R4 600, R5 200 and R6 400 per month respectively.
The following deductions must be made:
• Pension is 3% of gross salary and UIF is R20 per month.
• Medical aid is R50 per family member; Xolo is married with no
children; Yama is married, with two children; Zuma is divorced,
with two children.
• Xolo and Yama are taxed at 30% and Zuma at 36% on their
gross salaries.
The employer contributes to the UIF on a rand-for-rand basis, as well
as 50c for every rand to the pension fund.
Complete the Salaries Journal of Langa Traders for the month ended
30 September 2016. Cheques 931 to 933 were issued.
Solution
Salaries Journal of Langa Traders for the month ended 30 September 2016 SJ9
Deductions Employer’s contribution
Employee Gross Pension UIF Medical PAYE Total Net Cheque Pension UIF Total
salary fund aid salary no. fund
X Xolo 4 600 138 20 100 1 380 1 638 2 962 931 69 20 89
Y Yama 5 200 156 20 200 1 560 1 936 3 264 932 78 20 98
Z Zuma 6 400 192 20 150 2 304 2 666 3 734 933 96 20 116
16 200 486 60 450 5 244 6 240 9 960 243 60 303
Calculations for Xolo

Pension fund: R4 600 × 3% = R138
Medical aid: R50 × 2 = R100 (Xolo is married;
there are two family members)
PAYE: R4 600 × 30% = R1 380
Net salary: = Gross salary – total deductions
= R4 600 – R1 638
= R2 962
Pension fund contribution: R138 × 0,50 = R69

Activity 14.3
Required
use the information of monty Traders below to complete the Salaries Journal
for the month ended 31 January 2016. make a copy of the following partly
completed Salaries Journal taken from the books of monty Traders.
salaries Journal of Monty Traders for the month ended 31 January 2016 sJ1
K Xoseka 5 000 300 25 100 1 175 1 600 3 400
G Malan 4 200 252 21 160 987 1 420 2 780
T Block
1. The gross salary of T Block is R5 800.
2. The following deductions are applicable:
• Pension is 6% of gross salary.
• unemployment insurance for T Block is R29.
• medical aid costs R100 per member plus an extra R60 for every
dependant (T Block is married, with one child).
• PAYE is calculated using the following formula:
(gross salary – pension fund deduction) × 25%.
3. The employer pays the medical aid an amount equal to the
contribution made by the employee.
4. monty Traders’ contribution to the uIF for January is R75
(R25 per employee).
5. The accountant of monty Traders’ issues cheques 481 to 483
to the employees.
Activity 14.4
Pegasus CC employs three salary earners, J Botha at R84 000 per annum,
C Walder at R67 200 per annum and P mslambo at R8 500 per month. i The abbreviation for a close
corporation is CC.
Their deductions for march 2016 are as follows:

• Botha is taxed at 20%, Walder at 14% and mslambo at 23% on their gross i ‘per annum’ is the Latin term
for per year. It is abbreviated
salaries respectively.
as p.a.
• Pension is 2% of gross salary.
• medical aid is R60 per family member per month.
• union membership fees are R10 per month.

Botha is unmarried. Walder is married with three children, and Mslambo was
recently married. The business contributes to the pension fund on a rand-for-
rand basis.
Required
Complete the Salaries Journal for the month ended 31 March 2016.
(The last cheque issued was numbered 491.)
7. Wages Journal
The Wages Journal is used to record the gross wages, deductions, net
wages and employer’s contributions. The Wages Journal is drawn up
and posted weekly to the General Ledger. A normal working week
usually consists of 40 hours (normal time). Additional hours are
considered overtime.
Example
The following information applies to the Wages Journal of Langa
Traders for the week ended 27 January 2016.
Langa Traders employs two wage earners, A Adams and B Ball. They
earn R20 and R24 per hour respectively. For working overtime they
receive one-and-a-half times their normal time remuneration. Langa
Traders has a normal working week of 40 hours.
The following hours were worked in the week ended 27 January 2016:
• A Adams 42 hours
• B Ball 45 hours.
The following deductions must be made:
• Pension is 5% of normal time wages.
• Medical aid is R10 per family member (A Adams is married with two
children, and B Ball is unmarried).
• UIF is R15 each for unemployment insurance.
• Membership of the staff association is optional and only B Ball is a
member at R2 per week.
• PAYE is 20% of gross wages.
The employer contributes 50c for every rand to the pension fund, and
contributes to the UIF on a rand-for-rand basis.
Required
Complete the Wages Journal for the week ended 27 January 2016.

Example continued
Solution
Wages Journal of Langa Traders for the week ended 27 January 2016 SJ9
Normal time Overtime Deductions Employer's contribution
Employee
Hours Rate Amount Hours Rate Amount Gross Pension Medical UIF Staff PAYE Total Net Pension UIF Total
wage fund aid assn wage fund
A Adams 40 20 800 2 30 60 860 40 40 15 – 172 267 593 20 15 35
B Ball 40 24 960 5 36 180 1 140 48 10 15 2 228 303 837 24 15 39
2 000 88 50 30 2 400 570 1 430 44 30 74
Calculations for Adams

Normal time: 40 hours × R20 = R800
Overtime: 2 hours × R30 = R60
(R20 × 1,5 = R30)
Gross wage: R800 (normal time) + R60 (overtime)
= R860
Pension fund: 5% of normal time
= R800 × 5% = R40
Medical aid: R10 × 4 = R40 (R10 per member;
there are four members in his family)
PAYE: Gross wage × 20%
= R860 × 20% = R172
Net wage: Gross wage – total deductions
= R860 – R267 = R593
Pension fund contribution: R40 × 0,50 = R20
UIF contribution: R15 (same as deduction)
Activity 14.5
Wage earners G Smith, M Ntini and H Gibbs are employed by Protea Traders.
They work eight hours per day and five days per week (normal time) at rates
of R24, R30 and R20 per hour respectively. Should they work overtime, they
earn one-and-a-half times their normal time remuneration.
The three employees worked the following hours in the week ended
20 January 2016:
• Smith 40 hours
• Ntini 36 hours
• Gibbs 50 hours

Their deductions are as follows:
• PAYE is calculated at 20% of the gross wage.
• Pension is 5% of wages from normal time.
• UIF is R6 each.
• Medical aid is R14 each.
According to the law, employers contribute on a rand-for-rand basis to the
employee’s UIF. In addition, Protea Traders voluntarily contributes R2 for every
R1 that the employee contributes to the pension fund.
Required
Complete the Wages Journal of Protea Traders for the week ended
20 January 2016.
Activity 14.6
Use the same information as in Activity 14.5 as well as the additional

information below. The employees of Protea Traders worked the following
hours during the week ended 27 January 2016:
• Smith 45 hours
• Ntini 48 hours
• Gibbs 40 hours
Ntini was away for two hours of normal time for a doctor’s appointment.
Required
Complete the Wages Journal of Protea Traders for the week ended
27 January 2016.
8. Posting to the General Ledger

Posting from the Salaries Journal takes place monthly, whereas the Wages
Journal is posted at the end of each week. The process involved in posting
from the Salaries Journal and the Wages Journal is almost identical. We
will use the Salaries Journal prepared on page 258 to explain this process.
Salaries Journal of Langa Traders for the month ended 30 September 2016 SJ9
X Xolo 4 600 138 20 100 1 380 1 638 2 962 931 69 20 89
Y Yama 5 200 156 20 200 1 560 1 936 3 264 932 78 20 98
Z Zuma 6 400 192 20 150 2 304 2 666 3 734 933 96 20 116
16 200 486 60 450 5 244 6 240 9 960 243 60 303
1 4 5 6 7 8 9 2 3

8.1 Expenses
The first step in posting from the Salaries Journal is to realise that the
business (Langa Traders) has incurred three expenses:
1 Salaries – This is the gross salaries amount, and is the direct cost to
the business of employing staff.
2 Pension fund contributions – This cost is over and above the amount
that the business deducts from the gross salaries of the employees. It
is therefore an additional expense to the business.
3 UIF contributions – Again, this cost is over and above the amount
deducted from the gross salaries. It is therefore also an additional
expense to the business.
As you learnt previously, whenever a business incurs an expense, the
expense must be debited in the General Ledger. So our first step in
posting must be to create and debit these three expense accounts.
Pension Fund UIF

Salaries Contributions Contributions
1 16 200 2 243 3 60
Once we have established which accounts to debit, we must decide

which accounts should be credited. Remember the fundamental rule of
accounting states:
For every debit there must be a corresponding credit.
8.2 Liabilities (creditors)

We debited the Salaries account with the gross salary of R16 200. If this
amount was owed to one person or business, we would have simply paid
the amount by cheque and credited the Bank account. However, the
R16 200 is owed to several people and institutions, as shown below:
Amount owing to the pension fund 4 R486

Amount owing to the UIF 5 R60
Amount owing to the medical aid 6 R450
Amount owing to the SARS (PAYE) 7 R5 244
Amount owing to the employees 9 R9 960
X Xolo R2 962
Y Yama R3 264
Z Zuma R3 734
R16 200

People (or institutions) who are owed money by the business are called
liabilities (creditors) and are credited in the books of the business.
Therefore, when posting from the Salaries Journal to the General Ledger,
we must credit each liability shown. These credits correspond to the debit
entry in the Salaries account.
Pension Fund UIF Medical Aid

4 486 5 60 6 450
SARS (PAYE) Creditors for Salaries

7 5 244 9 9 960
The amount owing to the three employees (the net salaries) is recorded
in one account, called Creditors for Salaries. The account Creditors for
Wages is used to record the net amount owing to the wage earners. The
Creditors for Salaries and Creditors for Wages accounts show the amounts
the employees will actually receive.
There are also additional amounts owed to the pension fund 2 and
the UIF 3 because of to the employer’s contributions. These accounts
must again be credited, thus completing the double entry with debits
previously recorded in the Pension Fund Contributions account and the
UIF Contributions account.
Pension Fund UIF

486 60
2 243 3 60
729 120
8.3 The General Ledger

We have now finished posting from the Salaries Journal. The following
example shows these ledger accounts as they would appear in the
General Ledger of Langa Traders.

Example
Post from the Salaries Journal of Langa Traders for September 2016 to
all the relevant accounts in the General Ledger.
Solution
General Ledger of Langa Traders
Dr Pension Fund B3 Cr
2016
Sep 30 Salaries SJ9 486 00
Pension fund contributions SJ9 243 00
Dr UIF Contributions B4 Cr
2016
UIF contributions SJ9 60 00
Dr Medical Aid B5 Cr
2016
Dr South African Revenue Services (PAYE) B6 Cr

2016
Sep 30 Salaries SJ9 5 244 00
Dr Creditors for Salaries B7 Cr

2016
Sep 30 Salaries SJ9 9 960 00
Nominal accounts
Dr Salaries N6 Cr
2016
Sep 30 Gross salaries SJ9 16 200 00

Example continued
Dr Pension Fund Contributions N7 Cr

2016
Sep 30 Pension fund SJ9 243 00
Dr UIF Contributions N8 Cr
2016
Sep 30 UIF SJ9 60 00
Whenever you post from a journal to the General Ledger, the debit
and credit entries should always equal each other. In this case, all the
debits were expenses while all the credits were liabilities.
ebits (expenses): R16 503 (R16 200 + R243 + R60)
D
Credits (liabilities): R16 503 (R729 + R120 + R450 + R5 244 + R9 960)
8.4 How this effects the accounting equation

The table shows the effect of the transactions on the accounting equation.

–16 200 Salaries – expense +486 Pension fund
liability increases
+60 UIF liability
increases
+450 Medical aid
liability increases
+5 244 SARS (PAYE)
liability increases
+9 960 Creditors for
salaries liability
increases
–243 Pension fund +243 Pension fund
contributions – expense liability increases
–60 UIF contributions – +60 UIF liability
expense increases

The double-entry system has thus been successfully completed. This is
shown diagrammatically in the summary below.
Summary of posting from the Salaries Journal to the General Ledger
Debits in the General Ledger Credits in the General Ledger

(Expenses) (Liabilities)
Pension fund
(R486)
UIF
(R60)
Salaries Medical Aid

(R16 200) (R450)
SARS (PAYE)
(R5 244)
Creditors for Salaries

(R9 960)
Pension Fund Contributions Pension Fund

(R243) (R243)
UIF Contributions UIF

(R60) (R60)
Total expenses: R16 503 Total liabilities: R16 503
The main differences when posting from the Wages Journal are:
• The Wages account is debited instead of the Salaries account.
• The Creditors for Wages account is credited instead of the Creditors for
Salaries account.
• The posting is done weekly instead of monthly.

9. Entries in the Cash Payments Journal
The expense accounts (created in the example on pages 265 and 266)
will eventually be closed off to the Profit and Loss account at the end of
the financial year; the liabilities, however, must be paid. Salary earners
are generally paid by cheque at the end of the month, while wages are
paid weekly in cash.
The amounts owing from the deductions and employer’s
contributions must also be paid to the relevant institutions. This is done
either at the end of the month or at the beginning of the following
month. These payments are recorded in the Cash Payments Journal and
posted to the General Ledger.
Example
Use the information from the example on page 262 and show the
relevant entries in the Cash Payments Journal of Langa Traders.
Assume that Langa Traders pays the amounts owing to its employees,
the AB Pension Fund, the CD Medical Aid, SARS and the UIF by
cheque at the end of the month.
Solution
Cash Payments Journal of Langa Traders – September 2016 CPJ9
931– 30 Employees 9 960 00 9 960 00 Creditors for B7
933 salaries
934 AB Pension Fund 729 00 729 00 Pension fund B3
935 CD Medical Aid 450 00 450 00 Medical aid B5
936 SARS 5 244 00 5 244 00 SARS (PAYE) B6
937 UIF 120 00 120 00 UIF B4
16 503 00 16 503 00
The table shows the effect of the transactions on the


–16 503 Cash in –9 960 Creditors for salaries liability
the bank decreases
decreases
–729 Pension fund liability decreases
–450 Medical aid liability decreases
–5 244 SARS (PAYE) liability decreases
–120 UIF liability decreases

9.1 Paying wages
At the end of each week, the employer cashes a cheque for the total
week’s wages. Each wage earner is then given an envelope containing his
or her weekly wages in cash.
Because one cheque is used to pay the week’s wages, only this
amount is entered in the Cash Payments Journal. This payment is usually
recorded in a separate column in the Cash Payments Journal called
Creditors for wages. The payment of the wages, from the example on
page 261, would appear in the Cash Payments Journal of Langa Traders
as follows:
Cash Payments Journal of Langa Traders – September 2016 CPJ9

Doc. Day Name of payee Bank Creditors Sundry accounts
no. for Wages Amount Details Fol.
908 27 Cash 1 430 00 1 430 00
The next example shows the General Ledger after posting from the
Salaries Journal and the Cash Payments Journal.
Example
Post from the Salaries Journal (page 258) and the Cash Payments
Journal (page 268) of Langa Traders for September 2016 to all the
relevant accounts in the General Ledger.
Solution
Dr Bank B2 Cr
2016
Sep 30 Total payments CPJ9 16 503 00
2016 2016
Sept 30 Bank CPJ9 729 00 Sep 30 Salaries SJ9 486 00
Pension fund contributions SJ9 243 00
729 00 729 00

Example continued
Dr UIF B4 Cr
2016 2016
Sep 30 Bank CPJ9 120 00 Sep 30 Salaries SJ9 60 00
UIF contributions SJ9 60 00
120 00 120 00
2016 2016
Sep 30 Bank CPJ9 450 00 Sep 30 Salaries SJ9 450 00
Dr SARS (PAYE) B6 Cr
2016 2016
Sep 30 Bank CPJ9 5 244 00 Sep 30 Salaries SJ9 5 244 00
Dr Creditors for Salaries B7 Cr

2016 2016
Sep 30 Bank CPJ9 9 960 00 Sep 30 Salaries SJ9 9 960 00
Nominal accounts
Dr Salaries N6 Cr
2016
Sep 30 Gross salaries SJ9 16 200 00

2016
Sep 30 Pension fund SJ9 243 00
2016
Sep 30 UIF SJ9 60 00

Example continued
The previous example shows the General Ledger after all the liability
accounts have been settled. The accounts that remain may be
summarised in a Trial Balance as follows:
Langa Traders
Trial Balance at 30 September 2016
Balance Sheet account Fol. Debit Credit
Bank 16 503 00
Nominal accounts
Salaries 16 200 00
Pension fund contributions 243 00
UIF contributions 60 00
16 503 00 16 503 00
The Trial Balance shows that:

• The posting was carried out in accordance with the double-entry
system (the debits and credits are equal).
• The net effect in the books of Langa Traders from the processing
of the salaries is that expenses have increased by R16 503 while the
bank (cash) has decreased by R16 503.
Activity 14.7
Use the Salaries Journal of Monty Traders from Activity 14.3 and the following
information to complete these tasks.
Cheques are not only paid to the employees’ monthly, but also to the
pension fund (CT Pension Fund), the UIF, the medical aid (Good Health Medical
Scheme) and SARS.
Required
1. Show the necessary payments in the Cash Payments Journal of
Monty Traders for January 2016.
2. Post from the Salaries Journal and the Cash Payments Journal to all the
3. Show the effect of these transactions on the accounting equation.

Activity 14.8
Use the Salaries Journal of Pegasus CC from Activity 14.4 and the following
information to complete these tasks.
Information
• The employees are paid by cheque on the last day of the month.
• Cheques are also paid to SARS, the Liberty Pension Fund, the Medsure
Medical Aid and the All-for-one Staff Association.
Required
1. Record all payments in the Cash Payments Journal of Pegasus CC for
March 2016.
2. Post to all the relevant accounts in the General Ledger.
Example
The following Wages Journals were recorded in the books of Langa
Traders during January 2016.
Wages Journal of Langa Traders for the week ended 6 January 2016 WJ1
Employee
wage fund aid asso- wage fund

ciation
A Adams 30 20 600 – 30 – 600 30 40 15 – 120 205 395 15 15 30
B Ball 40 24 960 – 36 – 960 48 10 15 2 192 267 693 24 15 39
1 560 78 50 30 2 312 472 1 088 39 30 69
Employee

ciation
A Adams 30 20 600 – 30 – 600 30 40 15 – 120 205 395 15 15 30
B Ball 40 24 960 – 36 – 960 48 10 15 2 192 267 693 24 15 39
1 560 78 50 30 2 312 472 1 088 39 30 69
Employee

ciation
A Adams 40 20 800 2 30 60 860 40 40 15 – 172 267 593 20 15 35
B Ball 40 24 960 5 36 180 1 140 48 10 15 2 228 303 837 24 15 39
2 000 88 50 30 2 400 570 1 430 44 30 74

Example continued
Employee

ciation
A Adams 40 20 800 2 30 60 860 40 40 15 – 172 267 593 20 15 35
B Ball 40 24 960 5 36 180 1 140 48 10 15 2 228 303 837 24 15 39
2 000 88 50 30 2 400 570 1 430 44 30 74
Required
1. Show the relevant entries in the Cash Payments Journal of Langa
Traders for January 2016. Langa Traders pays the amounts owing to
AB Pension Fund, CD Medical Aid, the UIF, SARS and the LT Staff
Association by cheque at the end of the month. The wage earners
are paid weekly in cash.
2. Post from the Wages Journals and the Cash Payments Journal to all
the relevant accounts in the General Ledger.
Solution
Cash Payments Journal of Langa Traders – January 2016 CPJ1
Doc. Day Name of payee Bank Creditors Sundry accounts Fol.
no. for wages Amount Details
----
602 6 Cash 1 088 00 1 088 00
----
636 13 Cash 1 088 00 1 088 00
----
663 20 Cash 1 430 00 1 430 00
----
685 27 Cash 1 430 00 1 430 00
----
692 31 AB Pension Fund 498 00 498 00 Pension fund B3
693 CD Medical Aid 200 00 200 00 Medical aid B5
694 UIF 240 00 240 00 UIF B4
695 LT Staff Association 8 00 8 00 Staff association B9
696 SARS 1 424 00 1 424 00 SARS (PAYE) B6
7 406 00 5 036 00 2 370 00
B2 B8

Example continued

Dr Bank B2 Cr
2016
Jan 31 Total payments CPJ1 7 406 00
2016 2016
Jan 31 Bank CPJ1 498 00 Jan 6 Wages WJ1 78 00
Pension fund contributions WJ1 39 00
13 Wages WJ2 78 00
20 Wages WJ3 88 00
27 Wages WJ4 88 00
498 00 498 00
Dr UIF B4 Cr
2016 2016
UIF contributions WJ1 30 00
13 Wages WJ2 30 00
20 Wages WJ3 30 00
27 Wages WJ4 30 00
240 00 240 00

Example continued
2016 2016
13 Wages WJ2 50 00
20 Wages WJ3 50 00
27 Wages WJ4 50 00
200 00 200 00
Dr Staff Association B9 Cr
2016 2016
13 Wages WJ2 2 00
20 Wages WJ3 2 00
27 Wages WJ4 2 00
8 00 8 00
Dr SARS (PAYE) B6 Cr
2016 2016
Jan 31 Bank CPJ1 1 424 00 Jan 6 Wages WJ1 312 00
13 Wages WJ2 312 00
20 Wages WJ3 400 00
27 Wages WJ4 400 00
1 424 00 1 424 00
Dr Creditors for Wages B8 Cr

2016 2016
Jan 31 Bank CPJ1 5 036 00 Jan 6 Wages WJ1 1 088 00
13 Wages WJ2 1 088 00
20 Wages WJ3 1 430 00
27 Wages WJ4 1 430 00
5 036 00 5 036 00

Example continued
Nominal accounts
Dr Wages N5 Cr
2016
Jan 6 Gross wages WJ1 1 560 00
13 Gross wages WJ2 1 560 00
7 120 00

2016
Jan 6 Pension fund WJ1 39 00
13 Pension fund WJ2 39 00
166 00
2016
Jan 6 UIF WJ1 30 00
13 UIF WJ2 30 00
20 UIF WJ3 30 00
27 UIF WJ4 30 00
120 00
Activity 14.9
Use the Wages Journals of Protea Traders from Activities 14.5 and 14.6 and
the following summary of the Wages Journals of Protea Traders for the weeks
ended 6 and 13 January 2016.

Summary of Wages Journals of Protea Traders for the weeks ended 6 and 13 January 2016
Week Gross Deductions Net Employer’s contribution
wage Pension Medical UIF PAYE Total wage
Pension UIF Total
fund aid
fund
Week ended 3 600 150 42 18 720 930 2 670 300 18 318
6 January 2016
Week ended 3 500 140 42 18 700 900 2 600 280 18 298
13 January 2016
• Protea Traders pays wages weekly in cash, by drawing a cheque for the total
week’s wages.
• The GP Pension Fund, the Keep Fit Medical Aid, the UIF and SARS are paid by
cheque on the last day of the month.
Required
1. Show the necessary payments in the Cash Payments Journal of
Protea Traders for January 2016.
2. Post from the Wages Journal and the Cash Payments Journal to all the
Example (Consolidated exercise)

The information below was taken from the books of Zondeki Traders.
Balances in the General Ledger on 1 February 2016

Wages R325 600
Salaries R101 200
Pension fund contribution R25 300
Medical aid contribution R28 400
Summary of Wages Journals of Zondeki Traders for February 2016
Week ended Gross wage Pension fund Medical aid PAYE Net wage
3 February 7 400 444 230 1 554 5 172
10 February 7 400 444 230 1 554 5 172
17 February 7 900 474 245 1 659 5 522
24 February 7 900 474 245 1 659 5 522
Totals of the Salaries Journal of Zondeki Traders on 29 February 2016

Gross salary Deductions Net salary Employer’s contribution
Pension fund Medical aid PAYE Pension fund Medical aid
9 200 552 430 2 760 5 458 552 860

Example continued
• Zondeki Traders contributes to the pension fund on a rand-for-
rand basis.
• The contribution to the wage earners’ medical aid is in the same
ratio as for the three-monthly employees (salary earners).
• A wage earner was on sick leave on 17 February 2016 and his net wage
of R500 was only paid to him with his wage for the following week.
Required
1. Show the necessary entries in the Cash Payments Journal for
February 2016 for the payment of the net wages, net salaries and also
the payment of the pension to Zondeki Pension Fund, medical aid to
GH Medical Aid and the tax to the SARS. The cheques cashed to pay
wages were numbered 66, 78, 98, 120. The last cheque issued, on
29 February 2016, was number 136. (Folios may be omitted.)
2. Use the information in the journals below as well as the Cash
Payments Journal for February 2016 to draw up all the relevant
accounts in the General Ledger.
Solution
Cash Payments Journal of Zondeki Traders – February 2016
Doc. Day Name of payee Bank Creditors Sundry accounts
no. for Wages Amount Details Fol.
----
66 3 Cash 5 172 00 5 172 00
----
78 10 Cash 5 172 00 5 172 00
----
98 17 Cash* 5 022 00 5 022 00
----
120 24 Cash** 6 022 00 6 022 00
----
137– 29 Employees 5 458 00 5 458 00 Creditors salaries
139
140 Zondeki Pension Fund 4 776 00 4 776 00 Pension fund
141 GH Medical Aid 4 140 00 4 140 00 Medical aid
142 SARS 9 186 00 9 186 00 SARS (PAYE)
44 948 00 21 388 00 23 560 00
* Amount paid: R5 522 – R500 = R5 022

** Amount paid: R5 522 + R500 = R6 022

Example continued
General Ledger of Zondeki Traders

Dr Pension Fund Cr
2016 2016
Feb 29 Bank 4 776 00 Feb 3 Wages 444 00
10 Wages 444 00
17 Wages 474 00
24 Wages 474 00
29 Salaries 552 00
4 776 00 4 776 00
Dr Medical Aid Cr
2016 2016
Feb 29 Bank 4 140 00 Feb 3 Wages 230 00
Medical aid contributions * 460 00
10 Wages 230 00
Medical aid contributions * 460 00
17 Wages 245 00
Medical aid contributions ** 490 00
24 Wages 245 00
Medical aid contributions ** 490 00
29 Salaries 430 00
Medical aid contributions 860 00
4 140 00 4 140 00
* Medical aid contributions: R230 × 2 = R460

** Medical aid contributions: R245 × 2 = R490

Example continued
Dr SARS (PAYE) Cr
2016 2016
Feb 29 Bank 9 186 00 Feb 3 Wages 1 554 00
10 Wages 1 554 00
17 Wages 1 659 00
24 Wages 1 659 00
29 Salaries 2 760 00
9 186 00 9 186 00
Dr Creditors for Wages Cr

2016 2016
Feb 29 Bank 21 388 00 Feb 3 Wages 5 172 00
10 Wages 5 172 00
17 Wages 5 522 00
24 Wages 5 522 00
21 388 00 21 388 00
Dr Creditors for Salaries Cr

2016 2016
Feb 29 Bank 5 458 00 Feb 29 Salaries 5 458 00
Nominal accounts
Dr Wages Cr
2016
Feb 1 Balance b/d 325 600 00
3 Gross wages 7 400 00
356 200 00

Example continued
Dr Salaries Cr
2016
29 Gross salaries 9 200 00
110 400 00
Dr Pension Fund Contributions Cr

2016
3 Pension fund 444 00
27 688 00
Dr Medical Aid Contributions Cr

2016
31 160 00

Activity 14.10
The following information relates to the salaries of the employees of

Mandla Stores.
• Mandla Stores has the following employees:
• J Mtala, with a monthly salary of R4 800
• S Malinga, with a monthly salary of R5 000.
• The deductions are as follows:
• The pension fund is invested with Future Wealth Pension Fund. The
employees contribute 5% of their gross salary towards this fund.
• PAYE: J Mtala R1 100
S Malinga R1 200
• Medical aid: J Mtala R150
S Malinga R120
• Each employee contributes R25 per month to the United Staff
Association.
• Employer’s contributions:
• The employer contributes an additional amount of 10% of the gross
salaries towards the pension fund.
• Medical aid contributions are R2 for each R1 contributed by
the employee.
• On 31 May 2016, cheque no. 222 and cheque no. 223 were issued to J Mtala
and S Malinga respectively, while the amounts owed for the deductions
were paid to the relevant institutions.
Required
1. Complete the Salaries Journal of Mandla Stores for May 2016.
2. Show the necessary payments in the Cash Payments Journal of Mandla
Stores for May 2016. All salaries and deductions are paid on the last day of
the month.
Activity 14.11
The following information relates to the wages of the employees of Palm Stores.
Below is a summary of the Wages Journals for the first three weeks of
July 2016:
Summary of Wages Journals
Week ended Gross wage Pension fund Medical aid UIF PAYE
7 July 2 500 150 250 50 375
14 July 2 200 135 250 44 330
21 July 2 600 165 250 52 390

Below is a summary of the time worked by the wage earners of Palm Stores
during the week ended 28 July 2016:
Employee Normal time Overtime

Hours Rate per hour Hours Rate per hour
O Oak 40 25 4 50
A Ash 40 30 5 60
• The following deductions are made:

• Pension fund: Each employee contributes 7,5% of their normal-time
wage to the Better Growth Pension Fund.
• Medical aid: The employees contribute R50 per family member to the
Better Health Medical Scheme. Oak is unmarried, while Ash is married
with two children.
• UIF: 2% of gross wage
• PAYE: 15% of gross wage.
• Palm Stores contributes R2 for every R1 that the employee contributes to
the pension fund and on a rand-for-rand basis to the UIF.
Required
1. Draw up the Wages Journal of Palm Stores for the week ended 28 July 2016.
2. Complete the relevant entries in the Cash Payments Journal for July 2016.
A cheque is cashed for wages at the end of each week and all deductions
are paid on the last day of the month. (Use own cheque numbers.)
Activity 14.12
The information below was taken from the books of Ascot Traders during
December 2016.
Balances in the General Ledger on 1 December 2016

Wages R420 000
Salaries R165 000
Pension fund contribution R55 000
Medical aid contribution R32 000
Summary of Wages Journal of Ascot Traders for December 2016

Week ended Gross wage Deductions Employer’s contribution
Pension Pension
Medical aid PAYE Medical aid
fund fund
1 December 9 000 450 500 1 800 900 500
8 December 9 000 450 500 1 800 900 500
15 December 9 000 450 500 1 800 900 500
22 December 8 000 400 500 1 600 800 500
29 December 8 000 400 500 1 600 800 500

Summary of the Salaries Journal of Ascot Traders on 31 December 2016
Deductions Employers’ contribution
Gross salary
Pension fund Medical aid PAYE Pension fund Medical aid
15 000 750 800 3 000 1 500 800
Required
Use the information provided to draw up all the relevant accounts in the General
Ledger of Ascot Traders for December 2016. Assume that wages are paid weekly
and that salaries and all the deductions are paid on 31 December 2016.
10. Income tax calculations

As mentioned previously, employers are obliged to deduct income tax
from the salaries and wages of their employees according to the Pay-
As-You-Earn (PAYE) system. The amount deducted is calculated using
the income tax table. This table sets out the amount of tax payable per
annum based on a percentage of the income earned during the tax year
(1 March to 28/29 February). The income tax table is adjusted each year
when the National Budget is reviewed. For our purposes, we will use the
income tax table for the tax year ending 29 February 2012.
Income tax table for the year of assessment ending 29 February 2012
Taxable income (R) Rates of tax

0–150 000 18% of each R1
150 001–235 000 R27 000 + 25% of the amount above R150 000
580 001 and above R168 250 + 40% of the amount above R580 000
The following rebates were granted for the same year.
Tax rebates for the year of assessment ending 29 February 2012
Primary R10 755

Secondary (Persons 65 and older) R6 012
Tertiary (Persons 75 and older) R2 000

Notes
• The first column of the income tax table sets out the taxable income
brackets. A person who receives a salary of R15 000 per month will
earn taxable income of R180 000 per annum and thus be in the second
tax bracket (between R150 001 and R235 000).
• The second column sets out the rates of tax. A person who earns
R180 000 per annum is liable for tax of R27 000 + 25% of the amount
above R150 000 before rebates. This amount would be calculated
as follows:
Tax before rebates: R27 000 + 25% of the amount above R150 000
= R27 000 + 25% of (R180 000 – R150 000)
= R27 000 + (25% × R30 000)
= R27 000 + R7 500
= R34 500
• To work out how much the person must pay, the rebate is subtracted
from the above amount. For persons under 65 years old, the rebate
(for the 2011/12 tax year) is R10 755. A secondary rebate of R6 012 is
granted for persons 65 years and older, and a tertiary rebate of R2 000
is granted for persons 75 years and older. Assuming that the person in
our example is under 65 years old, the tax liability for the year would be:
R34 500 – R10 755 = R23 745
• Now you can calculate the monthly PAYE deduction.
R23 745 ÷ 12 = R1 978,75
Note
• The above example sets out the fundamental steps involved in
performing a tax calculation; however, in practice, tax calculations are
often more complex.
Example
Thabo Mdeki is 46 years old and earns a gross salary of R22 500 per
month. Calculate his tax liability for the year ending 29 February 2012.
Solution
Salary for the year: R22 500 × 12 = R270 000
Thabo’s taxable income falls under the R235 001 – R325 000 bracket in
the tax table.
Tax before rebates: R48 250 + 30% of the amount above R235 000
= R48 250 + 30% of (R270 000 – R235 000)
= R48 250 + (30% × R35 000)
= R48 250 + R10 500
= R58 750

Example continued
Thabo is 46 years old and entitled to a primary rebate of R10 755:
Tax liability for the year ending 29 February 2012: R58 750 – R10 755
= R47 995
Monthly PAYE deduction: R47 995 ÷ 12
= R3 999,58
Activity 14.13
Mary Mdaka is 66 years old and earns a gross salary of R20 000 per month.
Required
Calculate Mary’s tax liability for the year ending 29 February 2012, as well as the
monthly PAYE deduction.
11. Ethics
Employers have certain ethical and legal obligations relating to employment
and the payment of remuneration (salaries and wages) to their employees.
Employment contracts set out the conditions of employment and usually
include the responsibilities, normal working hours and remuneration of
the employee. Certain other employment conditions, such as overtime, sick
leave and annual leave, are specified by law.
Employers have an ethical responsibility to ensure that each of their
employees has a valid employment contract and that all employees
understand the terms of their contracts. Furthermore, the amount paid
to employees should be determined fairly, based on the working hours,
responsibilities and qualifications required for the job. This amount may
not be less than any legal minimum wage requirements and should (at
least) be in line with the industry employment standards.
Employees may opt to join a trade union in order to protect
themselves against unfair labour practices. Trade unions are organisations
that represent employees and help to protect them against unethical
and immoral labour practices. They endeavour to help members resolve
wage disputes, improve working conditions and ensure that safety
requirements are met and maintained in the workplace.
By its nature, the relationship between employer and employee is a
symbiotic relationship, whereby the employer and the employee depend
on each other to prosper. Ideally this should be a mutually beneficial
relationship, but unfortunately this relationship is frequently abused
due to unethical and immoral conduct. In some cases, unscrupulous
employers exploit their employees by forcing them to work long hours

while paying them as little as possible. In other instances, employees who
lack good work ethics often perform their duties with the minimum of
effort and do just enough so as to avoid being dismissed.
Research has shown that businesses who display a healthy ethical
relationship between employer and employees are more likely to succeed
and flourish. In these businesses, the employer and employees:
• treat each other with respect
• show appreciation for one another
• display loyalty, honesty and integrity
• behave in a professional and courteous manner.
Furthermore, in these businesses, the employers attempt to pay salaries and
wages above the market-related levels and award regular bonuses in order
to convey their appreciation for the hard work and loyalty of their staff.
This creates goodwill and the employees, in turn, show their gratitude by
working even harder or volunteering to work late when required.
Case study 14.1
Read the article below and then answer the questions that follow.
Cosatu: We will fight trains its managers to keep the workplaces

union-free.
against “Walmartisation” “By July 2008, the company faced more
T
than 80 lawsuits in connection with wages,
he Congress of South African Trade Unions overtime and hours violations, most of it class
(COSATU) on Thursday said it was deeply actions, with more than 10 000 workers affected
concerned at the bid by the world's in many of the cases.
biggest retailer, Wal-Mart, to take over South “It currently faces the largest class action
Africa's Massmart (MSM). on discrimination of women with more than
The union said that it fully shares the 1,5 million women workers being part of the
South Africa Commercial, Catering and Allied action, and it pays women less than men and
Workers Union’s (Saccawu) view that Wal-Mart women are less likely to be promoted than male
is one of the worst union-bashing employers in workers,” said Cosatu.
the world. The union also said that Wal-Mart has
This follows Monday's announcement by been listed in Human Rights Watch reports for
Massmart that it had received a non-binding its aggressiveness of its anti-union activities
proposal from Wal-Mart Stores (Wal-Mart), and that it conducts illegal surveillance on
which could lead to Wal-Mart making a cash its employees to root out any attempts at
offer to acquire the entire issued share capital of unionisation. Cosatu said it was also worried
Massmart for R148 per share, a deal which could about the impact that a Wal-Mart takeover
lead to a R32 billion offer for the consumer would have on local distributors, suppliers and
goods distributor. manufacturers.
Quoting Saccawu, Cosatu said that Wal-
Mart is a known anti-union company, which

“The company has become so powerful Cosatu said it would support any move
that it can dictate to suppliers the price they are by Saccawu to refer the takeover to the
prepared to pay for goods. This has led to many Competition Commission or the Ministers of
local suppliers, distributors and manufacturers Economic Development and Trade and Industry,
collapsing, and has also led to the use of child to ensure that the objectives of South Africa's
labour and payment of poverty wages in developmental agenda are not undermined.
countries such as Guatemala and Bangladesh,” “Cosatu and Saccawu will fight against any
it said. erosion of hard-fought-for workers' rights and
The union said that if the deal goes benefits. We will not tolerate the destruction
through, it could be a severe set-back for the of local procurement policies or the further
Proudly South African campaign to persuade decline of local manufacturing. We call on all
retailers to procure products manufactured South Africans to support a campaign against
locally by firms which comply with minimum the Walmartisation of the retail sector,” the
decent work standards. union said.
Extracted from an article by Zeenat Moorad appearing on BizCommunity, 30 September 2010
Questions
1. List the two South African unions that are mentioned in the article. Give the
full name and abbreviation for each union.
2. The article catalogues many unethical business and labour practices
committed by Wal-Mart, one of which is attempting to prevent its
employees from joining or forming a union. Quote three phrases from the
article that describe Wal-Mart’s attitude towards unions.
3. By July 2008, Wal-Mart was facing more than 80 lawsuits in connection with
various labour violations. List these labour violations.
4. Wal-Mart is also accused of unethical labour practices towards women.
Give two ways in which they discriminate against women.
5. Over and above its own unethical labour practices, Wal-Mart’s ruthless
business practices have contributed to unscrupulous labour practices in
countries such as Guatemala and Bangladesh.
a. Quote two examples of unethical labour practices employed in
these countries.
b. Explain how Wal-Mart has contributed to the use of these unethical
labour practices.
6. The word “Walmartisation” is used in the heading and in the last sentence of
the article. Provide a short definition for this made-up word.

12. Internal control
Now that you have studied salaries and wages and have seen how
transactions involving salaries and wages are recorded, it is useful to
revisit the internal controls for payrolls that were discussed in Chapter 4.
Remember that the internal control process for recording and paying
salaries and wages should ensure that payments are made only upon
proper authorisation to bona fide employees, and that these payments are
properly recorded. The following is a checklist of a few of the procedures
that should be adhered to:
Payroll controls
• Detailed personnel files are maintained for
all employees. 
• Access to personnel files are limited. 
• Detailed time sheets are used to record hours that employees

work, including overtime. 
• Time sheets are signed by a supervisor. 
• Time recording systems are carefully controlled. 
• Salary and wage calculations are always checked. 
• Regular employees are paid by direct deposit.
• The payroll list is checked regularly to make sure that all

employees are existing and bona fide. 

The following information was taken from the accounting records of

Olympic Traders on 31 December 2016.
Required
1. Use the information to draw up the Salaries Journal of Olympic Traders
for December 2016. (33)
2. Show the necessary payments in the Cash Payments Journal.
(You do not need to total the Cash Payments Journal.) (13)
3. Post entries to the following accounts in the General Ledger of
Olympic Traders:
• Pension Fund
• Creditors for Salaries
• Salaries. (14)
Information
Employees Gross monthly salary Marital state
H Sepeng R4 000 Married
H Cloete R5 800 Unmarried
M Jones R6 000 Married
The following deductions must be taken into account:
Pension fund
Every employee contributes 8% of their gross salary to the Olympic Pension
Fund. For every employee, the business contributes to the pension fund in the
ratio 2 : 1.
Unemployment Insurance Fund

With regards to unemployment insurance, every employee contributes
R1 per R1 000 (or part thereof ) of his gross salary. The business makes an
equal contribution.
Medical deductions
Married employees contribute R80 and unmarried employees R60 to the
Good Health Medical Aid. Olympic Traders contributes an equal amount for
every employee.
Union membership fees

Each employee contributes R15 per month to the Olympic Staff Association.

Income tax
Tax is deducted from each employee according to the PAYE tables.
Deductions for December were as follows: H Sepeng, R800; H Cloete, R1 450;
M Jones, R1 500.
All payments to employees are made on 31 December (cheques numbered

418 to 420). The business also makes all payments for deductions at the end
of the month.
Case study 14.2
Khune Traders, whose financial year ends on the last day of February, is owned
by Khaya Khune. The information given below relates to two employees
of Khune Traders, Harriet Hampton and Harold Hlope. Khune Traders
manufactures and sells raincoats and umbrellas.
Information
1. Harriet Hampton, who works as a fabric cutter for Khune Traders,
has been employed since 1 July 2007. The terms of her employment
contract stipulate the following:
Normal time 8½ hours per day Monday to Thursday and

6 hours on Friday
Overtime rate 1½ times the normal time rate
UIF 1% of gross salary
2. Harold Hlope, who is currently 43 years old, was appointed as the

factory foreman of Khune Traders on 1 March 2008. His salary scale is as
follows:
R132 000 × R8 400 – R165 600 × R9 600 – R213 600
Harold’s employment contract, which was signed on 1 March 2008,

provides for the following monthly deductions:
PAYE Calculated using the income tax tables

Pension fund 7,5% of gross salary
Medical aid R600 per month (as at 1 March 2008)
Annual increase of 10% p.a. on 1 March
each year
Staff R80 per month (as at 1 March 2008)
association Annual increase of R10 on 1 March each year

3. Khune Traders make the following additional contributions on behalf of
their employees:
Pension fund R1,50 for every R1,00 contributed by the

employee
Medical Aid on a rand-for-rand basis
4. The following is the partially completed wage advice slip of Harriet

Hampton for the week ending 26 February 2010:
WAGE ADVICE SLIP

Name: Harriet Hampton Week ending: 26 February 2010
Job description: Fabric cutter
Earnings
Hours worked Rate Earnings
Normal time ? R22,50 ?
Overtime 4 ? ?
Gross wage ?
Deductions Employer’s contributions

PAYE R 42,45 UIF ?
UIF ?
Total deductions ? Total contributions ?
Net wage ?
5. Tax information for the 2009/2010 tax year:
TAX TABLES FOR THE 2009/2010 TAX YEAR

Taxable income (R) Rates of tax
0–132 000 18% of each R1
• Primary rebate: R9 756

• Additional rebate (persons 65 and older): R5 400

Questions
1. Khune Traders pays Harriet Hampton a wage while Harold Hlope receives a
salary. Provide two key differences between these types of remuneration.
2. Use the information provided to complete the partially completed wage
advice slip of Harriet Hampton for the week ending 26 February 2010.
3. Determine the annual salary that Harold Hlope can expect to earn for the
year commencing 1 March 2014.
4. From what date will Harold Hlope receive a salary of R213 600?
5. Assume that Harold Hlope’s only source of income is his salary from
Khune Traders. Calculate his income tax payable for the tax year that ends
28 February 2010.
6. Calculate the amount of PAYE that will be deducted from
Harold Hlope’s salary each month during the tax year that ends
28 February 2010.
7. Determine Harold Hlope’s net salary for February 2010.
8. Calculate the total cost to Khune Traders of employing Harold Hlope for
February 2010.
9. When Khune Traders started eight years ago, they had a small factory with
only ten employees. Since then, the business has boomed and they have
moved to a bigger factory and now employ over 70 workers. Over this time,
Khaya Khune has been so focused on trying to keep up with the growing
demand for his products that he has neglected to update the payroll
controls of the business.
Provide Khaya with a checklist of controls that he should have in place for
recording and paying salaries and wages.
10. In an interview recently with Flourishing Business magazine, Khaya Khune
was asked to identify the attribute of his business that had contributed
mostly towards its success. Without hesitation, Khaya responded that the
accomplishments of Khune Traders were mostly due to his staff being
happy, ethical and hard-working.
Outline four steps that Khaya may have taken to help cultivate this sort of
working environment.
Research project 14.1
Work in pairs. Conduct an interview with an employee (possibly a family

member or friend). You can choose someone who earns a salary or a weekly
wage. Below is a list of questions you could ask:
• Do you earn a salary or a wage?
• What proportion is your overtime rate to your normal time rate
(if the person is a wage earner)?
• When and how are you paid?
• What deductions are made from your salary/wage?
• How is each deduction calculated?

• To which institutions are these deductions paid?
• Does your employer make any additional contributions towards your
pension fund, medical aid, UIF, and so on?
• Do you receive a bonus or a thirteenth cheque?
Feel free to add other questions to the list in order to find out more about
salaries and wages. You do not need to ask how much the employee earns,
as that is a private matter. If possible, also interview an employer and ask
similar questions.
Cross-curricula project 14.2
Work in pairs. A Salaries Journal or Wages Journal can be created easily

using a computer spreadsheet application (such as Microsoft Excel®). By
using a spreadsheet program, you can create formulae to perform repetitive
calculations, such as working out percentages and adding up columns.
In order to do this project, you will need access to a computer with a
spreadsheet program and a reasonable amount of computer knowledge. If
possible, ask the Computer Applications Technology teacher for help.
Use a spreadsheet program to create the Wages Journals for Activity 14.5
and Activity 14.6.
• All the calculations should be performed using cell formulae.
• Once you have created the Wages Journal for Activity 14.5, copy it
to another part of the spreadsheet and create the Wages Journal for
Activity 14.6 by just changing the hours by each employee works. The other
totals should be calculated automatically if your formulae are correct.
• Use the format options to format the numbers in your spreadsheet.
• Use borders and shading to create a neat presentation.
Special task – Working with EMP 201: Project 14.3
Before starting to work on the written presentation, read the following

information and study the example on the next page.
About the EMP 201 form

Every month, employers are required to pay amounts deducted for PAYE, as well
as amounts owing for SDL and UIF, to SARS. The prescribed form, the EMP 201,
must be completed and submitted to SARS with the amounts payable before
the seventh day of each month. This form is given to each employer by SARS.
The following information must be entered on the form (the numbers in
brackets are on the completed copy of the EMP201) for one month on page 296:

• The remuneration/leviable amount for PAYE is the amount on which the
PAYE calculation is based (see 1 ).
• The remuneration/leviable amount for SDL is the amount on which the
SDL calculation is based (see 2 ).
• The remuneration/leviable amount for UIF is the amount on which the
UIF calculation is based (see 3 ).
• The amount payable for PAYE is the amount to be paid to SARS for PAYE
(see 4 ).
• The amount payable for SDL is the amount to be paid to SARS for SDL
(see 5 ).
• The amount payable for UIF is the amount to be paid to SARS for UIF
(see 6 ).
• The control total is the total of the amounts payable for PAYE, SDL and
UIF (see 7 ).
• Penalties that have been incurred for late payments must be added (see 8 ).
• Interest is charged for overdue payments (see 9 ).
• The total amounts payable is the total of the amounts payable for PAYE, SDL
and UIF, and penalties or interest incurred (see 10 ).
• The number of employees refers to the number of:
• permanent employees (see 11 )
• non-permanent employees (see 12 )
• employees for whom SDL is paid (see 13 )
• employees for whom UIF is paid (see 14 ).
• Signature and date – the EMP 201 must be signed and dated
(see the bottom of the form).
Example
An employer has four permanent employees. The amounts payable
to SARS for PAYE, SDL and UIF, for January 2016, are set out in the
following table.
Employee Salary PAYE SDL UIF

1 R5 000 R400 R50 R100
2 R4 500 R375 R45 R90
3 R4 300 R365 R43 R86
4 R4 200 R360 R42 R84
Total R18 000 R1 500 R180 R360

example continued
The information in the table has been entered on the form below.
PART 1 of EMP201 (Example)
NB: READ APPLICABLE NOTES OVERLEAF PAYE PAYE PAYE
REMUNERATION (LEVIABLE AMOUNT)
(see notes 1–3)
1 R18 000 2 R18 000 3 R18 000
AMOUNT PAYABLE
(see notes 4–6) 4 R1 500 – 5 R180 – 6 R360 –
CONTROL TOTAL (4 + 5 + 6 = 7) 7 R2 040
ADD: Penalty 8 8 8
ADD: Interest 9 9 9
TOTAL AMOUNT PAYABLE 10 10 10
Permanent Employees
11 4 No of SDL employees No of UIF employees
Number of PAYE/SDL/UIF employees 13 4 14 4
Non-permanent empl
12
I certify that the particulars furnished in this return are true and correct.
Date Capacity: Accountant, etc Telephone/Fax/E-mail Signature
Required
You are the accountant of Tito Traders, and have to submit the
EMP 201 form to SARS each month. Construct a table (as shown in
the example) in which you set out the information below and then
complete a copy of EMP 201 form of Tito Traders for March 2016.
The EMP 201 form is included on the next page.
Information
Tito Traders has three permanent employees. Their salaries for
March 2016 are given in the table.
Employee Salary
W Wilkens R6 000
K Khumalo R6 400
P Peters R5 800
For each employee, the following deductions are made each month –
calculations are based on their monthly salaries:
• PAYE is calculated at 15%
• SDL payable amounts to 1%
• UIF payable amounts to 2%.
No penalties or interest charges were incurred for late payments.
The form must be signed and dated 5 April 2016.
296 c h a p t e r 1 4 • S A L A R I E S A n D WA G E S

i Note that this is an old
EMP201 form. It is only
being used here to show you how
to complete the proper fields
correctly.
Tito Traders
123 Main Road
Kenilworth 0860121218
7708 02
March 2016
07/04/2016
7234567890 0316
T234567890
7234567890
7234567890L0032016
T234567890G0032016
7234567890U0032016
188086
Tito Traders
123 Main Road 7234567890
Kenilworth T234567890
7234567890
7708 0032016
21/83100

Chapter 15
Financial accounting of a sole
trader – Final accounts and
year-end adjustments
• explain why closing transfers need to be done, what the accounting
period is and you will understand the accounting cycle
• journalise and post the following year-end adjustments: depreciation,
prepaid and accrued expenses, income received in advance, accrued
income and stock on hand
• enter closing transfers in the General Journal
• draw up the final accounts in the General Ledger and enter the closing
transfers in the ledger
• draw up a pre-adjustment Trial Balance, a post-adjustment Trial
Balance and a post-closing Trial Balance
• show and record the reversal of adjustments
• show the effect of year-end adjustments on the accounting equation
• record transactions using the perpetual inventory system.
Key concepts
• closing transfers • the accounting cycle • GAAP • year-end adjustments
• trading stock deficit • consumable stores on hand • closing transfers
• final accounts • reversal of adjustments
Sam, don't even think of asking

Busi for anything right now; it's
year-end!
fi n a n cial acc o u n ti n g o f a s o le trader –

298 chapter 15 •
F i n al acc o u n ts a n d year - e n d adj u st m e n ts

1. Accounting period
The main aim of any business is to make a profit. Profit is calculated
as follows:
Service business’s profit = income less expenses
rading business’s profit = sales less cost of sales plus other
T
income less expenses
The accounting period, or financial year, is usually twelve months and
it is always a fixed period and at the same time of the year, for example
1 March to 28 February, or 1 July to 30 June; it is the same twelve
consecutive months each year.
A business not only wants to calculate the profit for a certain period,
but also compares the current financial year with previous financial years.
2. Closing transfers
There are two reasons why a business would close off its books at the
end of a financial year (accounting period):
• to calculate the business’s profit for the year concerned
• to close off all nominal accounts, as well as drawings, so that the
following financial year can start anew.
A service business’s nominal accounts are all closed off to the Profit and
Loss account.
A trading business calculates its profit in two accounts. Gross profit
is calculated in the Trading account by taking sales less cost of sales.
This gross profit is then transferred to the Profit and Loss account, where
net profit is calculated by taking the gross profit plus other income less
expenses. The Trading account and Profit and Loss account are known as
final accounts. The closing transfers are entered in the General Journal.
Closing transfers
Trading account Profit and Loss account

Gross profit Net profit
= sales less cost of sales = gross profit plus other income
less expenses
F i n a n cial acc o u n ti n g o f a s o le trader –

• chapter 15 299

The following steps take place during the closing transfers of a trading
business at the end of the financial year:
Close off the Debtors Allowances account to the Sales account.
Close off the Sales and Cost of Sales accounts to the Trading account.
Calculate the gross profit in the Trading account.
Transfer the gross profit from the Trading account to the Profit and Loss account.
Close off all income to the credit side of the Profit and Loss account.
Close off all expenses to the debit side of the Profit and Loss account.
Calculate the net profit in the Profit and Loss account.
Transfer the net profit from the Profit and Loss account to the Capital account.
Close off the Drawings account to the Capital account.
After the closing transfers have been done, a post-closing Trial Balance
is drawn up. The post-closing Trial Balance contains only Balance Sheet
accounts, since all nominal accounts have already been closed off.

300 chapter 15 •

Example
The Trial Balance of Cunningham Traders on 28 February 2019, the
end of their financial year, is given below.
Required
1. Make journal entries of the closing transfers.
2. Open the Capital, Drawings and nominal accounts in the General
Ledger and show the closing transfers to the Trading account and
Profit and Loss account.
3. Draw up the post-closing Trial Balance on 28 February 2019.
Cunningham Traders
Trial Balance on 28 February 2019
Capital B1 200 840 00
Land and buildings B3 200 000 00
Bank B7 32 140 00
Petty cash B9 150 00
Nominal accounts
Sales N1 480 000 00
Debtors allowances N3 6 200 00
Water and electricity N6 4 674 00
Wages N8 19 200 00
Salaries N9 40 800 00
Advertising N10 2 400 00
Insurance N11 6 000 00
706 630 00 706 630 00

• chapter 15 301

Example continued
Solution
General Journal of Cunningham Traders – February 2019 GJ12
Day Details Fol. Debit Credit
28 Sales N1 6 200 00
(Closing transfer)
Sales N1 473 800 00
Trading account F1 473 800 00
(Closing transfer) (480 000 – 62 000)
(Closing transfer)
Profit and loss account F2 153 800 00
(transfer of gross profit)
(Closing transfer) (473 800 – 320 000)
Proft and loss account F2 79 036 00
Wages N8 19 200 00
(Closing transfer) (153 800 + 14 880 – 79 036)
Capital B1 89 644 00
(Transfer of net profit)
(Closing transfer)
General Ledger of Cunningham Traders
Dr Capital B1 Cr
2019 2019
Feb 28 Drawings GJ12 10 520 00 Feb 28 Balance b/d 200 840 00
Balance c/d 279 964 00 Profit and loss account GJ12 89 644 00
290 484 00 290 484 00
2019
Mar 1 Balance b/d 279 964 00

302 chapter 15 •

Example continued
Dr Drawings B2 Cr
2019 2019
Feb 28 Balance b/d 10 520 00 Feb 28 Capital GJ12 10 520 00
10 520 00 10 520 00
Nominal accounts
Dr Sales N1 Cr
2019 2019
Feb 28 Debtors allowances GJ12 6 200 00 Feb 28 Balance b/d 480 000 00
Trading account GJ12 473 800 00
480 000 00 480 000 00
Dr Cost of Sales N2 Cr
2019 2019
Feb 28 Balance b/d 320 000 00 Feb 28 Trading account GJ12 320 000 00
320 000 00 320 000 00
Dr Debtors Allowances N3 Cr
2019 2019
Feb 28 Balance b/d 6 200 00 Feb 28 Sales GJ12 6 200 00
6 200 00 6 200 00
Dr Rent Income N4 Cr
2019 2019
Feb 28 Profit and loss account GJ12 14 880 00 Feb 28 Balance b/d 14 880 00
14 880 00 14 880 00
Dr Telephone N5 Cr
2019 2019
Feb 28 Balance b/d 4 092 00 Feb 28 Profit and loss account GJ12 4 092 00
4 092 00 4 092 00

• chapter 15 303

Example continued
Dr Water and Electricity N6 Cr

2019 2019
4 674 00 4 674 00
Dr Stationery N7 Cr
2019 2019
1 870 00 1 870 00
Dr Wages N8 Cr
2019 2019
19 200 00 19 200 00
Dr Salaries N9 Cr
2019 2019
40 800 00 40 800 00
Dr Advertising N10 Cr
2019 2019
2 400 00 2 400 00
Dr Insurance N11 Cr
2019 2019
6 000 00 6 000 00

304 chapter 15 •

Example continued
Dr Trading account F1 Cr
2019 2019
Feb 28 Cost of sales GJ12 320 000 00 Feb 28 Sales GJ12 473 800 00
Profit and loss account GJ12 153 800 00
473 800 00 473 800 00
Dr Profit and loss account F2 Cr

2019 2019
Feb 28 Telephone GJ12 4 092 00 Feb 28 Trading account GJ12 153 800 00
Water and electricity GJ12 4 674 00 Rent income GJ12 14 880 00
Stationery GJ12 1 870 00
Wages GJ12 19 200 00
Salaries GJ12 40 800 00
Advertising GJ12 2 400 00
Insurance GJ12 6 000 00
Capital GJ12 89 644 00
168 680 00 168 680 00
The amount of R89 644 is therefore the net profit that is now
transferred from the Profit and Loss account to the Capital account.
Cunningham Traders
Post-closing Trial Balance on 28 February 2019
Capital (200 840 + 89 644 – 10 520) B1 279 964 00
Bank B7 32 140 00
290 874 00 290 874 00

• chapter 15 305

example continued
Notes
• The Capital balance is the new balance – in other words, after net
profit has been added and drawings has been subtracted.
• There is no Drawings account because it has been closed off.
Activity 15.1
P magubeni owns a sporting goods store that sells sports equipment and
clothing. The Trial Balance of magubeni Sport on 28 February 2019, the end of
their financial year, is provided.
Required
1. make journal entries for the closing transfers.
2. open the Capital (5), Drawings (2) and the nominal accounts (Sales has
The number in brackets 4 lines and 2 lines each for the rest) in the General Ledger and show the
indicates how many lines to closing transfers to the Trading account (4) and Profit and Loss account (10).
leave open for each account. 3. Draw up the post-closing Trial Balance on 28 February 2019.
Magubeni sport
Trial Balance on 28 february 2019
Capital B1 184 470 00
Bank B7 5 993 00
FInAnCIAL ACCounTInG oF A SoLE TRADER –

306 chapter 15 •
FInAL ACCounTS AnD YEAR-EnD ADJuSTmEnTS

Nominal accounts Fol. Debit Credit
Sales N1 1 320 000 00
Stationery N7 518 00
Wages N8 60 000 00
Advertising N10 642 00
1 534 650 00 1 534 650 00
Activity 15.2
P Rudolph is the owner of a furniture store, Rudolph Furnishers. The Trial

Balance on 30 June 2020, the end of their financial year, is given below.
Required
2. open the Capital (6), Drawings (3) and the nominal accounts (Sales has The number in brackets
5 lines and 3 lines each for the rest) in the General Ledger and show the indicates how many lines to
closing transfers to the Trading account (5) and Profit and Loss account (12). leave open for each account.
3. Draw up the post-closing Trial Balance on 30 June 2020.
Rudolph furnishers
Trial Balance on 30 June 2020
Bank B8 8 230 00
Loan: XY Bank B12 50 000 00

• chapter 15 307

Sales N1 1 080 000 00
Discount received N5 3 210 00
Wages and salaries N10 71 800 00
Interest on loan N12 6 500 00
Discount allowed N13 1 380 00
1 269 390 00 1 269 390 00
Activity 15.3
The Trial Balance of kirsten Traders on 28 February 2018, the end of their
financial year, is given below.
Required
The number in brackets 1. make journal entries for the closing transfers.
indicates how many lines to 2. Show only the following accounts in the General Ledger:
leave open for each account. Capital (5) and Drawings (3).
3. Draw up the post-closing Trial Balance on 28 February 2018.
Kirsten Traders
Fixed deposit: Unity Bank B5 30 000 00
Bank B8 10 185 00

308 chapter 15 •

Sales N1 1 350 720 00
Interest on fixed deposit N5 3 300 00
Rent expense N6 25 200 00
1 455 160 00 1 455 160 00
Activity 15.4
J Claasens runs a service business that offers cleaning services to businesses

and households. The Trial Balance of Dustbuster Cleaning Services on
i Remember: Since this is a
service business, there is only
28 February 2018, the end of their financial year, is given below. a Profit and Loss account and no
Trading account.
Required
2. Show the following accounts in the General Ledger: Capital (5), Drawings (2), The number in brackets
nominal accounts (2 each) and Profit and Loss account (11). indicates how many lines to
3. Draw up the post-closing Trial Balance on 28 February 2018. leave open for each account.
dustbuster Cleaning services

Capital B1 107 680 00
Fixed deposit: Unity Bank B5 10 000 00
Bank B7 5 320 00

• chapter 15 309

Current income N1 233 200 00
Interest on fixed deposit N2 800 00
Material costs N3 59 720 00
Wages N8 68 000 00
Repairs N9 2 910 00
Fuel N10 6 920 00
347 760 00 347 760 00
The financial year of Dennis’s Cycle Shop ends on 30 June 2017. They trade in
bicycles and other accessories and do repairs to bicycles.
Required
1. make journal entries for the closing transfers. (25)
The number in brackets 2. Show the following accounts in the General Ledger: Capital (5),
indicates how many lines to Drawings (2), Sales (4), Current Income (2) and Telephone (2). (15)
leave open for each account. 3. Draw up the post-closing Trial Balance on 30 June 2017. (10)
Balances on 30 June 2017

Wages and Salaries, R95 300; Trading Stock, R63 400; Sales, R420 000;
Cost of Sales, R262 500; Debtors Allowances, R5 660; Bank (DR), R6 447;
Debtors Control, R4 773; Creditors Control, R8 700; Rent Expense, R25 200;
Vehicles, R60 600; Equipment, R25 900; Petty Cash, R110; Cash Float, R600;
Drawings, R18 000; Repairs, R1 145; Advertising, R4 210; Water and Electricity,
R5 860; Telephone, R6 979; Capital, R126 906; Current Income, R31 078.

310 chapter 15 •

3. T
he accounting cycle and generally accepted
accounting practice (GAAP)
The GAAP concepts were discussed in Chapter 3. The following table
shows a summary and example of each concept:
GAAP principle Description Example

Business entity rule The financial affairs of the owner should be kept separate The business and the owner must each have their own
from that of the business – they are two separate entities. bank account.
Historical cost concept Assets should be entered at its historical cost; that is, the Land and buildings purchased for R500 000 will be entered
amount that was originally paid for them. at that amount in the books, even if the business can
received a lot more for it after a couple of years.
Going concern concept The financial statements of a business are prepared with Assets are valued at the historical cost and not at the value
the assumption that the business will continue operating the business will receive for it, should the business be sold
in the foreseeable future. in the following year.
Matching concept Income and expenses must be accounted for in the correct The telephone account for February 2015 has to be taken
time period. into account in the financial year ending 28 February 2015,
even if the account is only being paid in March.
Prudence concept Financial results are reflected in a conservative manner. If the business expects to make a profit of R100 000 on the
sale of part of the building, it will not be entered in the
books until the transfer of the land has been concluded.
Concept of materiality Material items must be shown in the financial statements, Interest on Overdraft must be shown in a specific account,
but the immaterial items need not be highlighted. while Consumables can be included with Sundry Expenses.
Activity 15.5
Match the explanations in column A to the concepts in column B by writing the

correct letter next to the correct question number.
COLUMN A COLUMN B
1. The financial statements of a business are A. Concept of materiality
prepared as if the business will continue
trading in the foreseeable future.
2. A business trading in MP3 players will show B. Matching concept
the value in the books at the cost price of
R350 each, even if it is planning to sell each
player at R600.
3. If a business purchased a building three years C. Going concern concept
ago at R600 000 and its worth R900 000
today, it will still be shown at the value of
R600 000 in the business’s statements.
4. The telephone account at the end of D. Historical cost concept
February 2017 is still payable. This will be
added to the Telephone account before
closing it off to the Profit and Loss account.
5. Consumable, postage and bank charges can E. Prudence concept
all be posted to one account called Sundry
expenses.

• chapter 15 311

The accounting cycle is as follows:
SOURCE DOCUMENTS
Receipt, cash register roll, deposit slip, cheque counterfoil, duplicate and original
invoice, petty cash voucher, debit note, credit note
SUBSIDIARY JOURNALS
CRJ, CPJ, DJ, CJ, PCJ, DAJ, CAJ, GJ
POSTING TO LEDGERS
General Ledger, Debtors Ledger, Creditors Ledger
PRE-ADJUSTMENT TRIAL BALANCE
YEAR-END ADJUSTMENTS
POST-ADJUSTMENT TRIAL BALANCE
CLOSING TRANSFERS AND FINAL ACCOUNTS

Trading account and Profit and Loss account
POST-CLOSING TRIAL BALANCE
FINANCIAL STATEMENTS
Income Statement and Balance Sheet

312 chapter 15 •

4. Year-end adjustments
4.1 Depreciation
If you bought a vehicle or equipment for R60 000 on 1 March 2017, it will
not still be worth R60 000 one year later because the value of the asset
has decreased as a result of wear and tear. This wear and tear is called
depreciation. It is calculated annually. The depreciation is then written
off against the asset and is considered an expense. You can thus say that
depreciation is what it costs you to use the asset. However, this amount is
not paid physically and therefore depreciation is considered an imputed inputed expense
expense. Depreciation is an imputed expense because the expense is A cost that is incurred by using an
linked to a specific accounting period. asset; not actual money spent
There are two methods by which depreciation can be calculated:
the fixed amount/straight-line method and the diminished balance
method.
4.1.1 Fixed amount method (on cost price)/straight-line method

According to the fixed amount method, a certain percentage of the cost
is written off annually. The expected life span of the asset is determined
and according to this, the percentage depreciation to be written off is
determined. The amount of depreciation is the same every year.
If, for example, a vehicle was bought for R70 000 on 1 March 2017,
and depreciation is calculated at 15% per annum on the cost price, the
calculations are shown in the table.
Date Calculation Annual Accumulated Carrying value

depreciation depreciation
01/03/2017 Cost price: R70 000 R70 000
28/02/2018 70 000 × 15% R10 500 R10 500 R59 500
28/02/2019 70 000 × 15% R10 500 R21 000 R49 000
29/02/2020 70 000 × 15% R10 500 R31 500 R38 500
Notes
• The annual depreciation is an expense within the financial year.
• The accumulated depreciation is the total depreciation already written
off on the asset (previous years’ depreciation added together).
• The carrying value is the amount that the asset is worth (cost price
less accumulated depreciation).
4.1.2 Diminished balance method (on carrying value)

According to this method, the depreciation is calculated on the
diminished balance or carrying value, where carrying value equals
cost price less accumulated depreciation.

• chapter 15 313

With this method, the depreciation written off annually will initially
be high and then decrease every year.
If, for example, equipment was bought for R20 000 on 1 March 2016
and depreciation is written off at 10% per annum on the diminished
balance, the calculation will be as follows:

01/03/2016 Cost price: R20 000 R20 000
28/02/2017 20 000 × 10% R2 000 R2 000 R18 000
28/02/2018 18 000 × 10% R1 800 R3 800 R16 200
28/02/2019 16 200 × 10% R1 620 R5 420 R14 580
This depreciation, together with various other information, is recorded in

the assets register.
Activity 15.6
Complete copies of these assets registers.
Assets register – Cunningham Traders

Item: Toyota truck (CLK3456EC) Date purchased: 1 March 2017
General ledger account: Vehicles (B4)
Purchased from: JW Motors Cost price: R90 000
Depreciation: 10% per annum on the cost price
01/03/2017
28/02/2018
28/02/2019
29/02/2020

314 chapter 15 •

Assets register – Cunningham Traders
item: Computer date purchased: 1 March 2017
general ledger account: Equipment (B5)
purchased from: Computron Cost price: R12 000
depreciation: 15% per annum on the diminishing balance
01/03/2017
28/02/2018
28/02/2019
29/02/2020
4.1.3 Recording depreciation

Depreciation is calculated at the end of every financial year. Since it
is a non-cash transaction, it is entered in the General Journal. The
Depreciation account which is an expense, is debited, and the Accumulated
Depreciation account on vehicles/equipment, which is a negative asset,
Accumulated depreciation is
is credited. Accumulated depreciation is a negative asset because it
a negative asset.
decreases the value of assets.
example
Cunningham Traders started their business on 1 March 2016 and
purchased equipment to the value of R32 000 for cash (cheque no. 001)
from Paarlberg Furnishers on this date.
On 28 February 2017, the end of the financial year, depreciation at
15% per annum on the cost price must be brought into account.
Required
1. Record the entries in the subsidiary journals.
2. Post entries to the General Ledger.
3. Show the effect on the accounting equation.
solution
Cash payments Journal of Cunningham Traders – March 2016 CpJ1
Doc. Day Name of payee Fol. Bank Sundry accounts Fol.
no. Amount Details
001 01 Paarlberg Furnishers 32 000 00 32 000 00 Equipment B5

• chapter 15 315

Example continued

28 Depreciation N20 4 800 00
Accumulated depreciation on equipment B6 4 800 00
(Depreciation at 15% on cost price)
Calculation: R32 000 × 15% = R4 800

Dr Equipment B5 Cr
2016
Mar 01 Bank CPJ1 32 000 00
Dr Accumulated Depreciation on Equipment B6 Cr

2017
Feb 28 Depreciation GJ12 4 800 00
Note
• The entry is on the credit side, because accumulated depreciation
on equipment is a negative asset – it decreases the value of assets –
assets decrease on the credit side.
Nominal account
Dr Depreciation N20 Cr
2017 Accumulated depreciation 2017
Feb 28 on equipment GJ12 4 800 00 Feb 28 Profit and loss account GJ12 4 800 00
Notes
• Depreciation is debited, because it is an imputed expense and
expenses decrease owner’s equity on the debit side.
• The Depreciation account is closed off to the Profit and Loss account
because it is an expense.

316 chapter 15 •

example continued
The effect on the accounting equation is shown below:
2016 +32 000 Equipment
Mar increased
01 –32 000 Cash decreased
2017 –4 800 Carrying value –4 800 Depreciation

Feb of equipment – expense
28 decreased
Activity 15.7 gAAp flash
J du Toit started a vegetable farm called Du Toit Farming on 1 march 2016. on Historical cost principle:
Assets are entered at their cost
this date, the business bought a vehicle with a cost price of R80 000 on credit
price in the Asset account, and the
from Baroda motors (renumbered invoice no. 001). on 28 February 2017, the depreciation is entered in a separate
end of the financial year, depreciation must be taken into account at 15% per account called Accumulated
annum on the cost price. Depreciation.
Required
1. Show the entries in the subsidiary books.
2. Post entries to the General Ledger.
3. Show the effect on the accounting equation.
In the previous example, the business started trading. In the following

financial year, the Accumulated Depreciation account will start with the
balance brought down from the previous year.
example
Cunningham Traders’ financial year ends on 28 February. Below is an
extract from the pre-adjustment Trial Balance of Cunningham Traders
on 28 February 2018.
Cunningham Traders
pre-adjustment Trial Balance on 28 february 2018

• chapter 15 317

Example continued
Adjustment on 28 February 2018
Depreciation on equipment must be taken into account at 15% per
annum on the cost price.
Required
1. Show the entries for depreciation in the General Journal.
2. Show the entries in the General Ledger.
Solution
28 Depreciation N20 4 800 00
(Depreciation at 15% on cost price)
Calculation: R32 000 × 15% = R4 800

Dr Equipment B5 Cr
2017
Dr Accumulated Depreciation on Equipment B6 Cr

2017
2018
Feb 28 Depreciation GJ12 4 800 00
9 600 00
Nominal account
Dr Depreciation N20 Cr
2018 Accumulated depreciation on 2018
Feb 28 equipment GJ12 4 800 00 Feb 28 Profit and loss account GJ12 4 800 00
4 800 00 4 800 00

318 chapter 15 •

Activity 15.8
on 1 march 2017, Louw Traders started trading and on this date they bought
a vehicle on credit from CAT motors for R90 000. Depreciation is written off at
20% per annum on the cost price.
Required
open the following accounts in the General Ledger and show the entries The number in brackets
for the period 1 march 2017 to 28 February 2019: Vehicles (2), Accumulated indicates how many lines to
Depreciation on Vehicles (5) and Depreciation (6). leave open for each account.
Activity 15.9
on 1 July 2017, Faure Stores started trading and on this date they bought
equipment with a cost price of R28 000 for cash. The business’s financial year
ends on 30 June and depreciation is written off at 15% per annum on the
diminished balance.
Required
1. open the following accounts in the General Ledger: Equipment (2), The number in brackets
Accumulated Depreciation on Equipment (5) and Depreciation (6). indicates how many lines to
2. Show the adjustment for depreciation on both 30 June 2018 and leave open for each account.
30 June 2019 in the General Ledger.
Activity 15.10
CJn Traders’ financial year ends on 28 February. Below is an extract from the
pre-adjustment Trial Balance of CJn Traders on 28 February 2018.
CJn Traders
Adjustment
Depreciation on equipment must be taken into account at 10% per annum on
the diminished balance.
Required
1. Show the entry for depreciation in the General Journal.
2. Show the entries in the General Ledger: Equipment (2), Accumulated indicates how many lines to
Depreciation on Equipment (5) and Depreciation (4). leave open for each account.

• chapter 15 319

gAAp flash Activity 15.11
The procedures that are followed
in the recording and reporting of on 1 march 2017 the following balances, among others, appeared in the
depreciation are based on three General Ledger of Gaobone Traders:
fundamental GAAP principles, • Vehicles R70 000
namely the historical cost • Accumulated Depreciation on Vehicles R14 000
concept, the prudence concept
and the matching concept. on 28 February 2018, depreciation at 20% per annum on the diminished
The historical cost concept balance must be taken into account. no additional vehicles were purchased
provides that assets should be during the year.
valued at historical cost, which
means to record the accumulated Required
depreciation in a separate account. 1. Show the entry for depreciation in the General Journal.
This way, the assets remain listed 2. Show the entries in the General Ledger: Vehicles (2), Accumulated
at cost.
Depreciation on Vehicles (5) and Depreciation (4).
Since assets are required to be
valued a historical cost, why 4.1.4 Assets purchased during the financial year
it is necessary to put through
depreciation at all? To answer this, In practice, not all assets are necessarily bought at the beginning of the
we need to look at the prudence financial year. What happens if an asset is bought during the year? This
concept, which provides that asset is not used for the full twelve months, therefore depreciation is only
accountants should be conservative taken into account for the number of months that the asset has been used.
and take care not to overstate
assets or income, nor to understate
liabilities and expenses. Certain example
assets, such as motor vehicles, A business’s financial year runs from 1 March 2018 to 28 February
decrease substantially in value over
2019. A vehicle was purchased on 1 July 2018 for R72 000. Below is the
time, so accountants prudently put
through depreciation so that the calculation for depreciation on 28 February 2019 if the business writes
carrying value of the assets (cost off depreciation at 20% per annum on the cost price.
less accumulated depreciation) is 8
fairly stated in the financial records. Calculation: R72 000 × 20% × __ 12 = R9 600
Furthermore, we have seen that The vehicle has only been used for eight months of that year, so
depreciation calculations are always depreciation is only written off for those eight months.
based on the time period in which
the asset was in use. This is done
in accordance with the matching
concept, so that the depreciation Activity 15.12
expense is recorded and matched
to the period in which the expense
on 1 march 2018 the following balances, among others, appeared in the
was actually incurred.
General Ledger of Freeman Traders:
• Equipment R25 000
• Accumulated Depreciation on Equipment R 3 750
on 1 november 2018, Freeman Traders bought additional equipment with a

cost price of R15 000 for cash. Depreciation at 15% per annum must be written
off on the cost price on 28 February 2019.

320 chapter 15 •

Required
1. Show the journal entries for depreciation on 28 February 2019.
2. Show the following accounts in the General Ledger for the period indicates how many lines to
1 march 2018 to 28 February 2019: Equipment (4), Accumulated leave open for each account.
Depreciation on Equipment (5) and Depreciation (3).
Activity 15.13
on 1 July 2019 the following balances, among others, appeared in the General
Ledger of Vuyo Traders:
• Vehicles R72 000
• Accumulated Depreciation on Vehicles R14 400
on 1 January 2020, Vuyo Traders bought an additional vehicle with a cost price
of R80 000 on credit from marais motors. on 30 June 2020, depreciation must
be taken into account at 20% per annum on the diminished balance.
Required
1. Show the journal entries for depreciation on 30 June 2020.
2. Show the following accounts in the General Ledger for the period
1 July 2019 to 30 June 2020: Vehicles (5) Accumulated Depreciation on leave open for each account.
Vehicles (5) and Depreciation (4).
4.1.5 Internal control of fixed assets

Now that you have learnt about the acquisition and depreciation of fixed
assets and have seen how these transactions are recorded, it is useful to
revisit the internal controls for fixed assets that were discussed in Chapter 4.
Below is a checklist of some of procedures that should be adhered to:
Controls for fixed assets

• Fixed assets are safeguarded physically against theft and loss. 
• Proper authorisation and approvals are required for the
acquisition of fi xed assets. 
• Detailed records of fi xed assets are maintained. 
• These records are checked periodically by physical stocktake. 
• Lost, stolen or destroyed items are reported immediately. 
• Depreciation policies are established and documented. 
• Any movements of fi xed assets are recorded promptly in
the appropriate journal. 

• chapter 15 321

Activity 15.14
On 1 March 2018 the following balances, among others, appeared in the

General Ledger of Yawa Traders:
• Accumulated Depreciation on Equipment R8 400
On 1 July 2018, Yawa Traders purchased an additional vehicle with a cost price
of R60 000 on credit from Paarlberg Motors. Additional equipment for R13 200
was bought for cash on 31 October 2018. Depreciation must be taken into
account on 28 February 2019 as follows:
• on vehicles at 20% per annum on the diminished balance
• on equipment at 15% per annum on the cost price.
Required
1. Show the journal entries for depreciation on 28 February 2019.
1 March 2018 to 28 February 2019: Vehicles, Equipment, Accumulated
Depreciation on Vehicles, Accumulated Depreciation on Equipment and
Depreciation (leave 5 open lines for each account).
Activity 15.15
On 1 July 2018 the following balances, among others, appeared in the General
Ledger of Xhala Traders:
• Accumulated Depreciation on Equipment R1 200
On 1 November 2018, Xhala Traders bought a motorbike for deliveries for

R9 600 cash. A computer was bought on credit from Computron for R7 200 on
30 April 2019. Depreciation must be taken into account on 30 June 2019 as follows:
• on vehicles at 15% per annum on the cost price
• on equipment at 10% per annum on the diminished balance.
Required
1. Show the journal entries for depreciation on 30 June 2019.
1 July 2018 to 30 June 2019: Vehicles, Equipment, Accumulated
Depreciation on Vehicles, Accumulated Depreciation on Equipment and
Depreciation (leave 5 lines open for each account).

322 chapter 15 •

4.2 Accrued and prepaid expenses
To calculate the net income for a specific financial period as accurately as
possible, the expenses for the whole financial year (twelve months) must
be taken into account.
4.2.1 Accrued expenses/Expenses payable gAAp flash

Accrued expenses are amounts that are still payable for expenses for the Matching principle: Income and
current financial year. For example, the amount for water and electricity expenses incurred in a certain year
paid during the year amounts to R4 532, but the account for February should be taken into account in that
of R435 (financial year ends on 28 February) has not yet been paid. An year’s financial statements.
adjustment has to be made as follows:
• R435 must be added to water and electricity, thus the water and
electricity account is debited.
• The contra-entry is in the Accrued Expenses account that is created,
and this account is then credited with R435; accrued expenses is a
liability because it is money that the business still owes (it is a Balance
Sheet account).
• So the total amount that is considered an expense for the current
financial year is R4 532 + R435 = R4 967.
4.2.2 Prepaid expenses

Prepaid expenses are amounts that have already been paid in the current
financial year but that apply to the following financial year. For example,
the amount paid for advertising during the financial year amounts to
R3 600. Included in this is R400 that was paid for advertising that will
only appear in March and April of the following financial year – it has
therefore been prepaid. The adjustment must be done as follows:
• R400 must be subtracted from advertising, because it is not an
expense for the current financial year; advertising must thus be
credited with R400.
• The contra-entry of the transaction is that the Prepaid Expenses
account is created and then debited with R400; prepaid expenses is an
asset because it is a service that is owed to the business (it is a Balance
Sheet account).
• So the total amount that is considered an expense for advertising for
the current year is R3 600 – R400 = R3 200.

• chapter 15 323

Example
Cunningham Traders’ financial year ends on 28 February.
Cunningham Traders
Pre-adjustment Trial Balance on 29 February 2016
Adjustments on 29 February 2016

• The telephone account for February 2016 of R227 has been received
but not yet paid.
• Insurance includes an annual insurance premium of R960 that was
paid on 1 October 2015.
Required
1. Show the entries of the adjustments in the General Journal.
2. Show the adjustments in the General Ledger and close off the
accounts properly on 29 February 2016.
3. Show the effect, with reasons, on the accounting equation.
Solution
1. General Journal of Cunningham Traders:

29 Telephone N5 227 00
Accrued expenses B14 227 00
(Adjustment)
Prepaid expenses B15 560 00
Insurance N6 560 00
(Adjustment)
1/3/2015 1/10/2015 29/2/2016

3 3
Timeline:
R960 5 months 7 months
Calculation: R960 × __ 7   = R560

 12

324 chapter 15 •

Example continued
2. General Ledger of Cunningham Traders:
Dr Accrued Expenses B14 Cr
2016
Feb 29 Telephone GJ12 227 00
Note
• Accrued expenses is credited, because it is a liability – the business
still owes R227.
Dr Prepaid Expenses B15 Cr

2016
Feb 29 Insurance GJ12 560 00
Note
• Prepaid expenses is debited, because it is an asset – the insurance
company owes the business the service, which was paid in advance
for seven months.
Nominal accounts
Dr Telephone N5 Cr
2016 2016
Accrued expenses GJ12 227 00
2 988 00 2 988 00
Notes
• The amount of R227 is added to the Telephone account, because it is
the current year’s expense and has not yet been paid.
• The actual expense for telephone that is transferred to the Profit and
Loss account is thus R2 988.
Dr Insurance N6 Cr
2016 2016
Feb 29 Balance b/d 6 600 00 Feb 29 Prepaid expenses GJ12 560 00
6 600 00 6 600 00

• chapter 15 325

Example continued
Notes
• The amount of R560 is subtracted from the insurance expense total
because it was paid in advance for the following financial year – it is
therefore not an expense for this year.
• The actual expense for insurance for the current financial year is
thus R6 040.
3. The effect on the accounting equation is shown below:
Adj . Effect Reason Effect Reason Effect Reason
no.
1. –227 Telephone +227 Create
– expense liability
increased – accrued
expenses
2. +560 Create asset +560 Insurance
– prepaid – expense
expense decreased
Activity 15.16
Wizard Traders’ financial year ends on 28 February. Below is an extract from the
pre-adjustment Trial Balance of Wizard Traders on 29 February 2016.
Wizard Traders

• The water and electricity account for February 2016 for R546 has been
received but not yet paid.
• Included in advertising is a six-month contract for R310 per month that ends
on 30 April 2016.
Required
2. Show the adjustments in the General Ledger and close off the accounts
properly on 29 February 2016.

326 chapter 15 •

Activity 15.17
Woods Store’s financial year ends on 28 February. Below is an extract from the
pre-adjustment Trial Balance of Woods Store on 28 February 2017.
Woods store
Adjustments on 28 february 2017

• The telephone account for February 2017 amounts to R512 and is
still payable.
• Insurance includes an annual insurance premium for R4 080 that was paid
on 1 September 2016.
Required
4.3 income received in advance and accrued income gAAp flash

As with expenses, only the income earned during the current financial Matching principle: Income and
year must be taken into account (matching principle). expenses incurred in a certain year
should be taken into account in that
year’s financial statements.
4.3.1 Income received in advance/Income deferred
Income received in advance is an amount that has been received during
the current financial year for the following financial year. For example,
the business (financial year ending 28 February 2018) lets a storeroom at
R600 per month. During the financial year R7 800 was received, including
the rent for March 2018. The adjustment will be as follows:
• R600 too much was received – it is an income for the following year –
so it must be subtracted from rent income – therefore Rent Income
is debited.
• The contra-entry is in the Income Received in Advance account, which
must be created. Income Received in Advance is thus credited – it is a
liability because the business owes the money/service to the tenant. It
is a Balance Sheet account.

• chapter 15 327

4.3.2 Accrued income/Income receivable
Accrued income is an amount of money that has not been received, yet
the income has already been earned during the current financial year. For
example, the business has a fixed deposit of R10 000 at 15% interest. The
interest that is earned during a year should be R1 500. The Trial Balance
shows, however, that the business has only received R1 125 and so R375 is
still receivable. The adjustment is made as follows:
• R375 must be added to the Interest on Fixed Deposit account, since it
has already been earned, but not yet received. Interest on fixed deposit
is thus credited.
• The contra-entry is in the Accrued Income account, that must be
created. Accrued income is debited and it is an asset, because it is
money that is owed to the business. It is thus a Balance Sheet account.
Example
extract from the Pre-adjustment Trial Balance of Cunningham Traders
on 29 February 2016.
Cunningham Traders
Fixed deposit: XY Bank (15%) B8 10 000 00
Nominal accounts

• The tenant has already paid the rent for March 2016, R1 300.
• The interest on fixed deposit has been received for nine months only.
The interest for the last quarter, R375, must still be received.
Required

328 chapter 15 •

Example continued
Solution
1. General Journal of Cunningham Traders is shown below.
29 Rent income N6 1 300 00
Income received in advance B15 1 300 00
(Adjustment)
Accrued income B16 375 00
(Adjustment)
2. General Ledger of Cunningham Traders is shown below.

Dr Income Received in Advance B15 Cr
2016
Feb 29 Rent income GJ12 1 300 00
Note
• Income received in advance is credited, because it is a liability –
R1 300 has been received in advance, so the business still owes it to
the tenant.
Dr Accrued Income B16 Cr

2016
Feb 29 Interest on fixed deposit GJ12 375 00
Note
• Accrued income is debited, since it is an asset – XY Bank still owes
the business R375 for interest on its fixed deposit.
Nominal accounts
2016 2016
Feb 29 Income received in advance GJ12 1 300 00 Feb 29 Balance b/d 16 900 00
16 900 00 16 900 00

• chapter 15 329

Example continued
Notes
• The amount of R1 300 is subtracted from rent income, so it is
debited because it is an income for the following financial year and
not the current financial year.
• The actual income in respect of rent income that is transferred
to the Profit and Loss account is thus R15 600; this is twelve
months’ rent.
Dr Interest on Fixed Deposit N7 Cr

2016 2016
Feb 29 Profit and loss account GJ12 1 500 00 Feb 29 Balance b/d 1 125 00
Accrued income GJ12 375 00
1 500 00 1 500 00
• The R375 is added to the Interest on Fixed Deposit account, thus it is

credited – this is an income already earned, but not yet received.
• The actual income in respect of interest on fixed deposit for the
current year is thus R1 500.
Adj. Effect Reason Effect Reason Effect Reason
no.
1. –1 300 Rent income +1 300 Create
– decreased liability
– income
received in
advance
2. +375 Create asset +375 Interest on
– accrued fixed deposit
income – income
increased

330 chapter 15 •

gAAp flash
The adjustments that you have learnt about in this section (accrued expenses, prepaid expenses, income received in advance and accrued income) are good
examples of the application of the matching concept. In each case, the adjustment is made to ensure that the income and expenses are recognised and
recorded in the correct time period. In order to illustrate this more clearly, we will use a time line to display a graphical representation of the adjustments from
the examples used in this section. The time line shows how, in each case, the income and expenses are adjusted at the end of the financial year, so that they are
matched to the correct time period.
← Financial year from 1 March 2017 to 28 February 2018 →

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
1. Water and electricity paid during the year: R4 532

ADD: Water and electricity accrued → R435
Water and electricity expense for the year = R4 532 + R435 = R4 967
2. Advertising expense paid during the year: R3 600

LESS: Prepaid Advertising → R400
Advertising expense for the year = R3 600 – R400 = R 3 200
3. Rent received during the year: R7 800

LESS: Rent received in advance → R600
Rent income for the year = R7 800 – R600 = R7 200
4. Interest on fixed deposit received during the year: R1 125

ADD: Interest on fixed deposit accrued → R375
Interest on fixed deposit income for the year = R1 125 + R375 = R1 500
Activity 15.18
Zenani Traders’ financial year ends at the end of February. on the next page
is an extract from the Pre-adjustment Trial Balance of Zenani Traders on
28 February 2018.

• chapter 15 331

Zenani Traders
Nominal accounts

• The tenant has already paid the rent for March 2018, R1 150.
• The interest on the fixed deposit has only been received for nine months.
The interest for the last quarter, R525, must still be received.
Required
Activity 15.19
Danner Traders’ financial year ends on 30 June. Below is an extract from the
Pre-adjustment Trial Balance of Danner Traders on 30 June 2018.
Danner Traders
Pre-adjustment Trial Balance on 30 June 2018
Nominal accounts
Adjustments on 30 June 2018

• The tenant has already paid the rent for July 2018.
• The interest on the fixed deposit has only been received for nine months. The
last quarter’s interest at 15% per annum must still be taken into account.
Required
properly on 30 June 2018.

332 chapter 15 •

Activity 15.20
Conradie Traders’ financial year ends on 28 February.
Required
1. Show the following accounts in the General Ledger (close off accounts
properly or balance on 28 February 2017). Folio references may be omitted.
Balance sheet accounts nominal accounts

Accumulated Depreciation on Vehicles (5) Water and Electricity (4)
Accumulated Depreciation on Equipment (5) Telephone (4)
Debtors Control (5) Bad Debts (4) leave open for each account.
Accrued Expenses (4) Interest on Fixed Deposit (4)
Income Received in Advance (2) Rent Income (4)
Accrued Income (2) Insurance (4)
Prepaid Expenses (2) Depreciation (4)
2. Draw up a Post-adjustment Trial Balance on 28 February 2017.

1. The following accounts have been received, but not yet paid:
• Water and Electricity R421
• Telephone R399
2. Wrote off debtor S du Toit’s debt of R470 as irrecoverable.
3. Interest on the fixed deposit amounts to 12% per annum and has only been
received for the period 1 march 2016 to 31 August 2016. Take the interest
for the last six months into account.
4. The rent amounts to R1 350 per month and the rent for march 2017 has
already been received.
5. An annual insurance premium of R4 200 was paid on 1 october 2016. It has
thus been paid in advance for seven months of the following financial period.
6. Depreciation must be taken into account as follows:

• chapter 15 333

Conradie Traders
Capital B1 221 414 00
Accumulated depreciation on vehicles B6 32 550 00
Fixed deposit: Unity Bank (12%) B8 10 000 00
Bank B11 11 527 00
Nominal accounts
Sales N1 892 410 00
Bad debts N6 3 710 00
Repairs N10 890 00
Wages N12 57 600 00
1 182 794 00 1 182 794 00

334 chapter 15 •

4.4.1 Trading stock deficit
As you learnt in Chapter 6, it is important to remember that there are
two types of inventory systems: the perpetual inventory system and the
periodic inventory system. The periodic inventory system will be dealt
with in Grade 11. Everything you have learnt thus far is relevant to the
perpetual inventory system.
The perpetual inventory system means that the business continually gAAp flash
keeps a record of items that move in and out of stock. This is entered
Prudence principle: According to
in the Trading Stock account. When stock is purchased, the Trading Stock this principle, accountants should
account is debited and when stock is sold the Trading Stock account is have a conservative approach when
credited with the cost price. The balance of the Trading Stock account preparing financial statements.
thus shows the value of the stock on hand at any given time. It is, For example, stock purchased for
however, necessary to do a stocktake (where the stock is physically R7 000 has now become obsolete
counted) to check whether the Trading Stock account is correct. and the business will only receive
R4 000 for this stock. The value of
When the stocktake is compared to the Trading Stock account, there is the stock will then be entered in
often a difference. If the Trading Stock account is less, it is called a surplus the books at the net realisable value
(this will not be discussed now). If the physical stock count is less than of R4 000.
the Trading Stock account indicates, it is called a deficit.
A trading stock deficit occurs when a business loses trading stock,
so it is recorded as a loss/expense in the books of the business. There
are several reasons for stock losses, ranging from the fairly innocuous,
such as recordkeeping errors, damaged stock items and expiry of
perishable goods; to the more serious, unethical and illegal issues, such as
bookkeeping fraud and theft.
Some of the more common control measures are:
Controls for purchasing stock

• Proper authorisation is required for purchasing stock. 
• Detailed perpetual inventory records are maintained. 
• These records are checked periodically by physical stocktake. 
• Stock items received are checked against those listed on the invoice. 
• Stock is safeguarded against theft, pilferage and loss. 
• Lost, stolen or destroyed items are reported immediately. 
• Extra safety measures are put in place for very expensive items. 
• Stock is insured adequately. 
• Expiry dates are displayed on perishable items and these
items are disposed of safely once the expiry date is reached. 
• Access to stock is limited and supervised. 
• Stock records are kept separate from the physical stock. 

• chapter 15 335

At the end of the financial year, an adjustment must be made for two
reasons: the loss of stock (trading stock deficit) must be recorded and
thus the net profit will decrease, and the Trading Stock account must be
adjusted to coincide with the actual post-physical stock on hand. This
adjusted amount will appear in the closing Trial Balance.
Example
The financial year of Cunningham Traders ends on 28 February.
Below is an extract from the Pre-adjustment Trial Balance of
Cunningham Traders on 29 February 2016.
Cunningham Traders
Information
• According to stocktake on 29 February 2016, the trading stock on
hand is R31 160.
Required
Solution

29 Trading stock deficit N20 1 250 00
(Adjustment for stock on hand) (32 410 – 31 160)

336 chapter 15 •

Example continued

Dr Trading Stock B7 Cr
2016 2016
Feb 29 Balance b/d 32 410 00 Feb 29 Trading stock deficit GJ12 1 250 00
32 410 00 32 410 00
2016
Note
• The Trading Stock account is credited because trading stock must
decrease and thus an asset decreases.
Nominal account
Dr Trading Stock Deficit N20 Cr
2016 2016
Feb 29 Trading stock GJ12 1 250 00 Feb 29 Profit and loss GJ12 1 250 00
Notes
• The Trading stock deficit account is debited since it is a loss or
expense, and it thus decreases owner’s equity.
• The account is thus closed off as an expense to the
Profit and Loss account.
no.
–1 250 Trading –1 250 Trading
stock stock deficit
decreased – expense/
loss

• chapter 15 337

gAAp flash Activity 15.21
In accounting, the procedures that
Xoseka Traders’ financial year ends on 28 February. Below is an extract from the
are followed for consumable goods
(stationery, packaging etc.) are Pre-adjustment Trial Balance of Xoseka Traders on 28 February 2017.
guided by the two fundamental
GAAP principles: the matching Xoseka Traders
concept and the going concern pre-adjustment Trial Balance on 28 february 2017
concept. Balance Sheet account Fol. Debit Credit
The matching concept, which Trading stock B7 40 112 00
provides that income and expenses
are recognised and recorded in the information
correct time period, is applied in • The trading stock on hand according to the stocktake done on
determining the consumable goods
28 February 2017 amounts to R38 994.
expense for the year. Thus, this
expense is limited to only the value Required
of consumable goods that were
actually used during the year.
1. Show the entries of the adjustment in the General Journal.
2. Show the adjustment in the General Ledger and close the accounts off
The going concern concept
provides that the financial
statements of a business should be 3. Show the effect, with reasons, on the accounting equation.
prepared based on the assumption
that the business will continue 4.4.2 Consumable stores on hand
to operate for the foreseeable The principles of GAAP determine that only the value of the goods
future. This principle is applied
in determining the value the
that were used during a certain accounting period should be used as an
consumable goods on hand at the expense in calculating the net profit for that period. It is thus necessary
end of the financial year, where to do a further adjustment, since not all the stationery, packaging and
the value of these items would consumable goods bought during the accounting period will necessarily
normally be far less if the business be used by the end of that financial year.
was in the process of closing down.
At the end of the financial year, a stocktake is done to determine the
value of the stationery, packaging and consumable goods that have not
been used. These goods will only be used during the following financial
year, and will be an expense for the following accounting period.
The value that is determined by the physical stocktake must be
subtracted from the respective expense accounts. Stationery, packaging
and consumable goods will thus be credited.
The account that is debited with the contra-entry is Consumable Stores
on Hand. Consumable stores on hand is an asset, since these goods that are
unused can be exchanged for cash, and therefore are considered to be an
asset. The unused stationery, packaging and consumable goods are taken
up as inventory and will appear as a current asset on the Balance Sheet.
Consider this example: A business bought stationery for R1 250 during
their accounting period. According to the stocktake at the end of the
financial year, stationery worth R310 was left over.
What has been used? R1 250 – R310 = R940. This is the amount that
must be transferred to the Profit and Loss account as the expense for
stationery for the year.

338 chapter 15 •

What about the stationery of R310 that was left over? The account
Consumable Stores on Hand is debited with R310 and is seen as an asset that
will appear in the Post-closing Trial Balance.
Example
Cunningham Traders’ financial year ends on 28 February. Here is an
extract from the Pre-adjustment Trial Balance of Cunningham Traders
on 29 February 2016:
Cunningham Traders
Packaging N6 3 140 00
Information
The stocktake on 29 February 2016 shows that the following has not
been used:
• Stationery R122
• Packaging R387
Required
2. Show the adjustments in the General Ledger and close the accounts
off properly on 29 February 2016.
3. Show the effect on the accounting equation, with reasons.
Solution

29 Consumable stores on hand (122 + 387) B12 509 00
Stationery N5 122 00
Packaging N6 387 00
(Adjustment)

• chapter 15 339

Example continued

Dr Consumables Stores on Hand B12 Cr
2016
Feb 29 Stationery GJ12 122 00
Packaging GJ12 387 00
509 00
Notes
• Consumable stores on hand is debited since it is an asset.
• The Consumable Stores on Hand account will appear in the post-
closing Trial Balance and Balance Sheet as a current asset.
Nominal accounts
Dr Stationery N5 Cr
2016 2016
Feb 29 Balance b/d 2 980 00 Feb 29 Consumable stores on hand GJ12 122 00
Profit and loss GJ12 2 858 00
2 980 00 2 980 00
Notes
• Stationery is credited with R122 since this stationery is unused and
must be subtracted from the total purchases of R2 980.
• The stationery that has been used and is thus the actual expense for
stationery for the accounting period is R2 858 and is the amount
that must be closed off to the Profit and Loss account.
Dr Packaging N6 Cr
2016 2016
Feb 29 Balance b/d 3 140 00 Feb 29 Consumable stores on hand GJ12 387 00
Profit and loss GJ12 2 753 00
3 140 00 3 140 00

340 chapter 15 •

Example continued
Notes
• The Packaging account is credited with R387 since this packaging is
unused and will thus only be used in the following financial year
– it is thus subtracted from the packaging balance.
• Consumable Stores on Hand is the contra-account and is debited since
it is an asset.
no.
+ 509 Create + 122 Stationery
asset – – expense
Consumable decreases
stores on
hand
+ 387 Packaging
– expense
decreases
Activity 15.22
Xoseka Traders’ financial year ends on 28 February. Below is an extract from the
Pre-adjustment Trial Balance of Xoseka Traders on 28 February 2017.
Xoseka Traders
Information
The stocktake on 28 February 2017 shows that the following has not
been used:
• Stationery R187
• Packaging R435
Required
2. Show the adjustments in the General Ledger and close the accounts off

• chapter 15 341

Activity 15.23
Malan Stores’ financial year ends on 30 June. Below is an extract from the Pre-
adjustment Trial Balance of Malan Stores on 30 June 2017.
Malan Stores
Nominal accounts
Consumable goods N8 1 672 00
Adjustments
The stocktake on 30 June 2017 shows that the following is on hand:
• Trading Stock R37 993
• Stationery R107
• Packaging R382
• Consumable Goods R95
Required
2. Show the adjustments in the General Ledger and close the accounts off
properly on 30 June 2017.
PG Stores’ financial year ends on 30 June.
Required
Show the journal entries of the adjustments on 30 June 2018. Narrations may
be omitted.

342 chapter 15 •

Below is an extract from the Pre-adjustment Trial Balance on 30 June 2018.
PG Stores
Fixed deposit: AB Bank (12% per annum) B11 20 000 00
Nominal accounts
1. According to the stocktake, the following stock was on hand on
30 June 2018:
• Stationery R143
2. A tenant has been renting a storeroom from the business for the past two
years. He has paid the rent for July 2018 in advance.
3. Interest on the fixed deposit for May and June 2018 still receivable.
4. The water and electricity account of R412 for June 2018 is still payable.
5. Included in the amount for advertising is R3 000 that was paid to the
local newspaper for advertisements for the period 1 November 2017 to
31 October 2018.
6. Depreciation must be written off as follows:
Activity 15.24
Corbett Traders’ financial period ends on 28 February.
Required
1. Show the journal entries of all the adjustments on 28 February 2017.
Narrations may be omitted.
2. Draw up a Post-adjustment Trial Balance on 28 February 2017.
3. Name the GAAP principles applied in each adjustment.

• chapter 15 343

Corbett Traders
Capital B1 293 989 00
Fixed deposit: Unity Bank (13%) B8 10 000 00
Bank B11 8 447 00
Nominal accounts
Sales N1 998 200 00
Wages N12 60 800 00
1 370 530 00 1 370 530 00

344 chapter 15 •

• Water and Electricity R533
• Telephone R497
2. Debtor C Peterson is overseas for an unlimited period and cannot be traced.
Write off his debt of R890 as irrecoverable.
3. Interest on the fixed deposit is calculated at 13% per annum and has only
been received for nine months. Take into account the interest for the last
three months.
4. A part of the building has been let since the beginning of the financial year.
The tenant has already paid the rent for march and April 2017 because she is
going on holiday.
5. An advertising contract with a radio station has been signed for six months
from 1 January 2017 and the full amount of R720 has been paid.
7. The stocktake done on 28 February 2017 shows the following on hand:
• Packaging R976
• Stationery R144
5. Closing transfers, final accounts and post- Remember that when you
closing trial balance do adjustments, there is
both a debit and a credit entry for
As already mentioned, all nominal accounts as well as drawings are closed every adjustment.
off at the end of every financial year. These closing transfers take place
after all adjustments have been done, thus from the Post-adjustment
Trial Balance.
Activity 15.25
Dunn Traders’ financial year ends at the end of February.
Required
1. Show the journal entries of the closing transfers on 28 February 2018.
2. Draw up the Post-closing Trial Balance on 28 February 2018.

• chapter 15 345

Dunn Traders
Post-adjustment Trial Balance on 28 February 2018
Capital B1 308 366 00
Consumable stores on hand B8 2 665 00
Bank B10 14 897 00
Accrued expenses B14 1 068 00
Nominal accounts
Sales N1 876 561 00
Repairs N12 2 669 00
Depreciation N14 10 500 00
1 267 858 00 1 267 858 00

346 chapter 15 •

Activity 15.26
The Pre-adjustment Trial Balance of Van Zijl Traders on 28 February 2017, the
end of their financial year, as well as adjustments that should be taken into
account, are given.
Required
1. Show the following accounts in the General Ledger: Capital, Accumulated
Depreciation on Vehicles, Accumulated Depreciation on Equipment, Trading
Stock, Sales, Rent Income, Interest on Loan, Water and Electricity, Stationery,
Consumable Goods, Depreciation, Trading Stock Deficit (leave 5 lines open
for each).
2. Draw up the Trading account and Profit and Loss account on
28 February 2017.
Van Zijl Traders

Capital B1 224 327 00
Bank B11 15 217 00

• chapter 15 347

Sales N1 878 524 00
Repairs N13 846 00
1 225 985 00 1 225 985 00

1. The stocktake done on 28 February 2017 showed the following
on hand:
• Consumable Goods R245
• Stationery R321
2. The tenant pays R1 400 per month and has paid for one month
in advance.
3. Interest on a loan amounts is 15% per annum. The interest for January and
February 2017 is still payable.
4. The account for water and electricity for February 2017 has been received,
but not yet paid, R580.
Activity 15.27
Veronica Yibe owns a business that weaves and sells baskets. There are four
women who do the weaving and two men who are responsible for selling the
baskets and delivering them to stalls and shops.
Veronica’s business has been operating for four years and is very successful.
The financial year of the business, Veronica’s Baskets, ends on 30 June and, as
her accountants, you are expected to do the following.

348 chapter 15 •

Required
1. Draw up the Trading account and Profit and Loss account on 30 June 2018.
(Do the adjustments first and draw up T-accounts where needed.)
2. Draw up the Post-closing Trial Balance on 30 June 2018.
Veronica’s Baskets
Capital B1 243 490 00
Fixed deposit: AB Bank B8 10 000 00
Bank B11 8 634 00
Nominal accounts
Sales N1 889 245 00
Wages N8 129 600 00
1 197 831 00 1 197 831 00

• chapter 15 349

Adjustments on 30 June 2018
1. A room in the building is sublet to an advertising company. Rent for July
2018 has already been received.
2. A debtor, L Gerber, whose account was in arrears for nine months cannot be
traced and her debt of R489 must be written off as irrecoverable.
3. Included in advertising is an amount of R2 700 for a nine-month contract
negotiated with the local newspaper commencing 1 November 2017.
4. The following accounts for June 2018 have been received, but not yet paid:
• Water and electricity R632
• Telephone R587
5. Veronica took stock worth R350 for her own use and no entry of this has yet
been made.
6. The Fixed Deposit account in the General Ledger reads as follows:
Dr Fixed Deposit: AB Bank B8 Cr

2017
Jul 1 Balance b/d 8 000 00
2018
Apr 1 Bank CPJ 2 000 00
10 000 00
Interest on the fixed deposit is calculated at 8% per annum. Some of the

interest is still receivable.

• The business owns a truck that is used for delivery; depreciation must be
written off at 15% per annum on the diminished balance.
• Equipment consists of a fax machine and equipment used for weaving
the baskets and depreciation on this must be written off at 10% per
annum on the cost price. Veronica purchased a computer and printer for
R6 000 on 1 January 2018 (this transaction was recorded correctly).
8. The following was on hand according to the stocktake done at the end of
the financial year:
• Trading stock R7 763
• Stationery R106

350 chapter 15 •

Activity 15.28
The following information was taken from the books of Yawa Traders on
28 February 2017, the end of their financial year.
Required
1. Draw up the Trading account and Profit and Loss account in the
General Ledger.
Yawa Traders
Capital B1 213 294 00
Bank B10 6 447 00
Loan: AB Bank B14 40 000 00

• chapter 15 351

Sales N1 979 658 00
Bad debts N4 932 00
Bad debts recovered N7 1 450 00
Bank charges N10 3 641 00
Repairs N15 1 873 00
1 291 134 00 1 291 134 00

1. No entries have been made with regards to the following:
• a debit note issued to Nkosana Traders for R620 for trading
stock returned
• a credit note issued to H Kotze for goods returned; selling price, R570,
and cost price, R380.
2. The stocktake on 28 February 2017 showed the following:
• Stationery R237
3. Write off debtor L Goosen’s debt of R430 as irrecoverable.
4. A cheque in favour of the municipality was entered on the debit side of
Water and Electricity and the credit side of Bank. The cheque was in payment
of the following:
• business account R489
• the owner’s personal account R340
5. Insurance premiums are paid in advance before or on the last day of the
month for the following month. The premium amounts to R646 per month.
6. The long-term loan was secured on 1 February 2017. According to the
agreement, the interest is payable half-yearly at 15% per annum.
7. A suite of offices has been let since 1 October 2016. The rental agreement
stipulates that the rent for the first year is R13 200.

352 chapter 15 •

8. Depreciation is written off as follows:
• on vehicles at 15% per annum on the cost price; a new vehicle was
bought for R60 000 on 1 June 2016 and was recorded correctly
The following information is taken from the books of Gemaine Stores on

28 February 2019, the end of their financial year.
Required
1. Draw up the Trading account and Profit and Loss account in the
General Ledger. (38)
2. Draw up the post-closing Trial Balance on 28 February 2019. (27)
Gemaine Stores
Capital B1 369 026 00
Fixed deposit: AB Bank B8 10 000 00
Bank B11 1 608 00

• chapter 15 353

Sales N1 786 542 00
Wages N7 65 400 00
Fuel N14 3 689 00
1 241 107 00 1 241 107 00

1. Rent was received for the period 1 March 2018 to 31 May 2019.
2. Interest on fixed deposit at 8% per annum is still receivable for
three months.
3. T Xoseka, a debtor who owes R750, was declared insolvent and the business
received 40 cents in the rand from the insolvent estate. This was recorded
correctly. The rest of the amount must be written off as irrecoverable.
4. An amount of R360 is still owing for advertising.
5. Insurance was prepaid, R940.
6. The owner took stock with a cost price of R620 for his own use. No entry of
this has yet been made in the books of the business.
7. According to the stocktake, the following is on hand:
• Packaging R467
• Stationery R289
• on vehicles at 15% per annum on the cost price
Equipment to the value of R3 840 was bought on credit from Cedarberg
Traders on 1 January 2019, but no entry of this has been made.

354 chapter 15 •

6. Reversal of adjustments
As you already know, adjustments are done at the end of the financial
year so that the financial statements for that specific year can be as
accurate as possible. For this reason, accounts such as Accrued Income and
Prepaid Expenses are created. These accounts must now be reversed at the
beginning of the following financial year. What does this mean and why
must we do the reversals?
6.1 What does this mean?

Let’s look at an example. At the end of the financial year, one month’s
rent income of R1 200 was received in advance. The adjustment is
made by debiting Rent Income (subtract from Rent Income), and creating
the account Income Received in Advance and crediting it. When must this
income be taken into account? It must be taken into account in the
following year because the rent income was earned in the first month
of the following financial year. The business starts the new financial
year with an opening balance for rent income of R1 200. The reversal
of the adjustment must then be to credit Rent Income and debit Income
Received in Advance.
6.2 Why do the reversals?

Reversals are necessary so that the accounts that were created at the end
of the financial year such as Accrued Income and Prepaid Expenses are now
cancelled. This is because these accounts are only used at the end of the
financial year while the financial statements are being drawn up. You do
not want these accounts in your books during the financial year.
Another reason for reversing these amounts is that they should
appear in the expense and income accounts as they relate to the new
financial year.
All reversals of adjustments are done in the General Journal.
Example
extract from the Post-closing Trial Balance on 28 February 2017.
Cunningham Traders
Prepaid expenses B11 1 500 00

• chapter 15 355

Example continued
The accounts above were created to adjust the following accounts on
28 February 2017:
• Accrued Income for interest on fixed deposit
• Income Received in Advance for rent income
• Accrued Expenses of R287 for telephone and R342 for water
and electricity.
Required
Show the reversal of the above-mentioned adjustments in the
General Ledger.
Solution
Dr Prepaid Expenses B11 Cr
2017 2017
Feb 28 Insurance GJ 1 500 00 Mar 1 Insurance GJ 1 500 00
1 500 00 1 500 00
Dr Accrued Income B12 Cr

2017 2017
Feb 28 Interest on fixed deposit GJ 900 00 Mar 1 Interest on fixed deposit GJ 900 00
900 00 900 00
Notes
• The amounts on the debit side are the adjustments that were done
at the end of the current financial year.
• The amounts on the credit side are the reversal of the adjustments
at the beginning of the new financial year.
Dr Income Received in Advance B13 Cr

2017 2017
Mar 1 Rent income GJ 1 200 00 Feb 28 Rent income GJ 1 200 00
1 200 00 1 200 00

356 chapter 15 •

Example continued
Dr Accrued Expenses B14 Cr

2017 2017
Mar 1 Telephone GJ 287 00 Feb 28 Telephone GJ 287 00
Water and electricity GJ 342 00 Water and electricity GJ 342 00
629 00 629 00
Notes
• The amounts on the debit side are the reversal of the adjustments at
the beginning of the new financial year.
• The amounts on the credit side are the adjustments at the end of the
current financial year.
Nominal accounts
Dr Insurance N5 Cr
2017
Mar 1 Prepaid expenses GJ 1 500 00
Note
• This amount for insurance was paid during the previous financial
period, but is applicable to the new financial year. It is thus added
to the expenses for the new financial year and will appear on the
Income Statement for the year ended 28 February 2018.
Dr Interest on Fixed Deposit N6 Cr

2017
Mar 1 Accrued income GJ 900 00
Note
• This amount for interest on the fixed deposit will only be received
in the new financial year because it was still receivable at the end
of the previous financial year. It is, however, not an income for
the new financial year as the interest was earned in the previous
financial year and recorded as such. It will therefore be cancelled
when the entry for Bank, R900, is made on the credit side when the
amount is received.

• chapter 15 357

Example continued
2017
Mar 1 Income received in advance GJ 1 200 00
Note
• This income was received during the previous financial year, but is
applicable to the new financial year. It will therefore be added to the
income of the new financial year.
Dr Telephone N8 Cr
2017
Mar 1 Accrued expenses GJ 287 00

2017
Mar 1 Accrued expenses GJ 342 00
Note
• Both the expenses for telephone and water and electricity were
incurred during the previous financial year, but not yet paid. They
will thus be cancelled when they are paid in the new financial year,
because they relate to the previous financial year.
Activity 15.29
Drakensberg Traders’ financial year ends on 30 June.
Show the entry with regard to the year-end adjustment, as well as the reversal
of the adjustment in the relevant accounts.
Below is an extract from the Post-closing Trial Balance on 30 June 2018.
Post-closing Trial Balance on 30 June 2018


358 chapter 15 •

The accounts above were created to adjust the following accounts on
30 June 2018:
• Accrued Income for interest on fixed deposit
• Income Received in Advance for rent income
• Accrued Expenses for telephone
• Prepaid Expenses for insurance.
Activity 15.30
Mangaliso Traders’ financial year ends at the end of February.
In groups, consider the ledger accounts below. Discuss the numbered

transactions/entries and then write a short description of each one.
2018 2017
Feb 28 Income received in advance 3 2 500 00 Mar 1 Income received in advance 1 1 250 00
2018
Profit and loss 4 15 000 00 Feb 28 Bank 2 16 250 00
17 500 00 17 500 00

2018 2017
Feb 28 Bank 6 6 879 00 Mar 1 Accrued expenses 5 538 00
2018
Accrued expenses 7 632 00 Feb 28 Profit and loss 8 6 973 00
7 511 00 7 511 00
Dr Stationery N7 Cr
2017 Consumable stores 2018 Consumable stores
Mar 1 on hand 9 187 00 Feb 28 on hand 11 214 00
2018
Feb 28 Bank 10 2 456 00 Profit and loss 12 2 429 00
2 643 00 2 643 00

• chapter 15 359

Case study 15.1
Work in groups of four to complete this assignment. Read and discuss the case
study, then work on your own to record your answers. Hand in your own work
for assessment, along with the assessment rubric.
Rafiq Julies is twenty years old. He matriculated last year from Kingston
High and in the same year was included in the South African canoeing
team that took part in the Africa Games in Tunisia. After school, Rafiq
realised that there was a large market in the canoeing circles for repairs to
canoes and paddles that break during races.
He then started his own services business called Rafiq’s Canoe Repairs.
On 1 January 2019, Rafiq started his business with R4 000 that he had saved
from prize money he won at canoe races (this was his capital contribution).
He opened a current banking account in the name of the business and
deposited the R4 000. He used R500 to buy a sanding machine, R900 for a
drill and he paid R1 300 for a set of tools (equipment).
Rafiq carefully recorded all receipts and payments and other transactions
for the year, but since he did not take Accounting at school, he has asked
you to calculate his net profit. He wants to know whether or not the
business is doing well. Rafiq provided the following information:
• Cash received for repairs to canoes and paddles during the year
(current income), R58 976.
• Three canoeists still owe him money for repairs: D Malan, R480;
C Tilsley, R325 and G Pepler, R266 (debtors).
• Cash paid for fibreglass, paintbrushes and other items he used for
repairing canoes and paddles (material costs) was R21 557.

360 chapter 15 •

• He still owes CJ Traders R896 for material he bought on his account.
• Rafiq has a cell phone for which he paid R3 360 during the year, but the
account for December 2019 for R244 is still owing.
• He rents a garage, which he uses for repairing and storing canoes,
paddles and equipment, from a business for R300 per month.
He must pay rent one month in advance and he has already paid rent
for January 2020.
• At the beginning of the canoeing season, Rafiq had pamphlets printed to
advertise his business and distributed them at the first three races. This
was very successful. The pamphlets cost R320.
• You suggest that Rafiq should write off depreciation on the equipment at
10% per annum on the cost price.
• Rafiq paid himself a salary of R2 000 per month.
• Apart from his salary, he withdrew an additional R2 400 from the
business’s account to buy a new canoe for himself (drawings).
• on 3 December 2019 there was material worth R410 left over.
Required
1. Draw up the following ledger accounts for Rafiq’s Canoe Repairs and show
the balances, adjustments where necessary, as well as closing transfers on
31 December 2019:
Capital (6), Drawings (2), Equipment (2), Accumulated Depreciation on The number in brackets
Equipment (2), Debtors Control (2), Bank (2), Creditors Control (2), Accrued indicates how many lines to
Expenses (2), Prepaid Expenses (2), Consumable Stores on Hand (2), Current leave open for each account.
Income (remember cash and credit entries) (2), material Costs (remember
cash and credit entries) (4), Cell Phone (4), Rent Expense (4), Advertising (2),
Depreciation (2) and, Salaries (2).
2. Draw up only the Profit and Loss account on 31 December 2019 since it is a
services business, and calculate the net profit for the year.
3. Draw up the Post-closing Trial Balance on 31 December 2019.

• chapter 15 361

Chapter 16
Financial accounting of a sole trader
– Financial statements

• apply the GAAP principles
• draw up the Income Statement of a sole trader, after the necessary
adjustments have been made
• draw up the Balance Sheet of a sole trader, after the necessary
adjustments have been made.
Key concepts
• financial statements • Income Statement • Balance Sheet • gross profit
• net profit • adjustments • GAAP principles • accounting cycle
Busi, is it possible for our accountant to show my

brother how to make up the financial statements
of a sole trader? He runs his own small business
and doesn't know what to do.
Of course, Sam,
go and ask him.
362 c h a p t e r 1 6 • F i n a n cial A C C OUN T I N G o f a s o le trader – F i n a n cial state m e n ts

1. financial statements
The financial statements of a sole trader consist of an Income Statement
and a Balance Sheet. The Income Statement shows the result of the
business activities for the financial period. The net profit for that specific
financial period is therefore calculated in the Income Statement. The
financial position of the business at the end of the financial period is
shown in the Balance Sheet. The Balance Sheet is a summary of the
assets (such as vehicles), liabilities (debts such as loans or creditors) and
owner’s equity.
Financial statements are not part of the system of double entries.
The Trading account and Profit and Loss account, however, are part of the i A simple exercise is provided
if you did not do financial
system, and provide the same information as the Income Statement. Only statements in Grade 9. If you did you
nominal accounts are used to draw up the Income Statement. The Post- could start directly with Activity 16.2.
closing Trial Balance provides the same information as the Balance Sheet
and only Balance Sheet accounts are used to draw up the Balance Sheet.
2. Who uses financial statements?

Various groups of people, both within and outside a business, have
an interest in the financial records of the business. These people or
institutions include:
• the owner – to see how his or her business is doing and whether it is a
good investment
• the financial manager – the financial statements assist him or her
with decision-making and monitoring; the manager needs the
statements to draw up budgets and draw comparisons between the
assets, liabilities and owner’s equity of the business
• banks and other suppliers of financing – they use the financial
statements to determine how safe their money is and whether the
business can pay their debts
• creditors – they want to determine the creditworthiness of the
business, particularly if they have to provide large quantities of
stock on credit
• government departments – they use the financial statements of
a business for tax purposes, and to accumulate statistics to make
predictions with regard to training needs, unemployment, regional
development, and so on.
F I n A n C I A L A C C o u n T I n G o F A S o L E T R A D E R – F I n A n C I A L S TAT E m E n T S • c h a p t e r 1 6 363

Example
Sibusiso Traders’ financial year ends on 28 February.
Required
1. Draw up the Income Statement for the year ended 28 February 2018.
2. Draw up the Balance Sheet on 28 February 2018.
Sibusiso Traders
Capital B1 274 430 00
Bank B8 13 756 00
Nominal accounts
Sales N1 487 500 00
Current income N4 23 400 00
Wages N8 40 300 00
Rates N11 2 520 00
819 080 00 819 080 00

Example continued
The owner, S Yawa, made an additional capital contribution of R20 000
on 1 November 2017.
Solution
S Yawa
Trading as Sibusiso Traders
Income Statement for the year ended 28 February 2018
Sales 487 500 00
Cost of sales (325 000 00)
Gross profit 162 500 00
Other operating income 38 400 00
Current income 23 400 00
Gross operating income 200 900 00

Operating expenses (140 170 00)
Water and electricity 4 875 00
Telephone 3 983 00
Salaries 84 000 00
Wages 40 300 00
Stationery 1 892 00
Advertising 2 600 00
Rates 2 520 00
Net profit (loss) 60 730 00
F i n a n cial A C C OUN T I N G o f a s o le trader – F i n a n cial state m e n ts • c h a p t e r 1 6 365

Example continued
S Yawa
Balance Sheet on 28 February 2018 Note R
ASSETS
Non-current assets 284 000 00
Fixed/tangible assets 1 284 000 00
Financial assets – –
Current assets 49 323 00

Inventories 24 563 00
Trade and other receivables 10 254 00
Cash and cash equivalents 2 14 506 00
TOTAL ASSETS 333 323 00
EQUITY AND LIABILITIES

Owner’s equity 314 573 00
Capital 3 314 573 00
non-current liabilities
Loans – –
Current liabilities 18 750 00

Trade and other payables 18 750 00
Bank overdraft – –
Current portion of loan – –
TOTAL EQUITY AND LIABILITIES 333 323 00

Example continued
S Yawa
Notes to financial statements at 28 February 2018:
1. FIXED/Tangible assets
Land and buildings R200 000
Vehicles 60 000
Equipment 24 000
R284 000
2. Cash and Cash equivalents

Bank R13 756
Cash float 600
Petty cash 150
R14 506
3. owner’s equity
Balance at begininng of year R254 430
Additional capital contributed 20 000
Net profit (loss) for the year 60 730
Drawings (20 587)
Balance at end of year R314 573
Activity 16.1 Baseline assessment
Work with a partner on this activity. Discuss what needs to be done. Then work
on your own and write down your answers.
Abrahams Traders’ financial year ends on 28 February.
Required
2. Draw up the Balance Sheet on 28 February 2019.

Abrahams Traders
Capital B1 306 350 00
Bank B8 21 678 00
Nominal accounts
Sales N1 585 120 00
Other income N4 33 470 00
Wages N8 60 210 00
Rates N11 2 870 00
960 290 00 960 290 00
The owner, T Abrahams, made an additional capital contribution of R40 000 on
1 January 2019.

3. Financial statements and adjustments
In Grade 9, you learnt about some of the annual routines in the
accounting cycle. You will learn more about these routines now.
The annual routines in the accounting cycle include:
• drawing up the Pre-adjustment Trial Balance
• doing year-end adjustments
• drawing up a Post-adjustment Trial Balance
• closing transfers and final accounts
• drawing up a Post-closing Trial Balance
• drawing up financial statements.
The information reflected in the financial statements must be as accurate
as possible and relevant to that particular financial period, so it is
necessary to do adjustments first. The fixed assets must, for example, be
entered at their carrying value, which is what they are actually worth.
The information that appears in the Income Statement is the same
as the information in the final accounts, while the information in the
Balance Sheet is the same as in the Post-closing Trial Balance.
There are considerably more notes to the Balance Sheet at Grade 10
level than were discussed in Grade 9.
Example
Cunningham Traders’ financial year ends on 28 February.
Required
Draw up the Income Statement for the year ended 28 February 2018
and the Balance Sheet for 28 February 2018.
Cunningham Traders
Capital B1 264 125 00

Example continued
Fol. Debit Credit

Fixed deposit: XY Bank B8 20 000 00
Bank B11 2 570 00
Mortgage loan: AB Bank B14 30 000 00
Income received in advance B17 650 00
Consumable stores on hand B20 336 00
Nominal accounts
Sales N1 436 125 00
Interest on mortgage loan N13 6 000 00
Interest on overdraft N14 120 00
Interest received on current account N16 480 00
Interest received N17 1 640 00
Interest paid N18 1 770 00
Salaries N20 140 000 00
820 610 00 820 610 00

Example continued
1. The owner, B Cunningham, increased his capital contribution by
R100 000 during the year.
2. Land and buildings were purchased during the year for R80 000.
3. A vehicle was purchased for R40 000 during the year.
4. Depreciation for the year was as follows:
• vehicles R8 800
• equipment R5 600
5. The mortgage loan is repaid in equal annual instalments of R10 000
on 1 July every year.
Solution
B Cunningham
Trading as Cunningham Traders
Note R
Sales (436 125 – 4 125) 432 000 00
Discount received 2 450 00

Telephone 2 892 00
Insurance 4 500 00
Stationery 2 166 00
Packaging 1 654 00
Bad debts 1 400 00
Depreciation 14 400 00
Salaries 140 000 00
Operating profit (loss) 36 245 00

Interest income 1 4 920 00
Profit before interest expense 41 165 00
Interest expense 2 (7 890 00)
Net profit for the year 7 33 275 00

Example continued
B Cunningham
Balance Sheet at 28 February 2018
Note R
ASSETS
Financial assets – –
Fixed deposit: XY Bank 20 000 00

Inventories 4 24 436 00
Trade and other receivables 5 15 134 00
Cash and cash equivalents 6 300 00

Owner’s equity 7 267 280 00
Capital 267 280 00
non-current liabilities 20 000 00

Mortgage loan: AB Bank 20 000 00

Trade and other payables 8 18 520 00
Bank overdraft 2 570 00
Short-term loan (less than 12 months) 10 000 00
Note
• The short-term loan (less than twelve months) of R10 000 is the
instalment on the mortgage loan that must be paid during the
following financial year. It is recorded as a current asset, as only
amounts payable over longer than one year from the initial loan date
are considered long-term liabilities.

Example continued
B Cunningham
Notes to the financial statements at 28 February 2018
1. Interest Income
On investments 2 800
On current account 480
On overdue debtors 1 640
4 920
2. Interest expense
On mortgage loan from AB Bank 6 000
On overdraft 120
On overdue creditors 1 770
7 890
3. FIXED/Tangible assets
Land and Vehicles Equipment Total
buildings
Carrying value at beginning of year 120 000 13 600 19 300 152 900
Cost 120 000 40 000 26 000 186 000
Accumulated depreciation – (26 400) (6 700) (33 100)
Movements
Additions 80 000 40 000 120 000
Depreciation for the year (8 800) (5 600) (14 400)
Carrying value at end of year 200 000 44 800 13 700 258 500
Cost 200 000 80 000 26 000 306 000
Notes
• The easiest way to draw up this note from the Post-adjustment Trial
Balance is to start at the bottom with cost, accumulated depreciation
and then the carrying value at the end of the current year, as these
amounts appear in the Post-adjustment Trial Balance.
• The next step is to enter the movements because this information is
supplied in the additional information.
• Now the information at the beginning of the current year can be
calculated as follows:
Cost of land and buildings: R200 000 – 80 000 = R120 000
Cost of vehicles: R80 000 – 40 000 = R40 000
• To calculate the accumulated depreciation at the end of the previous
year, it is easiest to draw up the T-accounts as follows:

Example continued
Accumulated Depreciation on Vehicles

Balance b/d 26 400
Depreciation 8 800
35 200
Accumulated Depreciation on Equipment

Balance b/d 6 700
Depreciation 5 600
12 300
4. inventories
Trading stock 24 100
Consumable stores on hand 336
24 436
5. trade and other receivables

Trade debtors 14 264
Expenses prepaid 560
Income accrued (receivable) 310
15 134
6. Cash & cash equivalents

Fixed deposit (maturing within 12 months) –
Savings account –
Bank –
Cash float 200
Petty cash 100
300
7. owner’s equity
Balance at beginning of year 164 125
297 400
Drawings (30 120)
Balance at end of year 267 280

Example continued
8. Trade & other payables

Trade creditors 16 890
Expenses accrued (payable) 980
Income received in advance (deferred) 650
18 520
Activity 16.2
Babelegi Furnishers’ financial year ends on 30 June. The owner, N Zweni, trades
in secondhand furniture and appliances.
Required
Draw up the financial statements of Babelegi Furnishers for the year ended
30 June 2019.
Babelegi Furnishers
Post-adjustment Trial Balance on 30 June 2019
Capital B1 334 017 00
Notice deposit: AB Bank B9 3 000 00
Bank B12 7 673 00
Savings account B15 1 800 00

Nominal accounts section Fol. Debit Credit
Sales N1 998 200 00
Interest on notice deposit N6 554 00
Interest on savings account N7 119 00
Interest on current account N8 63 00
Interest on overdraft N10 327 00
Salaries N12 196 000 00
Sundry expenses N17 9 772 00
Discount received N19 852 00
1 433 884 00 1 433 884 00
1. The owner, N Zweni, increased his capital contribution by R65 000 during
the year.
2. Improvements were made to buildings during the year, R70 000.
3. Equipment to the value of R8 000 was purchased during the year.
4. Depreciation for the year is as follows:
• vehicles R16 334
5. R10 000 of the fixed deposit matures on 31 December 2019.

Activity 16.3
Ramatlabama Couriers offers a delivery service and their financial year ends on
28 February.
Required
1. Show the following accounts in the General Ledger:
• Vehicles
• Accumulated Depreciation on Vehicles
• Accumulated Depreciation on Equipment.
2. Show the note to the Balance Sheet at 28 February 2017 for fixed assets.
An extract from the Post-adjustment Trial Balance on 28 February 2017 is

as follows:

Nominal account
1. Improvements were made to the buildings during the year, R60 000.
2. A vehicle with a cost price of R80 000 was bought for R80 000 cash on
30 November 2016.
3. Depreciation for the year is as follows (remember it has already been
recorded):
• vehicles R14 640

Activity 16.4
Chelmsford Stores’ financial year ends at the end of February.
Required
1. Show the following accounts in the General Ledger:
• Equipment
• Accumulated Depreciation on Vehicles
• Accumulated Depreciation on Equipment.
2. Show the note to the Balance Sheet on 28 February 2018 for fixed assets.
An extract from pre-adjustment Trial Balance on 28 February 2018 is

shown below.

i This is a Pre-adjustment
Trial Balance and therefore Balance Sheet accounts Fol. Debit Credit
depreciation must still be taken Land and buildings B3 360 000 00
into account.
1. An extra storeroom was built for R53 000.
2. Equipment with a cost price of R8 000 was bought on credit on 1 october
2017 and recorded correctly.
• vehicles at 20% per annum on the diminished balance
• equipment at 15% per annum on the cost price.
Although in practice the financial statements are drawn up from the Post-
adjustment Trial Balance, it is often asked differently in exams and tests.
In most cases, the Pre-adjustment Trial Balance and the adjustments are
given and the financial statements (or parts thereof ) must be drawn up
directly from the given information.
Note: This is an important Should a question be asked in this way, there is not enough time in
exam tip. a test to draw up the Post-adjustment Trial Balance first and then the
statements from there.
We suggest that you do these adjustments directly on the pre-
adjustment Trial Balance or do the adjustments using T-accounts. An
example is the adjustment for the telephone account of R230 that has not
yet been paid by the end of the year. When you do the adjustment, make
a note for yourself on the Pre-adjustment Trial Balance to show that R230
must be added to the Telephone account and create the Accrued Expenses
378 c h a p t e r 1 6 • F I n A n C I A L A C C o u n T I n G o F A S o L E T R A D E R – F I n A n C I A L S TAT E m E n T S

account in the Balance Sheet section. It is, however, very important that
you show these calculations in brackets on your Income Statement and
notes to the Balance Sheet.
Example
Draw up the financial statements of Cunningham Traders for the year
ended 28 February 2018.
Cunningham Traders
Capital B1 295 286 00
Fixed deposit: XY Bank (14% per annum) B8 20 000 00
Bank B12 2 300 00
Mortgage loan: AB Bank (18%) B15 40 000 00
Nominal accounts
Sales N1 473 680 00

Example continued
Fol. Debit Credit

Interest on mortgage loan N13 5 550 00
Interest received N15 1 144 00
Salaries N16 160 000 00
897 669 00 897 669 00
Adjustments
1. A debtor, D Collett, returned stock with a selling price of R864
(cost price, R480), but the transaction has not been entered yet.
2. Write off the debt of debtor W Smith, R276, as irrecoverable.
3. The business has already received the rent for March 2018.
4. Interest on fixed deposit is still receivable.
• Telephone R231
6. Insurance includes an annual premium of R3 600 that was paid on
1 July 2017.
7. The mortgage loan is repaid in equal annual instalments of R10 000
on 1 July every year and all payments have been made. Some of the
interest is still outstanding.
8. The owner gave equipment to the value of R12 000 on 1 March 2017
as additional capital contribution. The bookkeeper has neglected to
enter this transaction. No other capital contributions were made by
the owner.
9. Depreciation is taken into account as follows:
• vehicles at 20% per annum on the diminishing balance;
a vehicle with a cost price of R40 000 was purchased on
1 September 2017 and was entered correctly
10. According to the stocktake on 28 February 2018, R114 worth of
stationery was on hand.

Example continued
Solution
Calculations of adjustments
1. Debit Debtors Allowances and credit Debtors Control (subtract)
with R864.
Debit Trading Stock and credit Cost of Sales with R480.
2. Debit Bad Debts with R276 (add).
Credit Debtors Control with R276 (subtract).
3. R15 600 ÷ 13 = R1 200
Debit Rent Income with R1 200 (subtract).
Create the account Income Received in Advance with a credit entry of
R1 200.
4. R20 000 × 14% = R2 800 R2 800 – 2 100 = R700
Credit Interest on Fixed Deposit with R700 (add).
Create the account Accrued Income with a debit entry of R700.
5. Debit Telephone with R231 and Water and Electricity with R243 (add).
Create the account Accrued Expenses with credit entries of R231 and
R243 respectively.
6. R3 600 × __ 4   = R1 200
 12
Credit Insurance with R1 200 (subtract).
Create the account Prepaid Expenses with a debit entry of R1 200.
7. R50 000 × 18% × __ 4   = R3 000 R7 800 – 5 550 = R2 250
 12
R40 000 × 18% × __ 8   = R4 800
 12
Debit Interest on Mortgage Loan with R2 250 (add).
Add R2 250 to the Accrued Expenses account that has already
been created.
8. Debit Equipment with R12 000 (add).
Credit Capital with R12 000 (add).
9. Old vehicles: (R80 000 – 35 200) × 20%: R8 960
New vehicles: R40 000 × 20% × __ 6   :
 12 4 000
R12 960
Old equipment: R26 000 × 10%: R2 600
New equipment: R12 000 × 10%: 1 200
R3 800
Create the Depreciation account in the nominal accounts section
with debit entries of R12 960 and R3 800 respectively.
Credit Accumulated Depreciation on Vehicles with R12 960 (add).
Credit Accumulated Depreciation on Equipment with R3 800 (add).
10. Credit Stationery with R114 (subtract).
Create the account Consumable Stores on Hand in the Balance Sheet
section and credit it with R114.

Example continued
B Cunningham
Income Statement on 28 February 2018 Note R
Sales [473 680 – (5 680 + 864)] 467 136 00
Cost of sales (260 000 – 480) (259 520 00)
Other operating incomes 14 400 00
Rent income (15 600 – 1 200) 14 400 00

Telephone (2 995 + 231) 3 226 00
Water and electricity (2 724 + 243) 2 967 00
Insurance (5 200 – 1 200) 4 000 00
Stationery (2 340 – 114) 2 226 00
Packaging 2 556 00
Bad debts (2 644 + 276) 2 920 00
Salaries 160 000 00
Depreciation (12 960 + 3 800) 16 760 00

Interest income 1 4 823 00
Net profit for the year 7 22 584 00

Example continued
B Cunningham
Balance Sheet at 28 February 2018 Note R
ASSETS
Fixed deposit: XY Bank 20 000 00

Inventories 4 29 094 00
Trade and other receivables 5 17 340 00
Cash and cash equivalents 6 2 600 00

Owner’s equity 297 370 00
Capital 7 297 370 00
non-current liabilities 30 000 00

Mortgage loan: AB Bank 30 000 00

Trade and other payables 8 25 404 00
Short-term loan (less than 12 months) 10 000 00
B Cunningham
Notes to the financial statements at 28 February 2018
1. Interest Income
On investments (2 100 + 700) 2 800
On current bank account 879
On overdue debtors 1 144
4 823
2. Interest expense
On mortgage loan from AB Bank (5 550 + 2 250) 7 800
7 800

Example continued
3. fixed/tangible assets
Land & Vehicles Equipment Total
buildings
Carrying value at beginning of year 200 000 44 800 13 700 258 500
Cost 200 000 80 000 26 000 306 000
Movements
Additions – 40 000 12 000 52 000
Depreciation – (12 960) (3 800) (16 760)
Carrying value at end of year 200 000 71 840 21 900 293 740
Cost 200 000 120 000 38 000 358 000
Accumulated Depreciation on Vehicles

Balance b/d 35 200
Depreciation 12 960
48 160
Accumulated Depreciation on Equipment

Balance b/d 12 300
Depreciation 3 800
16 100
4. inventories
Trading stock (28 500 + 480) 28 980
Consumable stores on hand 114
29 094
5. trade & other receivables

Trade debtors (16 580 – 864 – 276) 15 440
Expenses prepaid 1 200
Income accrued (receivable) 700
17 340

Example continued
6. Cash & other cash equivalents

Bank 2 300
Cash float 200
Petty cash 100
2 600
7. owners’ equity
Balance at begininng of year 295 286
329 870
Drawings (32 500)
Balance at end of year 297 370
8. Trade and other payables

Trade creditors 21 480
Expenses accrued (payable) (231 + 243 + 2 250) 2 724
Income received in advance (deferred) 1 200
25 404

Activity 16.5
Work with a partner. Do the adjustments together. Discuss what needs to be

done, then work on your own and write the answers down.
The Trial Balance and on the next page was taken from the accounting records
of Tsomo Traders on 28 February 2017, the last day of their financial year.
Required
2. Draw up the Balance Sheet with complete notes on 28 February 2017.
Adjustments and additional information

1. Write off debtor G Moulton’s debt of R740 as irrecoverable.
2. The loan agreement stipulates that R15 000 must be repaid annually on
1 September and all payments have been made. Interest on loan amounts
to 18% per annum and part of this must still be taken into account.
3. Included in insurance is an annual premium of R5 040 that was paid on
1 December 2016.
4. The telephone account of R535 and water and electricity of R473 for
February 2017 must still be taken into account.
5. Part of the building has been let since 1 October 2015 at R1 500.
The rental agreement stipulates that the rent increases by 10% on
1 October 2016.
6. The owner, S Botha, contributed additional capital of R45 000 during the
year and this was recorded correctly.
7. Take depreciation into account as follows:
• vehicles at 10% per annum on the cost price
• equipment at 15% per annum on the diminished balance.
Take into account that new equipment with a cost price of R7 200 was
purchased and entered on 1 November 2016.
8. According to the stocktake on 28 February 2017, the following is
on hand:
• Stationery R389

Tsomo Traders
Trial Balance as at 28 February 2017
Capital B1 372 398 00
Loan: EC Bank B8 70 000 00
Bank B11 30 871 00
Nominal accounts
Sales N1 776 240 00
Rates N11 4 200 00
Sundry expenses N17 11 743 00
Bad debts recovered N18 870 00
1 344 696 00 1 344 696 00

Activity 16.6
Required
1. Draw up the Income Statement of Craylaw Stores for the year ended
28 February 2019.
2. Draw up the Balance Sheet of Craylaw Stores on 28 February 2019.
Craylaw Stores
Capital 100 000 00
Drawings 36 000 00
Vehicles (at cost) 52 000 00
Accumulated depreciation on vehicles 12 250 00
Equipment (at cost) 19 500 00
Accumulated depreciation on equipment 4 750 00
Fixed deposit: SB Bank 20 000 00
Loan from WK Bank 25 000 00
Bank 58 000 00
Nominal accounts
Sales 290 000 00
Debtors allowances 5 800 00
Packaging 2 436 00
Bad debts 510 00
Bad debts recovered 2 334 00
Interest on fixed deposit 1 400 00
Insurance 2 866 00
Interest on loan 4 874 00
Wages 19 535 00
Stationery 3 993 00
Repairs 6 280 00
450 000 00 450 000 00

Adjustments
1. Stock on hand on 28 February 2019:
• Packaging R518
2. The account of A Damon, a debtor, must be written off as irrecoverable, R380.
3. Interest on the fixed deposit at 14% per annum for six months is still
outstanding.
4. Insurance of R456 was paid for the following accounting period.
5. Interest on loan still outstanding, R580.
6. The rent received includes rent for March 2019.
7. Provide for depreciation on fixed assets as follows:
• vehicles at 10% per annum on the cost price (a vehicle worth
R17 000 was bought on 1 December 2018)
• equipment at 12% per annum according to the diminishing balance
method.
Note
• Capital contribution was increased by R25 000 on 1 July 2018.
(Transaction has been recorded.) Owner: D Craylaw.
Activity 16.7
The accounting period of Homezone Traders ends annually on the last day of
February. The following information appeared in their books on 29 February
2016 (owner: C Papendorf ).
Required
Use the necessary information to draw up the Income Statement and Balance
Sheet for the year ended 29 February 2016.
Adjustments
1. On 26 February 2016 a debtor returned goods, R360. The goods were sold at
a profit mark-up of 25%. No entry of these returns has been made yet.
• Stationery R282
• Packaging R256
3. An amount of R30 was received from a debtor whose account had
previously been written off as irrecoverable. The bookkeeper has credited
the amount to Debtors Control. Correct the error.
4. Write off T Bell’s debt of R40 as irrecoverable.
5. An insurance premium of R490 was paid on 1 December 2015 for the period
1 December 2015 to 30 June 2016.
6. The fixed deposit was invested on 1 October 2015. Interest is paid quarterly
at 18% per annum.

7. Rent income amounts to R253 per month.
8. The bank statement was received on 29 February 2016. The following items
must still be recorded:
• Cost of cheque book R9
• Service fees R14
• Sundry debits R5
• Interest on overdraft R70
• Monthly stop order for R200 for the owner’s personal loan
• RD cheque for R150 from D Bruwer, received in settlement of his account
of R155.
9. The mortgage loan was increased by R5 000 on 1 September 2015. Provide for
the outstanding interest. The interest rate was originally 15% per annum, but
was increased to 18% per annum on 1 September 2015.
10. Provide for depreciation as follows:
• Vehicles R930.
Note
• Capital was increased by R12 000 on 1 October 2015.
(The transaction has already been recorded.)

Capital 72 208 00
Drawings 22 824 00
Mortgage loan: United 35 000 00
Land and buildings 115 000 00
Fixed deposit: Allied 5 000 00
Equipment (cost price) 12 000 00
Vehicles (cost price) 17 500 00
Bank 2 355 00
Petty cash 50 00
Cash float 200 00

Sales 395 853 00
Rates and taxes 4 010 00
Salaries 59 550 00
Bank charges 310 00
Discount received 734 00
Discount allowed 870 00
Bad debts 320 00
Interest on mortgage loan 2 250 00
Stationery 1 682 00
Packaging 4 056 00
Telephone 1 522 00
Insurance 820 00
Interest on fixed deposit 225 00
534 423 00 534 423 00
An improvement of R15 000 was made to land and buildings. It has already
been entered.
Case study 16.1
Amyoli Mtise started her own

business two years ago. She
buys woven baskets from four
women in the Eastern Cape
and then sells them at street
markets. She transports the
baskets in her truck and stores
them in a garage she rents.
There are three other people
who work for her. Amyoli
has recorded all the transactions in the journals and posted them, as well
as drawn up a Trial Balance. She now wants you to draw up the financial
statements. Her financial year ends at the end of February and she gives
you the information on the next page. She calls her business Baskets Etc.

A Mtise
Trading as Baskets Etc.
Capital 36 990 00
Drawings 9 750 00
Vehicles 80 000 00
Equipment 9 000 00
Accumulated depreciation on equipment 900 00
Bank 10 870 00
Cash float 900 00
Loan: NEC Bank (14%) 50 000 00
Nominal accounts
Sales 502 054 00
Rent expense 9 100 00
Insurance 4 140 00
Stationery 689 00
Telephone 3 720 00
Fuel 5 040 00
Salaries 60 000 00
Wages 86 000 00
Bad debts 336 00
Bad debts recovered 210 00
604 629 00 604 629 00
Amyoli gives you the following additional information.

• Stationery R126
2. The garage is rented at R700 per month and is payable monthly
in advance.

3. An annual insurance premium of R1 560 was paid on 1 July 2017.
4. The telephone account for February 2018 of R312 was only paid in
March 2018.
5. Interest on the loan amounts to 14% per annum and interest for
three months is outstanding.
6. Debtor F Xoseka’s account of R289 must be written off as
irrecoverable.
7. Depreciation is written off as follows:
• vehicles at 15% per annum on the diminished balance
Activity 16.8
Sea View Stores’ financial year ends on 28 February. P Zaaiman is the owner.
Required
2. Draw up only the following notes to the financial statements on
28 February 2019:
• Fixed/tangible assets (omit the total column)
• Trade and other debtors
• Owner’s equity
• Trade and other creditors.

1. A part of the building has been let since 1 July 2018. Rent for March 2019
has already been received.
2. Debtor P Whyte owes R920 and has disappeared without a trace. Write off
his account as irrecoverable.
3. The rates and taxes for the year amount to R4 800.
4. The telephone account of R421 and the water and electricity of R559 for
February 2019 must still be paid.
5. Insurance for 2019 has been paid in advance, R2 850.
6. Interest on the fixed deposit is still outstanding. The interest was increased
on 1 September from 8% per annum to 10% per annum.
7. Improvements worth R50 000 were made to the buildings during the year.
8. Depreciation on equipment must be calculated at 15% per annum on the
diminished balance. Equipment for R9 000 was purchased on 1 January
2019 and correctly recorded.
9. Depreciation on vehicles must be calculated at 20% per annum on the
cost price.

P Zaaiman – Sea View Stores
Capital B1 390 280 00
Bank B12 22 462 00
Nominal accounts
Sales N1 556 325 00
Bad debts N4 830 00
Discount allowed N6 844 00
Repairs N7 1 637 00
Rates N9 4 620 00
1 035 258 00 1 035 258 00

The information below was taken from the accounting records of

Augrabies Traders, owner P Joubert, on 28 February 2019, the last day of their
financial year.
Required
1. Draw up the Income Statement for the year ended 28 February 2019. (30)
2. Draw up the Balance Sheet on 28 February 2019. (55)
Augrabies Traders
Balance Sheet section Fol. Debit Credit
Capital B1 207 740 00
Bank B12 21 471 00
Nominal accounts
Sales N1 654 320 00
Bad debts N4 564 00
Repairs N7 1 658 00
Rates N9 3 420 00

Fol. Debit Credit
1 037 130 00 1 037 130 00

1. Debtor K Eksteen’s debt of R580 must be written off as irrecoverable.
2. The interest on the fixed deposit is 12% per annum and the deposit was
made on 1 June 2017. Three months’ interest is still receivable.
3. Insurance includes an amount of R320 that was paid the following financial
year.
4. The rent for March 2019 has already been received.
5. Interest on the loan is charged at 20% per annum and the loan is repaid in
instalments of R10 000 on 1 December annually. All payments have been
made and recorded. Interest of R4 000 is still payable. (Remember that
R10 000 must be recorded as short-term loans under current liabilities, as
it is payable in the next financial year.)
6. Depreciation on vehicles is calculated at 20% per annum on the diminished
balance and on equipment at 15% per annum on the cost price.
7. The owner increased his capital by R20 000 during the year.
8. Stock on hand according to the stocktake on 28 February 2019:
• Stationery R1 380
Activity 16.9
Required
Use the information below taken from Woodwise Traders, owner T Hall, and
draw up only the Balance Sheet with complete notes on 28 February 2018.
1. The owner, T Hall, increased his capital by R65 000 during the year.
2. The net profit for the year ended 28 February 2018 amounts to R110 500.
This has already been added to the capital.
3. The owner withdrew R35 771 during the year. This has already been
subtracted from the capital.

4. Depreciation for the year was as follows:
• Equipment R5 300.
Remember: Depreciation has been taken into account, so it has already
been added to accumulated depreciation.
5. A vehicle with a cost price of R50 000 was purchased on 1 May 2017 and
recorded correctly.
6. The loan is repaid annually on 30 September in instalments of R10 000.
Woodwise Traders
Capital B1 405 181 00
Bank B10 7 890 00
Loan: Unity Bank B14 90 000 00
Accrued expenses B15 3 441 00
603 858 00 603 858 00

Chapter 17
Financial accounting of a sole trader –
Interpretation of financial statements

• analyse and interpret the financial statements
• comment on the financial position of a business
• suggest how to improve the financial position of a business.
Key concepts
• analysing and interpreting financial statements • gross profit on sales
• gross profit on cost of sales • operating profit on sales • net profit on
sales • operating expenses on sales • current ratio • acid test ratio
• solvency ratio • return on equity • liquidity • profitability
So you see, you actually

made a profit this year.
Well done,
Boet!

398 chapter 17 •
I n terpretati o n o f fi n a n cial state m e n ts

1. Introduction
As we have already discussed, there are several people and institutions
that would be interested in the financial statements of a business. They
look at the ratios and percentages, which they use as financial indicators.
So, for example, a bank would first ask to see a business’s Income
Statement and Balance Sheet before it would consider granting a short-
term loan or overdraft facility, since they would need to determine
whether the business could afford to repay the loan. SARS would use the
financials to determine how much tax is payable for a certain period.
So it is essential that the owner of a business analyses the financial
statements to determine the following:
• if the owner is earning a good return on the capital invested in the
business, and whether it was worth the risk
• how the business is performing compared to the previous financial
periods, as well as compared to other similar businesses
• whether the business has achieved certain goals that were set
• what influence certain managerial decisions have had on the
business, for example expansion programmes, an increase in the
profit margins, etc.
• whether there is adequate cost control; in other words, whether
the operational expenses are in line with the income generated by
the business.
2. Using ratios and percentages to interpret

financial statements
The following table contains a summary of the ratios and percentages
that assist us in analysing financial statements, as well as the questions
that are answered through these calculations.
Financial indicators Questions that are answered

Gross profit on sales
Gross profit on cost of sales Profitability
Operating profit on sales How profitable the business is and how well the business controls their
Net profit on sales expenses (cost control)
Operating expenses on sales
Current ratio Liquidity
Whether the business can meet its short-term commitments (debt), for
Acid test ratio example bank overdrafts, creditors and short-term loans; whether the
business has applied its working capital efficiently
Total assets : Total liabilities Solvability
Whether the business would be able to pay all their debts
Return on owner’s equity Yield
If the owner is earning a good return on the capital he invested in
the business

• chapter 17 399

Once the above ratios and percentages have been calculated, they can be
interpreted and analysed according to the following guidelines:
• Compare them to the previous year’s figures to see whether there is
an increase or decrease, and analyse what this means.
• Compare the figures to those of other similar businesses.
There are several factors that could influence the ratios, such as how long
the business has been trading, whether there has been any expansion or
whether the business has changed any policies, such as the purchasing
policy. The following table contains the ratios and percentages with
possible comments that could be made.
Financial indicator Ratio Possible comments

• Both equations test whether the
business meets its profit mark-up.
• The percentage is compared to that of
Percentage gross profit Gross profit ___
 ________  ×  100  
   the previous year.
on cost of sales Cost of sales 1
• If it is below the profit mark-up, it could
be due to one of the following reasons:
– too much discount allowed during sales
– mistakes were made when
recording prices, source documents
Percentage gross profit Gross profit ___ or in the books
 __________ ×  100  
    – strong competition caused prices
on sales Sales/Turnover 1
to drop
– suppliers have increased their prices.
• This percentage tests the cost control
of the business; in other words, the
business’s control over operating
expenses.
• If the percentage gross profit on sales
Operating profit on Operating profit ___ is, say, 60% and this percentage is
 __________   ×  100  
sales Sales/Turnover 1 only 5%, it means that the operating
expenses are not well controlled.
• It should be compared to previous
years’ figures.
• A drop in the percentage indicates
weaker cost controls.
• This percentage is very similar to the
previous one, but it is after interest
income and expenses have been taken
into account.
• If you compare operating profits on
Net profit
Net profit on sales  __________       100  
× ___ sales with this percentage, it will
Sales/Turnover 1
indicate the effect of finance costs on
the business.
• A percentage of 5% indicates that for
every R1 in sales, a profit of 5% goes to
the owner.

400 chapter 17 •

Financial indicator Ratio Possible comments
• This indicates the percentage of
turnover that is spent on operating
expenses.
• It also tests the cost control of the
Operating expenses Operating expenses ___ business and can be compared to the
_____________
    
   ×  100  
on sales Sales 1 previous year’s figure.
• A decrease in this percentage indicates
an improved cost control.
• If the figure is too high, the business
has to find a way to cut costs.
• Both ratios test whether the business
has enough current assets to pay
creditors, bank overdrafts and short-
Current ratio Current assets : Current liabilities term loans.
• For the current ratio, there should
be about 2 current assets for every
1 current liability. This would indicate a
good liquidity for the business.
• If the acid-test ratio is below 1 : 1, the
Current assets – inventory : business may struggle to meet short-
Current liabilities term commitments.
Acid-test ratio • Possible ways to improve the acid test
OR
Debtors + Cash: Current liabilities ratio are to sell surplus stock and to
collect debts faster. A bank overdraft
would also negatively influence the ratio.
• This indicates whether the business will
be able to meet all their commitments.
• This ratio has to be at least 1 : 1 for the
Solvability ratio
Total assets : Total liabilities business to be solvent.
(degree of solvency)
• The business should try to reach a
ratio of 2 : 1, which means there are
R2 of assets for every R1 of liabilities.
• This indicates what return the owner is
receiving on his capital investment.
Return on owner’s
Net profit • It should be more than alternative
equity  _______________
    100  
   × ___
Average owner’s equity 1 investments, such as fixed deposits,
(degree of profitability)
since there is a greater risk.
• It has to be worth the risk.

• chapter 17 401

Example
Analysis and interpretation of financial statements
Cunningham Traders’ financial year ends 28 February. Extracts from
the financial statements for the years ended 28 February 2017 and
28 February 2018 are given below.
Required
Calculate the following and comment briefly:
1. the percentage gross profit on cost of sales for 2017 and 2018
2. the percentage gross profit on sales for 2017 and 2018
3. the percentage net profit on sales for 2017 and 2018
4. the percentage operating profit on sales for 2017 and 2018
5. the percentage operating expenses on sales for 2017 and 2018
6. the liquidity for 2017 and 2018
7. the degree of solvency for 2017 and 2018
8. the degree of profitability for 2017 and 2018.
Information
Below is an extract from the Income Statement of Cunningham
Traders for the years ended 28 February 2017 and 29 February 2018.
B Cunningham
Income Statement for years ended 28 February 2017 and 28 February 2018
Note R R
2017 2018
Sales 420 000 00 438 075 00
Cost of sales (280 000 00) (295 000 00)
Gross profit 140 000 00 143 075 00
Operating expenses (109 900 00) (96 435 00)
Operating profit (loss) 30 100 00 46 640 00
Interest income 1 450 00 510 00
Profit before interest expense 30 550 00 46 130 00
Interest expense 2 (4 260 00) (5 320 00)
Net profit for the year 7 26 290 00 40 810 00

402 chapter 17 •

Example continued
Extract from the Balance Sheet of Cunningham Traders on
28 February 2017 and 28 February 2018:
B Cunningham
Balance Sheet for the years ended 28 February 2017 and 28 February 2018
Note R R
2017 2018
ASSETS
Non-current assets 228 500 00 278 500 00
Fixed/tangible assets 3 218 500 00 258 500 00
Fixed deposit: XY Bank 10 000 00 10 000 00
Current assets 51 020 00 42 700 00

Inventories 4 30 850 00 27 660 00
Trade and other receivables 5 16 070 00 14 740 00
Cash and cash equivalents 6 4 100 00 300 00
TOTAL ASSETS 279 520 00 321 200 00

Owner’s equity 7 158 250 00 268 940 00
Capital 158 250 00 268 940 00
non-current liabilities 90 000 00 20 000 00

Mortgage loan: AB Bank 90 000 00 20 000 00
Current liabilities 31 270 00 32 260 00

Trade and other payables 8 21 270 00 22 260 00
Short-term liabilities 10 000 00 10 000 00
TOTAL EQUITY AND LIABILITIES 279 520 00 321 200 00

• chapter 17 403

Example continued
7. owner’s equity
2017 2018
Balance at begining of year 146 160 158 250
Additional capital contributed 20 000 100 000
Net profit (loss) for the year 26 290 40 810
192 450 299 060
Drawings (34 200) (30 120)
Balance at end of year 158 250 268 940
Solution
Gross profit ____
1. Percentage gross profit on cost of sales = ___________
    ×  100
     
Cost of sales 1
2017 2018
140 000 
 _______  100
 × ____  
   143 075 
_______  100
 × ____   
280 000 1 295 000 1
= 50% = 48,5%
Comments
• The percentage has decreased by 1,5% from 2017 to 2018. The
business has thus not achieved its profit mark-up in 2018.
• A possible cause could be discount on sales, where a mistake was
made calculating the selling price or on the source documents.
• Another reason could be that suppliers of trading stock could have
increased their prices, while the business kept their selling price the
same.
Gross profit ____
2. Percentage gross profit on sales = __________
    ×  100
    
Sales 1
2017 2018
140 000 
 _______  100
 × ____  
   143 075 
_______  100
 × ____   
420 000 1 438 075 1
= 33,33% = 32,66%
Comments
• The percentage decreased from 33,33% in 2017 to 32,66% in 2018. The
business has therefore not achieved its profit mark-up.
• Possible reasons could be:
– Sales were held at discount prices.
– Mistakes were made when calculating the selling price, on the
source documents or in the business’s books.
– Suppliers increased the prices of their products.

404 chapter 17 •

Example continued
Net profit ____
3. Percentage net profit on sales = _________
  ×  100
  
    
Sales 1
2017 2018
26 290 
 _______    100
× ____  
    40 810 
_______  100
× ____
     
420 000 1 438 075 1
= 6,3% = 9,3%
Comments
• The percentage increased by 3% from 2017 to 2018.
• There is a slight increase in cost control, but it is still very poor – less
than one third of percentage gross profit on sales.
Operating profit ____
4. Percentage operating profit on sales = ______________
    
   ×  100  
sales 1
2017 2018
30 100 
 _______    100
× ____  
    46 640 
_______  100
× ____
     
420 000 1 438 075 1
= 7,2% = 10,6%
Comments
• The percentage increased from 7,2% in 2017 to 10, 6% in 2018.
• There is a slight increase in cost control, but it is still very poor.
• They must try to cut down on current expenses.
Operating expenses ____
5. Percentage operating expenses on sales = _________________
      
  ×  100  
Sales 1
2017 2018
109 900 
 _______  100
 × ____  
    96 435 
_______  100
× ____
     
420 000 1 438 075 1
= 26,7% = 22,0%
Comments
• The percentage decreased by 4,7% from 2017 to 2018, which means
that cost control has improved.
• The business should investigate how they could further cut expenses.
6. Current ratio = current assets : current liabilities
2017 2018
51 020 : 31 270 42 700 : 32 260
= 1,6 : 1 = 1,3 : 1
Acid test ratio = current assets – inventory : current liabilities

2017 2018
(51 020 – 30 850) : 31 270 (42 700 – 27 660) : 32 260
= 20 170 : 31 270 = 15 040 : 32 260
= 0,6 : 1 = 0,5 : 1

• chapter 17 405

Example continued
Comments
• The current ratio decreased from 1,6 : 1 in 2017 to 1,3 : 1 in 2018.
• This means that for every R1 current liability, there is only R1,30
current assets.
• The acid-test ratio decreased from 0,6 : 1 in 2017 to 0,5 : 1 in 2018.
• The liquidity of the business is thus not good.
• The business will struggle to meet its short-term commitments.
7. Degree of solvency = total assets : total liabilities
2017 2018
279 520 : (90 000 + 31 270) 321 200 : (20 000 + 40 620)
= 279 520 : 121 270 = 321 200 : 60 620
= 2,3 : 1 = 5,3 : 1
Comment
• The business’s solvency is good, because for every R1 of liabilities
there are R5,30 of assets.
Net profit
8. Degree of profitability = ____________________
      100
   × ____   
Average owner’s equity 1
2017 2018
26   290   × ____
=  __________________  100  
  40   810   × ____
= __________________
   100  
 1  (146 160 + 158 250)
__ 1  1  (158 250 + 268 940)
__ 1
2 2
=   26 290 
_______     100
× ____  
  =   40 810 
_______  100
× ____
     
152 205 1 213 595 1
= 17,3% = 19,1%
Comments
• The owner gets reasonably good interest on his investment.
He will, however, have to decide whether it is worth the risk.
• It increased from 17,3% in 2017 to 19,1% in 2018.

406 chapter 17 •

Activity 17.1
Mgeni Traders’ financial year ends on 31 December. Extracts from the financial
statements for the years ended 31 December 2017 and 31 December 2018 are
given below.
Required
1. the percentage gross profit on sales for 2017 and 2018
2. the percentage gross profit on cost price for 2017 and 2018
4. the percentage operating profit on sales for 2017 and 2018
5. the percentage operating expenses on sales for 2017 and 2018
8. the degree of profitability for 2017 and 2018.
Information
Below is an extract from the Income Statement of Mgeni Traders for the years
ended 31 December 2017 and 31 December 2018.
Mgeni Traders
Income Statement for the years ended 31 December 2017 and 31 December 2018
Note R R
2017 2018
Sales 381 600 00 431 850 00
Cost of sales (212 000 00) (245 250 00)
Gross profit 169 600 00 186 600 00
Operating profit (loss) 7 101 800 00 112 000 00
Interest income – – – –
Profit before interest expense 101 800 00 112 000 00
Interest expense/Finance cost (8 800 00) (6 600 00)
Net profit for the year 93 000 00 105 400 00

• chapter 17 407

Below is an extract from the Balance Sheets of Mgeni Traders for the years
ended 31 December 2017 and 31 December 2018.
Mgeni Traders
Balance Sheet for the years ended 31 December 2017 and 31 December 2018
Note R R
2017 2018
ASSETS
Non-current assets
Current assets 48 320 00 85 270 00

Inventories 4 21 800 00 31 300 00
Cash and cash equivalents 6 10 920 00 34 650 00
TOTAL ASSETS 442 200 00 507 400 00

Owner’s equity 7 323 800 00 405 800 00
Capital 323 800 00 405 800 00


Trade and other payables 18 400 00 21 600 00
Short-term liabilities 20 000 00 20 000 00

408 chapter 17 •

Mgeni Traders
Extract from notes to the financial statements
7. owner’s equity
2017 2018
Balance at begining of year 240 200 323 800
Additional capital contributed 20 000 –
Net profit (loss) for the year 101 800 112 000
362 000 435 800
Drawings (38 200) (30 000)
Balance at end of year 323 800 405 800
Activity 17.2
The information below was taken from the financial statements of Brown
Traders for the years ended 28 February 2018 and 28 February 2019.
Required
1. the percentage gross profit on cost of sales for 2018 and 2019
5. the degree of profitability for 2019.
Information
Below is an extract from the Income Statements for the years ended
28 February 2018 and 28 February 2019.
Mgeni Traders
Income Statement for the years ended 28 February 2018 and 28 February 2019
Note R R
2018 2019
Sales 492 000 00 565 400 00
Cost of sales (328 000 00) (379 970 00)
Gross profit 164 000 00 185 430 00
Net profit for the year 98 580 00 103 600 00

• chapter 17 409

Below is an extract from the Balance Sheets on 28 February 2018 and
28 February 2019.
Mgeni Traders
Balance Sheet for the years ended 28 February 2018 and 28 February 2019
Note R R
2018 2019
ASSETS
Non-current assets
Current assets 42 850 00 46 050 00

Inventories 4 28 800 00 32 500 00
Cash and cash equivalents 6 3 820 00 950 00
TOTAL ASSETS 377 230 00 486 170 00

Owner’s equity 7 324 600 00 398 200 00
Capital 324 600 00 398 200 00


Trade and other payables 22 630 00 25 170 00
Bank overdraft – – 12 800 00
Activity 17.3
An extract from the financial statements of Kei Traders on 30 June 2020 with
comparable figures is given on the next page.
Required
1. Calculate the current ratio on 30 June 2020 and use your answers to
comment on the business.
2. Calculate the amount that would appear as inventory on the Balance Sheet
on 30 June 2020 if the acid test ratio on that date is 0,85 : 1.
3. Calculate the amount that would appear as debtors on 30 June 2019 if the
acid test ratio on that date is 0,8 : 1, the cash float is R900 and the bank has
an overdraft of R1 490.

410 chapter 17 •

4. Is the business a good investment for the owner? Explain why or why not.
5. Did the cost control of the business improve or weaken from 2019 to 2020?
Use total expenses as percentage of sales.
6. Calculate the solvency of the business for 2020.
2019 2020
Sales 688 590 733 880
Operating expenses 108 300 116 480
Net profit 88 440 93 200
Owner’s equity 296 200 349 640
Long-term liabilities 60 000 40 000
Fixed/tangible assets (carrying value) 332 920 355 748
Investments 10 000 10 000
Current assets 46 480 63 712
Current liabilities 33 200 39 820
Activity 17.4
Required
Use the information given below from the financial statements of Hougaard
Stores and calculate the following:
1. the degree of solvency

2. the acid test ratio
3. profitability.
In each case, write down the formula first and give your opinion.
Information from the books of Hougaard Stores on 31 October 2019

1. Equipment R25 000 7. Current assets R74 300
2. Investments R40 000 8. Mortgage loan R75 000
3. Cash R12 000 9. Drawings R23 000
4. Current liabilities R25 000 10. Net profit R65 000
5. Land and buildings R190 000 11. Debtors R37 500
6. Vehicles R80 000 12. Owner’s equity at
the end of year R358 000
Note
• Money can be invested at 8,5% interest per annum.

• chapter 17 411

Activity 17.5
Required
Calculate the following for 2015 (show your calculations). Compare the figures
for 2015 with the previous year, giving comments and your own opinion on the
situation:
1. percentage gross profit on sales

2. percentage net profit on sales
3. rentability (profitability)
4. solvability
5. current ratio.
(Round off to one decimal.)
Information
The balances given below were taken from the books of Rose Traders on
31 May 2015 after all adjustments have been taken into consideration.
2014 2015
Capital 361 786 373 786
Land and buildings 225 000 250 000
Equipment 64 000 70 000
Accumulated depreciation on equipment 32 000 38 000
Fixed deposit 10 000 20 000
Trading stock 28 750 34 200
Debtors control 20 400 21 600
Cash (Cash float and petty cash) 300 300
Creditors control 30 450 32 600
Bank overdraft 2 300 2 100
Long-term loan 70 000 60 000
Prepaid expenses 1 230 2 050
Income received in advance 468 890
Accrued expenses 890 980
Accrued income 540 940
Sales 620 000 550 000
Cost of sales 421 600 390 500
Notes 2014 2015

The drawings of the owner during the year 46 920 8 200
The net profit for the year 92 920 20 200

412 chapter 17 •

The figures/ratios for 2014 were already calculated and are as follows:
Percentage net profit on sales 14,98%

Percentage gross profit on sales 32%
Rentability (profitability) 29,42%
Solvability 3,06 : 1
Current ratio 1,5 : 1
Acid test ratio 0,66 : 1
Required
Use the information below taken from the financial statements of Bobby
Traders, and calculate the following for 28 February 2018:
1. the degree of solvency (5)

2. the current ratio (5)
3. the acid test ratio (5)
4. degree of profitability (5)
5. net profit on sales. (5)
Notes
• Use average owner’s equity where applicable.
• Write down the formula in each case and also give your opinion.
• Money can be invested at 15% interest per annum.
• Round off to one decimal where applicable.
Information taken from the books on 28 February 2018

Fixed/tangible assets R285 000
Investments R40 000
Current assets R94 000
Current liabilities R25 000
Inventory (28 February 2018) R52 000
Mortgage loan R75 000
Net profit R45 000
Owner’s equity (28 February 2017) R269 000
Owner’s equity (28 February 2018) R311 000
Sales R167 000
Net profit on sales (28 February 2017) 30,2%

• chapter 17 413

Chapter 18
Cost Accounting
• understand the importance of costing in the manufacturing
environment
• know the difference between direct and indirect costs
• identify and calculate various cost concepts in the manufacturing
environment
• draw up a basic Production Cost Statement.
Key concepts
• manufacturing • direct and indirect costs • production
• unit cost • cost calculations • Production Cost Statement
Did you know, before a book is ready for the

bookshop, authors write manuscripts that
are then edited, illustrators draw pictures,
typesetters typeset the pages and then it all
goes to the printer? Only after that process
can the books be delivered to our shop.
414 c h a p t e r 1 8 • C o st acc o u n ti n g

1. Manufacturing
Manufacturing is the process through which something (a product) is
created or made. This process is also known as production. There was a
manufacturing process involved in creating this textbook. This process
included printing the text, and binding and trimming the pages and
the cover. The end result is the product you have in front of you – this
textbook.
Manufacturing takes place in all types of businesses, ranging from
large corporations to small businesses. A large corporation such as Coca
Cola is a company that has a manufacturing process through which their
beverages are produced. A person who has a small business making and
selling carved wooden animals goes through a manufacturing process
that includes carving and painting the wood.
Whether a business is big or small, products are manufactured with
the aim of selling them at a profit. In order to make a profit, a product
must be sold for an amount greater than the cost of producing that
product. It is therefore very important to have a good understanding of
the costs involved in the manufacturing environment.
Activity 18.1
List five different types of manufacturing businesses. Also list the product each
business manufactures.
For example: Sony is a manufacturing business. One of its products is TV sets.
When you have finished listing your five examples, work in groups and discuss
or explain your answers to the group.
2. Manufacturing costs
Manufacturing (production) costs are the costs that are incurred by a
manufacturer when converting raw materials into finished products.
These costs may be divided into three main groups: material costs, labour
costs and manufacturing overheads.
2.1 Material costs

Material costs consist of the costs of all the raw materials used in the
manufacture of a product. Material costs are further classified into direct
material costs and indirect material costs.
C o st acc o u n ti n g • c h a p t e r 1 8 415

2.1.1 Direct material costs
This is the cost of all the raw materials that are used directly in the
manufacture of a product. These raw materials can be identified as
components of the final product.
Example: T
he cost of the paper used in the production of this textbook
is a direct material cost.
2.1.2 Indirect material costs

This is the cost of the raw materials used in the manufacturing process.
These costs are either not directly identifiable in the finished product,
or form a relatively insignificant part of the finished product. Indirect
material costs are included as part of the manufacturing overheads.
Example: T
he cost of the glue that was used to bind this textbook is an
indirect material cost.
2.2 Labour costs

Labour costs consist of the costs of the labour involved in the
manufacturing of a product. Labour costs are further classified into direct
labour costs and indirect labour costs.
2.2.1 Direct labour costs

Direct labour costs include the salaries and wages paid to the employees
who are directly involved in the manufacture of a product. The work
done by these employees can be identified directly in the production
process. Direct labour is often referred to as touch labour because these
workers generally touch the product that is being manufactured.
Example: T
he wages paid to the person who binds the textbooks will be
a direct labour cost.
2.2.2 Indirect labour costs

Indirect labour costs include the salaries and wages paid to the employees
who are not directly involved in the manufacture of a product. The work
done by these employees cannot be directly identified in the production
process of a specific product. As with indirect material costs, indirect
labour costs are also included as part of the manufacturing overheads.
Example: T
he wages paid to the printing factory foreman is an indirect
labour cost.

2.3 Manufacturing overheads/Factory overheads
Manufacturing overheads are all the costs of the manufacturing process
that are not directly identifiable with a specific product. In other words,
manufacturing overheads include all the costs of production, excluding
the direct material and direct labour costs. Manufacturing overheads
include costs such as indirect materials, indirect labour, water and
electricity, factory rental and depreciation on machinery.
2.4 Fixed and variable costs

2.4.1 Fixed costs
Fixed costs are manufacturing costs that do not vary according to
changing levels of production. Even if production is halted, these costs
will be incurred.
Example: The rent paid by the printing company that printed this
textbook is an example of a fixed cost. The same amount will
be paid irrespective of the number of textbooks produced.
2.4.2 Variable costs

Variable costs are manufacturing costs that vary according to the number
of units produced. If production stops, these costs will no longer be incurred.
Example: Direct material costs (the paper used in this textbook) are
variable costs. The amount of paper used will increase if more
textbooks are printed. Also, if production is stopped, then no
paper will be used.
Fixed costs and variable costs will be dealt with in more detail in Grade 11.
Activity 18.2
Choose one of the following terms: direct material costs, direct labour costs or
manufacturing overheads. Identify the type of manufacturing cost associated
with each item in the list below.
1. The glass used to make a bottle

2. The amount paid to the cleaner at a factory
3. The wood used to manufacture a chair
John assembles bicycles and is paid for each bicycle that is
4.
completed.
5. The salary paid to a factory supervisor
6. The flour used by a bakery to bake a cake
7. Depreciation of the machinery in a shoe factory

Activity 18.3
Consider a business that manufactures cars.
Required
1. List three examples of direct materials used in the production of a car.
2. Give two examples of direct labour involved in the production process to
manufacture cars.
3. List three manufacturing overheads that would be incurred by the business
that manufactures cars.
3. Prime costs
The term prime costs is used to describe the total cost of the direct
materials and direct labour. This is also often called the primary cost of
production because these are the primary (direct) costs involved in the
manufacturing process. This may be represented by the following equation:
Prime costs = direct materials + direct labour
4. Total manufacturing cost (cost of production)

The total manufacturing cost, also called the cost of production, is
calculated by adding all the costs involved in the manufacturing process.
This is equal to the sum of the direct material costs, direct labour costs
and the manufacturing overheads. This may be represented by the
following equation:
Cost of production = prime costs + manufacturing overheads
5. Unit cost (average cost)

The unit cost of a product (the average cost of one product) is calculated
by dividing the total cost of production by the total number of units
produced. This is also called the average cost of a product. The following
equation is used to calculate the unit cost of a product:
total cost of production
Unit cost of a product =  __________________________
    
   
total number of units produced
In general, the unit cost of a product decreases as the number of units
produced increases. This happens because the fixed costs portion of
the manufacturing overheads remains constant at different levels of
production. The variable costs will increase as the number of units
produced increases. This is illustrated in the following table where it is
assumed that all the manufacturing overheads are fixed costs and all the
prime costs are variable costs.

Number Prime Manufacturing Total cost of Unit
of units costs overheads production cost
produced (variable) (fixed)
100 R1 000 R2 000 R3 000 R30
200 R2 000 R2 000 R4 000 R20
400 R4 000 R2 000 R6 000 R15
Activity 18.4
1. Give another term that can be used to describe prime costs. Explain why
this term is appropriate.
2. What basic costs must be added in order to calculate the total cost of
manufacturing a product?
3. Write down the equation used to determine the unit cost of a product.
4. In a manufacturing process, when 1 000 units are produced, R10 000 prime
costs (assume all are variable costs) are incurred, while the manufacturing
overheads amount to R5 000 (assume all are fixed costs).
a. Calculate the total cost of production and the unit cost of the product.
b. Now calculate the total cost of production and the unit cost of the
product, if the number of units produced increases to 2 000 units.
6. Manufacturing cost calculations

The following example illustrates how a manufacturer would calculate
the manufacturing costs using the cost concepts you have just learnt.
Example
Bafana-Bafana Sportswear Ltd is a business that manufactures soccer
jerseys. During January 2019 they manufactured 10 000 soccer jerseys.
They compiled the following list of the costs incurred for the month.
Fabric used for the soccer jerseys R150 000

Badges for the soccer jerseys R10 000
Wages paid to the sewing machine operators R200 000
Wages paid to the fabric cutters R40 000
Rent paid for the hire of sewing machines R30 000
Salary paid to the factory supervisor R25 000
Other general overheads R45 000

Example continued
Required
Use the information provided to calculate the:
1. direct material cost
2. direct labour cost
3. prime costs
4. manufacturing overheads
5. total cost of production
6. unit cost of a soccer jersey
7. selling price of the soccer jerseys if the company policy is to use a
profit mark-up of 150% on cost.
Solution
1. Direct material cost = fabric cost + cost of badges
= R150 000 + R10 000
= R160 000
2. Direct labour cost = wages (sewing machine operators)
+ wages (cutters)
= R200 000 + R40 000
= R240 000
3. Prime costs = direct material cost + direct labour cost
= R160 000 + R240 000
= R400 000
4. Manufacturing overheads = rent (sewing machines) + salary
+ general
= R30 000 + R25 000 + R45 000
= R100 000
5. Total cost of production = prime costs + manufacturing overheads
= R400 000 + R100 000
= R500 000
total cost of production
6. Unit cost of a soccer jersey =  _________________________
        
total number of units produced
 R500 000  
= ________
10 000  
= R50
7. Selling price of the soccer jersey = cost price + profit mark-up
= R50 + (R50 × 150%)
= R125

7. Production Cost Statement
The results of the manufacturing cost calculations done in the previous
example are usually set out in a statement format called the Production
(Manufacturing) Cost Statement. Although you will learn more about
this statement in Grades 11 and 12, you will now learn about the basic
format of the Production Cost Statement. Using the information from
the previous example, you can prepare the Production Cost Statement for
Bafana-Bafana Sportswear Ltd for the month of January 2019.
Bafana-Bafana Sportswear Ltd

Production Cost Statement for the month of January 2019
Note R
Direct materials cost 1 160 000 00
Fabric 150 000 00
Badges 10 000 00
Direct labour cost 2 240 000 00
Wages (sewing machine operators) 200 000 00
Wages (fabric cutters) 40 000 00
Prime cost 400 000 00
Factory overhead cost 3 100 000 00
Rent (sewing machines) 30 000 00
Salary (supervisor) 25 000 00
Other general overheads 45 000 00
Total cost of production 500 000 00
Activity 18.5
Mohamed owns a furniture manufacturing business called Mo’s Wood Works.

During December 2019, a school asks Mohamed for a quotation for 50 desks.
Mohamed asks you to help calculate the price he should charge for the desks.
He gives you the information below about the production of the desks.
Raw materials needed for 50 desks

Wood R8 000
Screws (12 screws are required per desk) R1 each
General materials (glue, varnish, cleaning materials) R100

Labour requirements
Mohamed employs two people, Joe and Jenny. Joe will be responsible for
assembling and varnishing the desks and will receive a wage of R40 for
each completed desk. Jenny is a permanent employee, who supervises the
production. She receives a salary of R2 300 per month.
Rent
Mohamed rents a workshop at a cost of R3 000 per month.
Mohamed tells you that it will take the whole of January 2020 to build the
50 desks and during that month no other products would be manufactured.
Required
Use the information above to calculate the:
1. direct material cost
2. direct labour cost
3. prime costs
4. manufacturing overheads
5. total cost of production
6. unit cost of a desk
7. price Mohamed should charge the school (for each desk) if he uses a profit
mark-up of 50% on cost.
Activity 18.6
Use your answers calculated for Activity 18.5 to draw up the Production Cost
Statement for Mo’s Wood Works for January 2020.
8. Work in progress
The cost calculations that we have dealt with thus far have all involved a
fixed quantity of items being manufactured to completion. However, in
reality, in most factories at any given point in time, there are usually tens,
hundreds or even thousands of products at various stages of completion
on the production line. These unfinished products are collectively known
as work in progress.
Work in progress may be defined as that part of a manufacturer’s
inventory that is still in the production process and is thus only partially
complete. The value of the work in progress is determined by adding the
costs of the direct materials; direct labour and manufacturing overheads
that were allocated to these unfinished products. In Grades 11 and 12
you will learn how these costs are calculated and recorded in the Work in
Progress account.

9. Ethics
The manufacturing industry can be extremely competitive and there
are usually a number of manufacturers bidding for the same contract
or tender. Often it is the price of the goods that is the deciding factor in
determining who gets the contract. Thus manufacturers are constantly
trying to keep their production costs to a minimum. Of course,
there are many perfectly legal ways of doing this, such as using more
efficient manufacturing processes, sourcing cheaper raw materials or
implementing stricter internal controls. Unfortunately, this drive to cut
costs can also lead to unethical and often illegal practices, such as:
• using sweatshops, which are small factories where employees are
made to work very hard, in poor conditions, for very low wages
• using cheap or forced child labour
• non-compliance with health and safety regulations in factories
• non-compliance with environmental regulations, such as spillages and
leaks, illegal disposal of waste and other forms of pollution
• producing goods without conducting adequate safety testing
• producing unsafe or potentially harmful goods
• cruelty to animals, such as using animals in product testing or
intensive farming.
There are also other types of unethical practices relating to the
manufacturing sector, such as:
• manufacturing addictive products, such as tobacco (cigarettes)
• manufacturing weapons
• manufacturing for and trading with governments that abuse
human rights
• offering bribes to secure contracts or tenders.
10. Internal control

As mentioned previously, it is very important for manufacturers to
keep their production costs as low as possible. One way in which
manufacturing businesses can avoid escalating costs is to maintain an
efficient production process. In order to achieve an efficient and smooth
running operation, it is vital to implement and preserve effective internal
control procedures.
Although these internal controls may vary in detail from one
manufacturer to the next, the following are some of the general control
procedures that should be adhered to:

Production cost controls
• Proper authorisation is required before raw materials can be issued
from the storage into production. 
• Accurate records of raw materials issued to production are

maintained. 
• The quality of the raw materials is checked before entering

production. 
• Accurate measurements are used on raw materials to reduce

wastage. 
• Raw materials, work in progress and finished goods are safeguarded

against theft and loss. 
• The quality of each employee’s work in the production line is carefully

monitored. 
• The production line is closely monitored to avoid any unintended

‘bottlenecks’, which may slow down the production process. 
• A factory supervisor or foreman oversees the production process. 
• The machinery in the factory are well maintained, clean and kept in
good working condition. 
• Finished goods are checked for any defects and any defective
products are set aside. 
• Proper measures are taken to ensure that the hygiene

of the employees is appropriate (this is particularly
important in the production of foodstuffs). 
• Proper measures are taken to ensure the health and

safety of employees. 

Benni Fortune sells hotdogs at the school tuckshop. He sells the hotdogs at
R4 each. He gives you the following information.
Receipt from Shopmore Supermarket

15 packets of sausages (10 sausages per packet) R225
12 __12 dozen hotdog rolls R40
1 tub of butter (500 g) R15
1 bottle of tomato sauce (2 l) R20
• The school charges him R35 to use their kitchen to prepare the hotdogs.
• He pays his friend, Quinton McCarthy, to boil the sausages and butter the
rolls. Quinton receives 20c for every hotdog he helps to prepare.
• Benni travels to Shopmore Supermarket by bus. It costs him R10 for a
return fare.
• Assume that Benni sees the butter and tomato sauce as indirect costs.
Questions
1. How many sausages did Benni buy? (2)
2. How many hotdog rolls did he purchase? (2)
3. How many complete hotdogs will he produce? (1)
4. How much will Quinton McCarthy be paid to make all the hotdogs? (3)
5. Draw up the Production Cost Statement for Benni’s hotdog business. (12)
6. What is the unit cost of one hotdog? (3)
7. How much profit does Benni make on each hotdog? (2)

Case study 18.1
The following passage relates to a small business enterprise. Read the passage
and answer the questions that follow.
Thandaza’s beaded necklace business

Thandaza mbeki is a young entrepreneur who manufactures and sells
beaded necklaces. The necklaces are made by threading colourful beads
onto a leather strip.
Thandaza buys a large bag of assorted beads from Beads-R-us Wholesalers
for R300. The Tanning Warehouse supplies leather strips in rolls of ten metres.
She orders three rolls at a cost of R20 per roll. She employs her brother, Siya,
to make the necklaces and pays him R2 for every completed necklace.
Thandaza has calculated that she uses one metre of the leather strips
to make four necklaces. There are enough beads in a large bag for exactly
120 necklaces.
She rents a room for R500 in which she manufactures the necklaces.
Thandaza will also pay a friend, nomsa, R100 to clean the room after the
production is finished.
Thandaza asks Siya to make as many necklaces as possible from the
materials she has purchased.
Questions
1. Identify the two direct materials used in the manufacture of the
beaded necklaces. (2)
2. Identify the direct labour cost in the production of the necklaces. (1)
426 chapter 18 • CoST ACCounTInG

3. How many necklaces can be made with the leather strips purchased? (2)
4. Calculate the total direct material costs and the direct labour costs. (4)
5. Calculate the manufacturing overheads of the business. (2)
6. Calculate the total cost of production and the unit cost of a necklace. (7)
7. Draw up the Production Cost Statement of Thandaza’s beaded
necklace business. (9)
8. What would the unit cost of a necklace be if Thandaza doubled
her production? (8)
Research project 18.1
Conduct an interview with a manufacturer in your area. Below is a list of

questions you could include:
• What product(s) do you manufacture?
• What direct materials do you use in the manufacturing process?
• What work do the staff, whose wages/salaries contribute towards the
direct labour cost of product(s), perform?
• What are a few of the manufacturing overheads?
• Do you have a Production Cost Statement for one of your products?
If so, can you please give us a copy?
Practical project 18.2
Create your own manufacturing business and make a product to sell at

your school or in your community. Use the skills you have developed
recently to draw up a list of the various costs involved in manufacturing
your product. Draw up a Production Cost Statement for the product and
calculate your selling price using an appropriate profit mark-up.
Suggestions for a few products that are easy and inexpensive

to manufacture:
• simple edible products such as popcorn, fudge, sandwiches, cookies
• a gift package: buy sweets (or stationery) from a wholesaler and make
small packets of assorted sweets (or stationery).
In order to make this project as realistic as possible:

• the member(s) of the group who perform(s) the manufacturing process
should be paid a small wage (direct labour).
• each manufacturing business (group) should pay a nominal amount of
rent to the school for the rights to sell on the property (overheads).
The aim of this project is not to make large profits, but to gain valuable
understanding of the concepts studied in this chapter through practical
experience. This project can also be sponsored by the school and used as a
fundraising activity.

Chapter 19
Budgeting
By the end of this chapter, you should be able to:
• understand the importance of preparing budgets
• know the difference between a cash budget and Projected
Income Statement
• do basic forecasting calculations
• draw up basic cash budgets and Projected Income Statements.
Key concepts
• budget period • types of budget • the National Budget • cash budget
• debtors collection schedule • creditors payment schedule
Busi, why don't we

order 300 copies of
each best seller?
I wish we could, Sam, but we

didn’t budget to do that. We
can't change the budgets now.
428 c h a p t e r 1 9 • b u dgeti n g

1. Introduction
In this chapter, you will be introduced to various budget concepts.
Although you will not be required to prepare formal budgets until
Grade 11, it is important that you understand the concepts that are
outlined in this chapter.
For any business to operate effectively and reach its full potential, it
is necessary to do careful planning and control. Budgeting is an essential
tool used in planning business activities. Budgets are prepared by
predicting and planning future transactions in order to achieve a desired
future outcome. Once the budgets have been completed, they must
be checked regularly to monitor whether the business is achieving its
financial goals. This process is known as control.
1.1 Sources of information

In order to forecast accurately and realistically, it is necessary to use
information from a variety of sources. These sources include past
results (financial statements from previous years), business trends,
future expectations, the economic climate, contracts relating to future
transactions and any other factors that may have an influence.
1.2 Budget period

Budgets can be prepared for one month, three months, six months, a year
or even for a number of years, depending on the needs of the business.
The period of time over which the budget is drawn up is called the
budget period.
Budgets generally cover one of three periods of time:
• short-term budgets: usually less than one year
• medium-term budgets: usually one year (12 months)
• long-term budgets: usually prepared for a number of years.
1.3 Types of budget

Businesses use many different types of budget to plan their future
business activities. The following are some of the types of budget that are
more commonly used by businesses.
• Cash budget
A cash budget is a forecast of the cash position of a business over a
future period. It sets out the expected cash receipts and cash payments
over the budget period.
b u dgeti n g • c h a p t e r 1 9 429

• Projected Income Statement
A Projected Income Statement is used to predict the amount of
profit that a business will generate over a certain period. It sets out
the expected income generated and expenses incurred during the
budget period.
• Capital budget
A capital budget is a forecast of the future expenditure on fixed assets.
It sets out the expected costs for purchasing, extending and improving
fixed assets over the budget period.
• Zero-based budget
A zero-based budget is a budget of expenses in which each item
must be justified on its overall merits, rather than on the previous
year’s budget. Each item is re-evaluated to determine whether or
not it is required.
• Project budget
A project budget is a one-off budget that is prepared to evaluate the
merits of a specific project. It sets out the costs involved with the
project so that an assessment can be made against the expected future
benefits from the project.
• Production budget
A production budget is used to forecast the costs involved in the
manufacture of a specific product. It sets out the costs of the raw
materials, labour, overheads and all other production expenses that
relate to manufacturing the product. The production budget can be
used to determine the expected unit cost of the product.
Although it is important to know about all the different types of budget
listed above, we will focus on the cash budget and Projected Income
Statement in this chapter. These two types of budget will also be dealt
with in more detail in Grades 11 and 12.
2. The National Budget

Budgeting is not restricted to businesses only. In fact, each year an
extremely important budget that affects all of us is prepared – the
National Budget. The National Budget is prepared by estimating the
amount of income (revenue) that will be generated by the government
and then determining how these funds should be allocated (expenditure)
in order to benefit the people of South Africa.

Summary of the 2010/2011 National Budget
R billion
Revenue 738,40
Expenditure 906,96
Budget shortfall/deficit 168,56
The summary of the National Budget for the year ended 28 February 2011
shows an expected shortfall (deficit) as a result of the budgeted expenditure
exceeding the estimated revenue. The chart below details the breakdown
of the planned expenditure by the government over the same period.
Functional breakdown of government expenditure for 2010/2011

Other
9%
Education
General public services
18%
6%
Defence
4%
Public order
Health and safety
12% 9%
Economic affairs
Housing and
18%
community
amenities
10% Social protection
14%
Another form of budgeting that you should already be familiar with is the
study timetable. In a study timetable, you budget your time rather than
money, but the same basic principles apply (See Project 19.1 on page 442).
3. The cash budget

The cash budget is used to monitor and plan the liquidity of a business.
When preparing the cash budget, the most important word to remember
is cash. Only the inflow and outflow of cash is predicted and planned
for in a cash budget. In other words, only future cash transactions are
considered when drawing up a cash budget.
A cash budget is essential for a business to be able to maintain
its liquidity – this means that a business can meet its short-term
commitments, such as paying creditors, repaying loans and having

enough cash to purchase stock and pay operating expenses. If the cash
budget of a business predicts a cash shortfall in a specific month, the
business can make arrangements with the bank or make alternative plans
in advance.
3.1 Components of the cash budget

The cash budget contains the following:
• cash receipts: a prediction of the cash receipts (inflow) for the
budget period
• cash payments: a prediction of the cash payments (outflow) for the
budget period
• cash surplus (shortfall): the total cash receipts less total cash
payments for the budget period
• bank (opening balance): the bank balance at the beginning of the
budget period
• bank (closing balance): the expected bank balance at the end of the
budget period.
These components are summarised in the following example.
Example
Components of a cash budget
Cash receipts 100 000
Cash payments (70 000)
Cash surplus (shortfall) 30 000
Bank (opening balance) 10 000
Bank (closing balance) 40 000
Notes
• A cash surplus (an increase in cash) arises when the expected
cash receipts are greater than the expected cash payments for the
budget period.
• If the expected cash payments exceed the expected cash receipts for
the budget period, a cash shortfall (decrease in cash) is recorded.
3.2 Cash receipts and cash payments

The following is a list of some of the more common business
transactions that need to be considered when preparing a cash budget.
The transactions are divided into cash receipts (causing an inflow of cash)
and cash payments (causing an outflow of cash).

CASH RECEIPTS (inflow of cash) CASH PAYMENTS (outflow of cash)
Cash sales Cash purchases of stock
Receipts from debtors Payments to creditors
Investment income Operating expenses paid
(such as interest) (such as insurance)
Rent income received Cash drawings by owner
Disposal of fixed assets (for cash) Cash purchase of fixed assets
Loan received Repayment of loans
Investments that mature Investments(such as fixed deposits)
Note
• All the types of transactions listed above are cash transactions.
Transactions such as bad debts, depreciation, discount received and
drawings of stock are non-cash transactions and are therefore not
taken into account when preparing a cash budget.
Activity 19.1
Breyton Willemse is a Grade 10 learner who is saving money to buy a CD player.

The CD player costs R950. At the beginning of February, he had saved R320.
He asks you to help him draw up a budget to determine whether he will have
enough money to buy the CD player by the end of April. He gives you with the
following information now (at the beginning of February):
Information
1. He gives extra lessons in Accounting to five of his classmates. He teaches
each one twice a month for an hour and charges R20 per hour per person.
He expects to teach them throughout the year.
2. On Saturday mornings, he packs boxes at his uncle’s factory for a wage of
R15 per hour. He estimates that he will work 12 hours in February and eight
hours each month thereafter.
3. His birthday is on 15 March. He tells you that his grandmother normally
gives him R100 as a birthday present.
4. He works as a waiter in a small restaurant and has calculated that his
average earnings (including tips) over the last few months was R60 per shift.
He expects to work three shifts per month.
5. He plans to sell three of his old music CDs to a secondhand CD shop in April.
He predicts that he will receive R20 per CD.
6. Breyton estimates that on average he spends R8 a day at the school
tuckshop. (Assume that there are 20 school days in each month.)
7. He also intends to buy a bracelet for his girlfriend as a Valentine’s Day
present (on 14 February). He has seen the bracelet he wants to buy
advertised for R150.
8. He collects music CDs and buys one CD every month. The current price for a
CD is R80, but he has heard that the price will increase by 25% from March.

Required
Use the information provided to complete a cash budget for Breyton Willemse
for February, March and April. Copy the cash budget format shown below and
complete it by entering the figures. (Hint: the cash balance for the beginning of
March is the same as the cash balance at the end of February.)
Breyton Willemse
Cash budget for the period February to April
February March April
Receipts
Extra lessons
Packing boxes
Birthday present
Restaurant work – tips
Sale of CDs
Total receipts
Payments
Tuckshop
Bracelet
Music CD
Total payments
Cash surplus/deficit
Balance at beginning of month
Balance at end of month
3.3 Debtors Collection Schedule

An important source of cash that must be determined when preparing a
cash budget is the cash received by an business when debtors settle their
accounts. This calculation can be quite challenging, as debtors usually
pay their debt over a number of months.
The results of this calculation are usually set out in the Debtors
Collection Schedule that is prepared before the cash budget is drawn up.
You will learn more about the Debtors Collection Schedule in Grade 11,
but we will not look at the calculations involved with the help of the
following example:

Example
During January 2016 the credit sales of Mpumalanga Traders
amounted to R100 000. From past experience, the accountant of
Mpumalanga Traders has determined that debtors usually settle their
accounts as follows:
• 50% pay within the month in which the sales took place
• 30% pay in the following month
• 20% pay in the second month after the sales.
Calculate the expected amounts to be received from January’s debtors
during January, February and March.
Solution
Cash to be received from debtors:
January: R100 000 × 50% = R50 000
February: R100 000 × 30% = R30 000
March: R100 000 × 20% = R20 000
Activity 19.2
The credit sales of Hillside Stores for March and April amounted to R80 000
and R90 000 respectively. It is estimated that debtors will settle their accounts
as follows:
• 30% pay within the month in which the sales took place
• 50% pay in the following month
• 20% pay in the second month after the sale.
Required
Calculate the expected amounts to be received from debtors during March,
April, May and June.
3.4 Creditors Payment Schedule

Creditors arise when a business purchases trading stock on credit.
These creditors will have to be paid in the future. Before preparing the
cash budget, the business needs to calculate the expected cash to be paid
to creditors in order to settle its debts. These payments are set out in the
Creditors Payment Schedule. You will learn more about the Creditors
Payment Schedule in Grade 11 but the following example should give
you an indication of how payments to creditors are determined.

Example
The credit purchases of Mpumalanga Traders for January 2016 and
February 2016 amounted to R60 000 and R50 000 respectively. Creditors
are paid in the month after the purchases are made.
Required
Determine the expected amounts to be paid to creditors in February
and March.
Solution
Payments to creditors:
February: R60 000 ( January’s credit purchases)
March: R50 000 (February’s credit purchases)
Activity 19.3
The credit purchases of Harley Traders for September and October amounted
to R48 000 and R53 000 respectively. Credit purchases are usually paid for two
months after the date of invoice.
Required
Determine the amounts that will be paid to creditors during November and
December.
4. The Projected Income Statement

The Projected Income Statement is used to monitor and plan the
profitability of a business. Whereas in the cash budget the focus is on
the future cash position of a business, the Projected Income Statement
is used to predict and plan the amount of profit a business will generate
through its operation. Thus, the key word here is profit.
The Projected Income Statement sets out the estimated income and
expenses over the forecast period. The business needs this to determine
whether they will keep making a profit or whether, for example, expenses
must be cut.
Most businesses have quiet and busy times during the year. A business
that sells ice creams, for example, will determine that they need more
stock and extra personnel during December and January, while the
opposite would be true for the winter months.
When preparing a Projected Income Statement, management must
analyse and estimate how certain decisions will impact on the profit
of the business. For example, by employing more sales staff, a business
may be able to increase its income by increasing sales. However, the
expenses would also increase because extra wages will need to be paid.

If it is predicted that the increase in sales will exceed the additional cost
of wages, then the expected profit would also increase and management
would hire the additional staff.
4.1 Components of the Projected Income Statement

The Projected Income Statement contains information from the
following budgets:
• sales budget: a prediction of the expected sales over a future period
• operating expense budget: a forecast of the expenses that will be
incurred over a future period.
These budgets can each be prepared on their own, but this is not
necessary as the information from these budgets is included in the
Projected Income Statement.
In Grade 11, you will spend more time preparing Projected Income
Statements. The following example should give you a clearer picture of
what you need to be able to do.
Example
Study the Income Statement of Rajie Traders for the year ended
28 February 2019.
Rajie Traders
Note R
Sales 480 000 00
Salaries 60 000 00
Insurance 7 000 00
Fuel 12 000 00
Depreciation 9 000 00
Interest income 1 – –
Net profit for the year 170 000 00

Example continued
Required
Use the previous year’s Income Statement and the information given
below to calculate the following projected figures for March 2019.
Information
1. Sales: the sales will be the same as the average sales figure of the
previous year.
2. Cost of sales and gross profit: Rajie Traders use a fixed profit
margin.
3. Rent income: the lease agreement stipulates that the monthly rental
will increase by R500 from 1 March 2019.
4. Salaries: after negotiations with the trade unions, it is expected that
salaries will increase by 10% from 1 March 2019.
5. Insurance: the insurance company notified the business that the
insurance premium would increase by R1 400 for the year.
6. Fuel: it is expected that the price of fuel will increase by 20% as
from 1 March 2019.
7. Depreciation: the depreciation for the coming year is expected to
remain unchanged.
8. Advertising: the cost of advertising is expected to equal 4% of sales.
9. Interest expense: the loan is currently R30 000 and interest is
charged at 12% per annum.

Example continued
Solution
1. Sales: 480 000 ÷ 12 = R40 000
2. Cost of sales: 40 000 × 50% = R20 000
Gross profit: 40 000 × 50% = R20 000 (gross profit margin = 50%)
3. Rent income: (36 000 ÷ 12) + 500 = R3 500
4. Salaries: (60 000 × 110%) ÷ 12 = R5 500
5. Insurance: (7 000 + 1 400) ÷ 12 = R700
6. Fuel: (12 000 × 120%) ÷ 12 = R1 200
7. Depreciation: (9 000 ÷ 12) = R750
8. Advertising: (40 000 × 4%) = R1 600
1
Interest expense: 30 000 × 12% ×  __
9. 12    = R300
The Projected Income Statement is set out in the same format as a normal
Income Statement. Using results of the calculations from the previous
example, we can draw up the Projected Income Statement of Rajie
Traders for the month ended 31 March 2019, as shown below.
Rajie Traders
Projected Income Statement for the month ended 31 March 2019
Note R
Sales 40 000 00

Salaries 5 500 00
Insurance 700 00
Fuel 1 200 00
Depreciation 750 00

Interest income 1 – –
Interest expense 2 (300 00)

Activity 19.4
Study the Income Statement of Manuel Stores for the year ended
31 December 2019.
Manuel Stores
Income Statement for the year ended 31 December 2019
Note R
Sales 500 000 00
Wages 90 000 00
Stationery 6 000 00
Bank charges 3 000 00
Interest income 10 000 00
Interest expense – –
Required
Use the previous year’s Income Statement and the information given below to
calculate the following projected figures for January 2020.
Information
1. Cost of sales and gross profit: the sales for January 2020 are expected to
amount to R60 000, while the percentage profit margin will remain constant.
2. Rent income: the annual rental will increase by R10 000 for 2020.
3. Wages: the standard wage increase of 10% from 1 January 2020 will
be maintained.
4. Advertising: a new contract was entered into with the local newspaper –
each month four advertisements will be placed at a cost of R750 each; no
other advertising is expected.
5. Stationery: the consumption of stationery is expected to remain unchanged
in 2020.
6. Bank charges: it is expected that bank charges will increase by 20% in 2020.
7. Interest income: on 1 January 2020, an amount of R80 000 will be invested
in a fixed deposit for twelve months at 15% per annum.

Activity 19.5
Use the results of your calculations from Activity 19.4 to complete the following
Projected Income Statement of Manuel Stores for the month ended 31 January
2020 (redraw the statement and enter the figures).
Manuel Stores
Projected Income Statement for the month ended 31 January 2020
Note R
Sales
Cost of sales
Gross profit
Other operating income
Rent income
Gross operating income

Operating expenses
Wages
Advertising
Stationery
Bank charges
Operating profit (loss)

Interest income 1
Profit before interest expense
Interest expense 2
Net profit for the month

Project 19.1
As mentioned before, a study timetable is a type of budget. Instead of

budgeting in terms of rands and cents, in a study timetable you budget time.
The process involved when drawing up a study timetable is similar in many
ways to that used by a business when preparing budgets.
Required
Prepare a study timetable for your next exams. use the following steps
as a guideline.
1. decide on the study period – your timetable should start from the date on
which you plan to start studying and run until the last day of the exams.
2. Assess the time available – assess the time that you expect to have
available to study during this period.
• Draw up a list of all your expected future commitments (events you
must attend that are already scheduled) over the study period. Your
list should include the time (start and finish) of the commitment,
and the date of the commitment as well as a brief description of the
commitment. Look at this example.
date Time description

nov 15–19 8:00 a.m.–2:30 p.m. normal school time
nov 22 (mon) 9:00 a.m.–11:30 a.m. Accounting exam
nov 23 (Tues) 2:30 p.m.–4:30 p.m. Cricket practice
nov 27 (Sat) 3:30 p.m.–11:30 p.m. my sister’s wedding
• Draw up a second list in which you detail preferred breaks – all the
i The preferred breaks are not
the same as commitments, future times you would prefer to keep available during your study
but rather events that you would period. This list might include a friend’s party you would like to attend,
like to budget time for if possible. a TV programme you enjoy watching, exercising or playing sport with
your friends, or watching a soccer match.
3. estimate the time required for each subject – there is no way of

determining the exact amount of study time you will need for each subject.
In order to estimate the time required, you must analyse the volume of work
covered in each subject and draw on your past experience. Here are a few
questions you should ask yourself about each subject.
• How well did I do in this subject in previous exams and tests?
• How much time did I spend on this subject for the previous exams?
• How long does it take me to study a chapter for this subject?
• How many chapters do I need to cover?
• What outcome do I want? (Do I just want to pass? or do I want an
A-aggregate?)
442 chapter 19 • BuDGETInG

By analysing your answers to these questions, you should be in a better
position to estimate the amount of study time you need for each subject.
As mentioned before, accurate analysis of the information collected is a vital
part of drawing up a successful budget. From the results of your analysis, draw
up a table showing the estimated study time required for each subject. (Be
careful not to under-budget.)
4. Budget the time available with the time required – the final step is to
prepare the budget (your study timetable).
a. Draw a table for the budget period on a big piece of paper (at least A3
size). The first column on the table should list all the dates (and days) of
the study period. Split the days into time slots by drawing more columns.
b. Enter your commitments and your preferred breaks in the appropriate
time slots. Use a different colour for each one.
c. Now allocate the estimated study time for each subject into the time slot
available. If you find that there is not enough time available, you may
have to extend your study period or use some of the time allocated to
preferred breaks.
d. Additional tips:
• A study session should not be longer than one-and-a-half hours.
• Budget for at least a 15-minute break between study sessions.
• The day before an exam, try to only budget time for that subject.
• A good night’s sleep is very important before an exam, so don’t plan
to study late at night.
• Budget time for exercise and meals – remember a healthy body leads
to a healthy mind.
5. Control – once you have completed your study timetable, make sure you
follow your plan. Monitor your work constantly and if you feel that you need
more study time, make the necessary adjustments to the timetable.

Chapter 20
Revision activities
This is a revision chapter that reinforces all the work done in the previous
chapters. You can use this chapter as extra practice before tests and
examinations. Ask your teacher to either mark your work once you have
completed a question or to make the answers available to you.
Activity 20.1 Accounting concepts and source documents
Choose the correct word in column B to match the description in column A.

Write the letter of column B next to the number of column A on the answer paper.
Column A Column B
1.1.1 The document used when goods are sold on credit to A. Current assets
a debtor
1.1.2 The document used when the debt is settled with B. Fixed/tangible assets
a creditor
1.1.3 The document issued by the business when a debtor C. Creditors
sends goods back
1.1.4 Their balances changes continually and it can easily be D. Cheque counterfoil
converted to cash.
1.1.5 Money acquired from a commercial bank in order to E. Discount allowed
buy property
1.1.6 Objectivity, trust and integrity F. Duplicate receipt
1.1.7 Outsiders to whom the business owes money for G. Debit note
goods purchased
1.1.8 Outsiders who owe the business money for goods sold H. Debtors
to them
1.1.9 The document used for non-cash transactions I. Original invoice
1.1.10 The discount that debtors receive when they pay their J. Mortgage bond
account within 30 days
K. Credit note
L. Journal voucher
M. Duplicate invoice
N. Ethical principle
Activity 20.2 Journals
Sinazo Mbekwa owns a business selling party favourites, called Party Planet.
She uses the perpetual inventory system and makes a profit mark-up of 40% on
the cost price.
444 c h a p t e r 2 0 • R evisi o n activities

Required
Complete the following journals in the books of Party Planet for March 2018.
You don’t have to add the columns.
Cash Receipts Journal Cash Payments Journal
Creditors Journal Creditors Allowances Journal
Balances on 1 March 2018

General Ledger Debtors Ledger
C Burger R1 640 August Wholesalers R ?
K Kotze R960 Marais Ltd R2 390
J Ranjit R1 860 EJ Motors R2 170

02 Cash sales of trading stock amounts to R3 276.
Issued receipt no. 57 to debtor K Kotze for R960. She settled
her account.
03 Because the business often needs to deliver goods to their clients,
the need for a delivery vehicle has risen. Sinazo applied for a loan
at AB Bank. On 3 March 2018 it was granted and the amount of
R70 000 was deposited in the business’s current bank account.
Interest is 15% per annum and payable on the last day of every month.
04 Issued cheque no. 277 to EJ Motors for purchase of a delivery vehicle
for R68 000.
05 Bought cups, plates and other stock from Marais Ltd for R7 400 and
received 20% trade discount. The invoice was renumbered 92.
The cheque received from debtor K Kotze on 2 March was dishonoured
by the bank due to insufficient funds.
06 C Burger settled her account of R1 640 and the business allowed
5% discount.
Cash sales of trading stock, R9 072.
07 Sent paper cups (stock) marked R230, after the 20% trading discount
was deducted, back to Marais Ltd, because it was of bad quality
(doc. no. 20).
10 Issued a cheque for R6 004 to August Wholesalers to settle the
account, after 5% discount was allowed.
13 Received an invoice from EJ Motors for repairs done to one of the
delivery vehicles, R680, as well as fuel bought on account for R1 020.
14 Receive document no. 21 from EJ Motors. There was an overcharge
on the invoice received on 13 March and they are now giving R70
allowance for repairs done.
R evisi o n activities • c h a p t e r 2 0 445

16 Issued the following invoice:
Party Planet No. 112

To: Paarl Girls High
80 Boxes paper cups R35 R2 800
17 Issued a cheque to EJ Motors in settlement of the account up to date

and received 5% discount.
18 Goods sold on credit to J Ranjit for R882.
20 Issued a cheque to August Wholesalers for trading stock purchased for
R7 200, and received a 20% trading discount and a 10% cash discount.
Paid Speedy Transport R330 to deliver the trading stock.
21 J Ranjit returned goods with a selling price of R112, because it was the
wrong colour. Issued doc. no. 55.
26 Cashed a cheque for R5 000. Wages was R4 500 and the rest the
owner took for personal use.
28 Paarl Girls High informed the business that two boxes of paper
cups got wet when delivered and were now completely damaged.
Give the allowance.
29 Received a cheque for R4 860 from XY Bank. This was a fixed deposit
that matured as well as interest at 8% per annum for a year. Issued
receipt no. 59.
30 Issued a cheque to AB Bank in payment of the interest on the loan for
the first month, as well as a payment on the loan of R1 100.
31 Received a bank statement from WW Bank which shows the following:
Debits
• stop order for R900 to Allsure Insurance for the business insurance
• debit order for R886 to the municipality for water and electricity
• service fees, R45; cash handling levy, R89; tax levy, R39.
Credits
• interest, R73
• direct deposit by Paarl Girls High in settlement of their account.

Activity 20.3 General Journal and General Ledger
The following information appeared in the books of Sunshine Traders on

30 June 2019.
Required
1. Complete the additional entries in the General Journal of Sunshine Traders
on June 2019.
2. Open the following accounts in the General Ledger (only balance the
Balance Sheet accounts):
Trading Stock Creditors Control

Debtors Control Debtors Allowances
The following balances appeared in the books of Sunshine Traders on

1 June 2019:

Debtors Allowances R897
These are the column totals for the journals on 30 June 2019

Bank Sales Cost of Sales Debtors Control Discount
Allowed
30 287 18 960 12 640 ? 336

Bank Trading Debtors Creditors Discount Sundry
Stock Control Control Received Accounts
46 604 ? 630 21 447 452 2 564
Creditors Journal
Creditors Control Trading Stock Stationery Sundry accounts
22 774 19 874 211 2 689
Creditors Allowance Journal

Creditors Control Trading Stock Stationery Sundry accounts
2 182 1 630 89 463
Sales Cost of Sales Debtors Cost of Sales
Allowances
? 8 960 2 040 1 360
General Journal
Sales Cost of Sales
Dr Cr Dr Cr
125 89 124 450

Open the General Journal with the totals above and write up the following
transactions which have not been entered into the journal on 30 June 2019
(narrations may be left out):
• Write debtor N Meintjies’ debt off as irrecoverable, R574.
• Raise interest on debtor J Adam’s overdue account for R600 for three
months, using 12% interest per year.
• The overdue account of Sunshine Traders for R5 600 is taxed with 15%
interest per year for six months.
• The owner takes goods with a cost price of R720 for his own use.
• The owner donates a second-hand vehicle to the business as a capital
contribution, R60 000.
• Trading stock purchased for R2 300 is entered as packaging.
Correct the mistake.
• Trading stock for R780, which was sent back to JP Traders, was accidentally
posted to the account of JJ’s Shop in the Creditors Ledger.
Activity 20.4 General Ledger
Study the Debtors Control, Creditors Control and Trading Stock accounts taken
from the books of CL Traders and answer the questions that follow. CL Traders
make use of the perpetual inventory system.
2017 2017
Jun 1 Balance b/d 15 230 00 Jun 30 Bank and discount allowed CRJ 14 990 00
? DJ 12 516 00 ? DAJ 1 885 00
Bank CPJ 112 00 Balance c/d 10 983 00
27 858 00 27 858 00
2017
2017 2017
Jun 30 ? CPJ 21 642 00 Jun 1 Balance b/d 25 640 00
Sundry returns CAJ 2 478 00 30 Sundry purchases CJ 18 794 00
44 434 00 44 434 00
2017

Dr Trading Stock Cr
2017 2017
Jun 1 Balance b/d 33 410 00 Jun 30 Cost of sales CRJ 25 640 00
30 Bank CPJ 19 635 00 Cost of sales DJ 8 940 00
Creditors control CJ 18 774 00 Creditors control CAJ 987 00
? DAJ 632 00 Balance c/d 36 884 00
72 451 00 72 451 00
2017
Questions
1. Give a possible reason for the entry of R112 on the debit side of the
Debtors Control account.
2. What is the correct contra account for the amount of R12 516 on the debit
side of the Debtors Control account?
3. What is the correct contra account for the amount of R1 885 on the credit
4. Which column in the CRJ is posted for the entry of R14 990 on the credit
5. What is the contra entry for the entry of R21 642 on the debit side of the
Creditors Control account?
6. What is the source document used for the entry of R2 478 on the debit side
of the Creditors Control account?
7. What is the source document for the entry of R18 774 on the debit side of
the Trading Stock account?
8. What is the contra account for the entry of R632 on the debit side of the
Trading Stock account?
9. Give a reason for the entry of R987 on the credit side of the
Trading Stock account.
10. Calculate the profit mark-up on the cost price.
Activity 20.5 Creditors Ledger
1. Study the following information and answer the questions that follow.
2020 2020
Feb 28 Bank & discount received A CPJ 5 800 00 Feb 1 Balance b/d 1 500 00
? B CAJ 1 000 00 28 Sundry purchases C CJ 5 859 00
Balance c/d D
7 359 00 7 359 00
2020
Mar 1 Balance b/d A

1.1 What is the meaning of the description at A ?
1.2 What is the source document for C ?
1.3 What does B represent?
1.4 Give any two reasons for the entry at B .
1.5 Calculate the amount value for D .
2. The inexperienced bookkeeper gives you the following information that

must be used to set up the Trading Stock account. The business uses a mark-
up of 40%. You must NOT balance the account.
• The total stock in the storeroom on 1 March 2020 has a value of R4 500.
• Total cash sales for March amounts to R1 260.
• Total credit sales for March amounts to R840.
• Total trading stock purchased for cash is R5 000.
• Total trading stock purchased on credit is R1 400.
• The total debit notes for trading stock returned issued during March
amounts to R1 000.
Activity 20.6 Debtors Ledger
Show the account of debtor P Pienaar in the Debtors Ledger of Van Staden
Traders. On 1 February 2019, P Pienaar owed the business R1 240.

04 P Pienaar bought goods on credit for R1 670.
06 Pienaar returned goods with a selling price of R330 because they were
damaged.
16 Pienaar settled her account as on 1 February 2019 with a cheque for
R1 178. The business allowed a discount of R62.
22 Pienaar paid another R350 on her account.
28 The bank informed the business that the cheque received from P Pienaar
on 22 February was dishonoured, due to a mistake on the cheque.
Activity 20.7 Accounting equation
Analyse the following transactions according to the accounting equation.
Transactions
1. Merchandise with a selling price of R500 was donated to the local
primary school (profit margin of 25% on the cost price).
2. Charged the overdue account of R600 of A Malgas with interest at
10% p.a. for one month.
3. Received R100 from G Goobie. His account was written off as a bad
debt during the previous year.
4. Sent a cheque to W Winn for R620 to settle your account of R645.
5. Drew a cash cheque for the following:
• the owner’s daughter’s school fees, R600

• the petty cashier, R500
• repairs to equipment, R400.
6. A loan for R15 000 at a interest rate of 13,5% was negotiated six months
ago at Top Bank. The agreement stipulates that the loan must be paid
back in three equal instalments over a period of nine months. Pay the
second instalment plus interest for the previous three months by cheque.
7. The bank charged the overdrawn bank account of the business with
R66 interest.
Activity 20.8 Debtors reconciliation
The inexperienced bookkeeper of Visser Traders prepared the following Debtors

Control account on 31 October 2020:
2020 2020 Bank
Oct 1 Balance b/d 31 520 00 Oct 31 (C Rabie cheque dishonoured) CPJ 90 00
Bank (Debtors control column) CRJ 85 836 00 Journal credits GJ 192 00
207 914 00 207 914 00
2020
Nov 1 Balance b/d 207 258 00
The total Debtors List at 31 October 2020 amounted to R33 506.

Since this total did not agree to the balance on the Debtors Control account, an
investigation was launched. The following errors and omissions were revealed:

1. Posting errors were made when the Debtors Control account was drawn up.
2. C Rabie’s cheque for R90 was returned by the bank marked ‘insufficient
funds’. C Rabie had previously settled her debt of R100 with this cheque.
No entry in respect of the difference has yet been made.
3. I Steenkamp, a debtor, is insolvent and the balance of R120 on his account
must be written off as a bad debt. Although no entry has been made,
Steenkamp’s balance does not appear on the Debtors List.
4. The Debtors Journal is overcast by R2 000.
5. An entry for R34 in the Debtors Allowance Journal was inadvertently posted
to debtor D Human’s account as R234.
6. A debit note for R168 in respect of goods returned to B Beyers (a creditor),
was entered in the Debtors Allowance Journal by mistake and posted to the
account of B Buys (a debtor) in the Debtors Ledger.
7. A creditor, Mostert & Son, who has a debit balance of R60, appeared on the
Debtors List.

Required
1. Draw up an amended Debtors Control account as at 31 October 2020,
after the errors and omissions have been taken into account.
2. Calculate the correct total of the Debtors List. Show every step of
your calculations.
Activity 20.9 Salaries and wages
1. Marina Smuts is employed at RJ Outfitters as a receptionist. She started

working on 1 July 2016 and was appointed at the following salary scale:
93 600 × 9 360 – 121 680 × 13 320 – 161 640
Answer the following questions relating to Marina Smuts.

1.1 What was Marina’s starting salary at the end of her first month of
employment (31 July 2016)?
1.2 What monthly salary can she expect to earn in July 2020?
1.3 Her contract stipulates that she is entitled to a bonus of 90% of her
salary. She only worked for six months in 2016 and can expect only 50%
of her bonus on 31 December 2016. What is this amount?
1.4 Do you think it is ethically right for RJ Outfitters to pay her 50% of the
bonus? Give reasons for your answer.
1.5 The following income tax scale was obtained from SARS and applies to
the tax year ended 28 February 2017:
Personal income tax rate and bracket adjustments

For the tax year ending February 2017
Taxable income
0–80 000 18% of each rand
Calculate the amount of tax that Marina should have paid for the tax
year ended 28 February 2017.
2. The following information relates to the wage earners of Blommendal

Traders, who are paid biweekly (every second week). The different
deductions are paid over on the last day of the month. All payments for
September 2018 were made.

Week Ending Gross Wage
Pension Fund Medical Aid PAYE Pension Fund Medical Aid
14 Sep 2018 2 973 164 240 840 328 240
28 Sep 2018 3 542 213 240 1 032 426 240

Required
Take all the information into account and post to the following accounts in the
General Ledger of Blommendal Traders for the month of September 2018:
2.1 Pension Fund

2.2 SARS (PAYE)
2.3 Wages.
Activity 20.10 Final accounts and adjustments
The following information relates to the business of Namso Traders.
Required
1. Use the information to prepare the following accounts in the General Ledger:
• Capital
• Accumulated Depreciation on Equipment
• Trading Stock
• Prepaid Expenses
• Rent Income
• Interest on Loan
• Trading account
• Profit and Loss account.
2. Prepare the Post-closing Trial Balance 28 February 2017.
Pre-adjustment Trial Balance for Namso Traders at 28 February 2017
Bank B10 23 410 00
Cash float B11 1 400 00

Sales N1 1 525 830 00
Rent expense N5 72 000 00
Advertisements N11 6 420 00
UIF contribution N16 2 340 00
1 793 311 00 1 793 311 00

1. The building is rented at R6 000 per month and all rent is paid up to date.
Two offices in the building are rented out to a property agency. The rent
agreement with the property agency stipulates that they should pay 15% of
the business’s rent. They must pay the rent one month in advance.
2. A debtor E Marais settled her account of R540 on 23 February 2017 with
a cheque of R513 and this was recorded correctly. The bank notified the
business that the cheque has been dishonoured due to insufficient funds.
No entry was made of this.
3. The business has a loan at AB Bank. Interest on loan is capitalised.
A loan statement received from the bank on 28 February 2017 revealed
the following:
Interest on loan for the year R14 800 00

Capital redemption of loan for the year R29 600 00
Total of instalments paid for the year R44 400 00
The business paid a monthly instalment of R3 700 as payment on the loan –

this included the redemption of the loan as well as interest. The accountant
entered the transaction in the books by crediting Bank and debiting Loan:
AB Bank with R3 700 each month.

4. The following accounts for February 2017 was still payable on
28 February 2017:
• Telephone R526
5. An advertisement contract for six months was paid on 1 January 2017 for
R3 150.
6. Goods with a cost price of R1 340 was returned to a creditor, MP Suppliers,
after the physical stocktake was done (adjustment 7) on 28 February 2017.
No entry was made of this transaction.
7. A physical stocktake was done on 28 February 2017 and showed the
following on hand:
• Trading stock R36 870 (goods mentioned in adj. 6 included)
• Stationery R331
8. Depreciation should be written of as follows:
Take into account that equipment with a cost price of R6 000 was purchased
on 1 October 2016 on credit and the transaction was recorded correctly
(show calculations).
Activity 20.11 Financial statements
The following information was taken from the accounting records of DAN
Traders for the year ended 28 February 2018. Take all the necessary information
into account and complete the following:
1. The Income Statement for the year ended 28 February 2018

2. The following notes to the Balance Sheet:
2.1 Fixed/tangible assets
2.2 Trade and other debtors
2.3 Owner’s equity
2.4 Trade and other creditors.
3. The Equity and Liabilities section of the Balance Sheet at 28 February 2018.

Information
Pre-adjustment Trial Balance for DAN Traders at 28 February 2018
Balance Sheet accounts Debit Credit
Capital 191 670 00
Drawings 43 000 00
Land and buildings 400 000 00
Vehicles 70 000 00
Equipment 52 000 00
Bank 2 344 00
Petty cash 100 00
Cash float 450 00
Loan: MM Bank 200 000 00
Nominal accounts
Sales 1 292 077 00
Rates and taxes 3 400 00
Telephone 10 920 00
Salaries and wages 273 000 00
Bad debts 3 551 00
Discount received 1 998 00
Discount allowed 2 550 00
Stationery 2 339 00
Bad debts recovered 1 037 00
Insurance 7 650 00
Interest on current account 221 00
Interest on bank overdraft 1 997 00
Bank charges 2 449 00
1 778 063 00 1 778 063 00

1. A new store room that cost R75 000 was built during the year. All the
necessary entries were made.
2. The business’s policy on depreciation states the following:
2.1 Depreciation must be provided for on equipment at 10% p.a. on the
cost price of all equipment. Take into account that new equipment, with
a cost price of R15 000, was purchased and entered in the books on
1 November 2017.
2.2 Depreciation on vehicles must be provided for at 15% p.a. on the
diminished balance method.
3. The account of debtor, W Pearce, amounting to R350 must be written off as
irrecoverable since he cannot be traced.
4. The owner, Daniël Joubert, increased his capital on 1 December 2017 by
depositing R25 000 cash in the business’s banking account. This transaction
was properly recorded in the books of the business.
5. A loan instalment of R20 000 is made annually on 1 September.
All necessary entries regarding this transaction were made during
the financial year. Some of the interest at 15% p.a. is still payable.
6. A debtor, M Kota, returned goods she bought for R832 to the business on
27 February 2018. The business uses a profit mark-up of 60% on the cost
price. No entries were made of this transaction.
7. According to the physical stocktake done on 28 February 2018, the
following goods were on hand:
• Stationery R118
8. The business rents a store room to a local advertising agency at R1 340 per
month.
9. The water and electricity account for February 2018 amounted to
R1 889 and the telephone account was R570. On 28 February 2018 both
these amounts were still payable.
10. An annual insurance premium of R2 940 was paid in full on 1 October 2017.
11. The bank statement was received after the final Trial Balance was drawn up.
The following must be brought into account:
• bank charges of R176
• interest on the bank overdraft, R117
• a dishonoured cheque of R324 of debtor, E Spies. The cheque
was received in settlement of her account of R360. No entry
was made.
12. One of the employees requested an advance of R600 on his salary for March
2018, as his daughter was getting married. The request was granted but no
entry was made.

Activity 20.12 Interpretation of financial statements
Rushdah Abrahams is the owner of RA Traders, who trades in groceries. She

started her business on 1 March 2016 with R450 000 cash.
At the end of her first year of trading on 28 February 2017, her accountant
drafted an Income Statement and Balance Sheet which reflected the following
information:
Sales for the year R810 000

Expenses R112 500
Net profit for the year R157 500
The Balance Sheet as at 28 February 2017 reflected the following information:
Fixed assets (vehicles and equipment at carrying value) R330 000

Inventory R165 000
Debtors R34 500
Cash and cash equivalents (only Bank) R81 000
Capital (opening balance R450 000, net profit
R157 500, drawings for the year, R45 000) R562 500
Creditors R48 000
After another year of trading (the year ended 28 February 2018), her accountant
drafted financial statements which reflected the following information:
Sales for the year R1 080 000

Expenses R217 500
Net profit for the year R52 500
The Balance Sheet as at 28 February 2018 reflected the following information:
Fixed assets (vehicles and equipment at carrying value) R360 000

Inventory R157 500
Debtors R 55 500
Cash and cash equivalents (only Bank) R18 000
Capital (opening balance R562 500, net profit R52 500,
drawings for the year, R120 000) R495 000
Creditors R96 000

Required
Take all the necessary information into account and answer the following
questions:
1. The following is a summary of the ratios taken from the Income Statement
for the year ended 28 February 2017:
Gross profit % on sales 33 __13 %

Net profit % on sales 19,4%
1.1 Calculate the gross profit % on sales and the net profit % on sales for
the year ended 28 February 2018.
1.2 Comment briefly on your calculation in 1.1 (TWO points).
2. The current ratio and the acid test ratio for the year ended 28 February 2017
were 5,84 : 1 and 2,41 : 1 respectively.
2.1 Calculate both ratios for the year ended 28 February 2018.
2.2 Comment on your calculations in 2.1.
3. The return on the average owner’s equity (profitability) for the year ended
28 February 2017 was 31%.
3.1 Calculate the return on average owner’s equity (profitability) for the
year ended 28 February 2018.
3.2 Comment on your calculation in 3.1, taking into account that the
current return by commercial banks on fixed deposits is 6 __12 %.
Activity 20.13 Cost calculations in manufacturing and VAT
1. Conrad Kriel manufactures standard kites for children. The selling price per
kite is R146. Provided below is a summary of all his costs for October 2018.
He manufactured 2 160 kites during October.
Costs per kite

Material per kite R30
Wood per kite R5
Line per kite R5
Wage per kit completed R40
Costs for the month
Salary of factory foreperson R5 000
Rent of factory R9 000
Water and electricity of the factory R2 300
Indirect material cost R450
Required
1.1 Calculate the direct material cost per kite.
1.2 Calculate the total manufacturing overheads for October 2018.
1.3 Explain the difference between fixed and variable costs.
1.4 Calculate the total production cost per unit for October 2018
if 2 160 kites were produced.

1.5 What is the percentage profit Conrad earned per kite during
October 2018, if the kites were sold at R146 each?
1.6 Conrad is considering increasing the wage per kite completed to R44.
Explain two consequences of such a wage increase to Conrad.
2. The following information with regard to VAT was provided for

November 2018.
Total purchases (VAT inclusive) R430 920 00

Total sales (VAT inclusive) R718 200 00
2.1 Calculate the input tax for November 2018.

2.2 Calculate the output tax for November 2018.
2.3 Calculate the amount payable to SARS for November 2018.
2.4 The selling price per kite is R146. What should the marked price be if
Conrad is a registered VAT vendor?
Activity 20.14 Budgets
Your hockey team is planning to go on a tour to Potchefstroom during the April

2019 holidays. You were asked to draw up a cash budget to calculate how much
each player should pay for the tour.
Information
1. There are 14 players in the team as well as a coach. It is the school’s policy
that the coach’s costs should be covered by the players.
2. You have received a donation of R4 500 from Nikita Restaurant.
3. The quotation you received from Hippo Rock for new uniforms and a
sweater amounts to R300 per player. The coach will also receive a sweater
that costs R100.
4. Hiring a bus from the school will cost R1,50 per kilometre and you are
expecting to travel 4 000 km in total.
5. Fuel is now R10,20 per litre. You will travel 4 000 km and the fuel efficiency
of the bus is 8 km/ℓ.
6. The team will sleep over at the Gariep Dam on the way there and back.
Accommodation costs are R200 per person per night. You will braai that
evening, which costs R34 per person, and breakfast the next morning is
R10 per person.
7. The cost of the tournament at PUK hockey academy is R900 per player and
R500 for the coach.
Required
1. Draw up a cash budget to calculate the total amount of cash needed
for the tour.
2. Calculate the cost per player.

Grade
Study & Master Study & Master
10 10
Accounting
Study & Master Accounting Grade 10 has been especially Accounting
Accounting Learner’s Book

developed by an experienced author team according to the
Curriculum and Assessment Policy Statement (CAPS). This new
and easy-to-use course helps learners to master essential
content and skills in Accounting.
The comprehensive Learner’s Book includes: CAPS

case studies which deal with issues related to the real world,
and move learners beyond the confines of the classroom
margin notes to assist learners with new concepts –
especially GAAP flashes, that give learners guidance on
General Accepted Accounting Practice
examples with solutions after the introduction of each
new concept.
The Teacher’s Guide includes:

a daily teaching plan, divided into the four terms, that
guides the teacher on what to teach per day and per week
moderation templates to assist teachers with assessment
solutions to all the activities in the Learner’s Book.
CAPS
The CD-Rom with a PowerPoint® presentation includes:
interactive examples to explain new concepts
links to all solutions to activities and assessments in
the Learner’s Book
Study & Master

a colourful, exciting and dynamic interface with
numerous graphics and tables designed to enhance
the learning experience.
Learner’s Book Grade
10
www.cup.co.za
I S B N 978-1-107-60251-9
9 781107 602519
SM_Accounting_10_LB_CAPS_ENG.indd 1 2011/11/02 7:58 PM

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Grade

Study & Master Study & Master

Accounting Learner’s Book

The comprehensive Learner’s Book includes: CAPS

The Teacher’s Guide includes:

Study & Master

Learner’s Book Grade

SM_Accounting_10_LB_CAPS_ENG.indd 1 2011/11/02 7:58 PM

Elsabé Conradie • Derek Kirsch • Mandy Moyce

FET Accounting Grade 10 LB Book.indb 1 11/2/11 6:41:37 PM

Cambridge, New York, Melbourne, Madrid, Cape Town,

Cambridge University Press

© Cambridge University Press 2011

This publication is in copyright. Subject to statutory exception

First published 2011

Editor: Christine de Nobrega

FET Accounting Grade 10 LB Book.indb 2 11/2/11 6:41:37 PM

Chapter 1 Indigenous bookkeeping and informal businesses 1

Chapter 3 GAAP principles 20

Chapter 4 Internal controls 27

Chapter 5 Financial accounting of a sole trader 42

Chapter 6 Bookkeeping of a sole trader – Revision of Grade 9 content 60

Chapter 7 Bookkeeping of a sole trader – Debtors 97

Chapter 8 Bookkeeping of a sole trader – Creditors 119

Chapter 9 Bookkeeping of a sole trader – Additional cash

Chapter 10 Bookkeeping of a sole trader – The General Journal 181

Chapter 11 Reconciliation of control accounts and Debtors and

Chapter 12 Combined bookkeeping activities 224

Chapter 13 Value-added tax (VAT) 236

Chapter 14 Salaries and wages 250

Chapter 15 Financial accounting of a sole trader – Final accounts and

Chapter 16 Financial accounting of a sole trader – Financial

Chapter 17 Financial accounting of a sole trader – Interpretation of

Chapter 18 Cost Accounting 414

Chapter 19 Budgeting 428

Chapter 20 Revision activities 444

FET Accounting Grade 10 LB Book.indb 3 11/2/11 6:41:37 PM

fixed deposit Definitions are provided for new or difficult

i The business makes use of a

Transactions on discount Notes in the margin remind you of

gAAp flash gAAP flashes appear where GAAP

Clipboards appear throughout the textbook

FET Accounting Grade 10 LB Book.indb 4 11/2/11 6:41:42 PM

How much are the almonds, mama?

i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses • c h a p t e r 1 1

FET Accounting Grade 10 LB Book.indb 1 11/2/11 6:41:44 PM

2. The indigenous (informal) accounting system

3. Contrasts between formal and informal

Concept Formal bookkeeping Indigenous bookkeeping

2 c h a p t e r 1 • i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses

FET Accounting Grade 10 LB Book.indb 2 11/2/11 6:41:44 PM

Sometimes money left over after

InDIGEnouS BookkEEPInG AnD InFoRmAL BuSInESSES • chapter 1 3

FET Accounting Grade 10 LB Book.indb 3 11/2/11 6:41:44 PM

4 c h a p t e r 1 • i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses

FET Accounting Grade 10 LB Book.indb 4 11/2/11 6:41:45 PM

1. Briefly explain the difference between indigenous and formal

i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses • c h a p t e r 1 5

FET Accounting Grade 10 LB Book.indb 5 11/2/11 6:41:45 PM

Formal Assessment task: Questionnaire and written and

Aim: The learners conduct an interview using a questionnaire and then

Work in pairs or groups of three.

6 c h a p t e r 1 • i n dige n o u s b o o k k eepi n g a n d i n f o r m al b u si n esses

FET Accounting Grade 10 LB Book.indb 6 11/2/11 6:41:45 PM

Chapter 6 Bookkeeping of a sole trader – Revision of Grade 9 content 60

Chapter 9 Bookkeeping of a sole trader – Additional cash

Chapter 11 Reconciliation of control accounts and Debtors and

Chapter 15 Financial accounting of a sole trader – Final accounts and

Chapter 16 Financial accounting of a sole trader – Financial

Chapter 17 Financial accounting of a sole trader – Interpretation of

2. The indigenous (informal) accounting system

3. Contrasts between formal and informal

4. The relationship between GAAP and ethics