JuanPierreJPBru 2016 EndOfChapterQuestions AppliedAccounting

What have we covered in this chapter?
In this chapter, we have covered the following:

• How to post from the subsidiary journals to the general ledger
• How to prepare a trial balance from the general ledger
• How to draw up the statement of comprehensive income from the trial balance
• How to draw up the statement of financial position from the trial balance
End-of-chapter questions
Question 1
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For each statement, indicate whether it is true or false:

1.1 The total of the bank column in the cash payments journal is representative of ‘total receipts’ in the
bank account in the general ledger.
1.2 Nominal accounts get totalled until year end, when they are closed off to a trading and profit and loss
account.
1.3 Current assets can include inventory, accounts receivable and bank overdraft.
1.4 The general ledger is a summary of only the real accounts of the business.
1.5 The vehicles ledger account has an opening balance on the debit side.
1.6 Financial statements may be prepared at any time during the year, if needed.
1.7 If the total debits equal total credits in the trial balance, everything is correct.
1.8 Real accounts are used to prepare the statement of comprehensive income.
1.9 A general ledger account consists of an average of 12 columns.
1.10 IFRS stands for International Financial Recording Standards.
Question 2
In each case, indicate whether the account is a real account or a nominal account:
2.1 Capital
2.2 Donations
2.3 Depreciation
2.4 Drawings
2.5 Land and buildings
2.6 Bad debts
2.7 Bank overdraft
2.8 VAT control
2.9 Sales
2.10 Stationery
Copyright 2016. Oxford University Press Southern Africa.
Question 3
Barney Traders – owned by Mr Barney, a sole trader – sells superhero memorabilia, model ships and
aeroplanes. The business’s year end is 28 February. Where applicable, assume that all parties are VAT
vendors. VAT of 14% is included where applicable. The perpetual inventory system is used. The
following balances appeared in the books on 30 June 20X8:
BARNEY TRADERS
TRIAL BALANCE AS AT 30 JUNE 20X8
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 4/7/2023 6:07 AM via UNISA
AN: 1468758 ; Juan-Pierr (JP) Bruwer, Tracy Geraldine Beck.; Applied Accounting
Account: s7393698.main.ehost 191
The following subsidiary journals have been prepared:
EBSCOhost - printed on 4/7/2023 6:07 AM via UNISA. All use subject to https://www.ebsco.com/terms-of-use 192
Required:
• Open and post all balances to the accounts in the general ledger of Barney Traders for the month ending
31 July 20X8.
• Balance and total all accounts.
• Prepare a trial balance as at 31 July 20X8.
Question 4
Jean Traders is owned by Mr Jeans, who is a sole trader. Jean Traders sells designer jeans to cities and
towns all over South Africa. The business’s year end is 31 March. Where applicable, assume that all
parties are VAT vendors. VAT of 14% is included where applicable. The perpetual inventory system is
used. The following balances appeared in the books on the 28 February 20X7:
The following subsidiary journals have been prepared:
Required:
• Open and post all balances to the accounts in the general ledger of Jean Traders for the month ending 31
March 20X7.
• Prepare a trial balance as at 31 March 20X7.
• Prepare the statement of comprehensive income for the year ending 31 March 20X7.
• Prepare the statement of financial position as at 31 March 20X7.
Question 5
Charlotte’s Chocolate Traders is owned by Mrs Charlotte, a sole trader. Charlotte’s Chocolate Traders
sells handmade chocolate. The business’s year end is 31 March. Where applicable, assume that all parties
are VAT vendors. VAT of 14% is included where applicable. The perpetual inventory system is used. A
mark-up of 60% on cost price is charged. The following balances (among others) appeared in the books
on 31 May 20X4:
*Sundries was made up of Capital (R50 000.00) and Loan: AH Bank (50 000.00).
*Sundries was made up of the following transactions that did not include VAT: Drawings (3 000.00),
Petrol (R600.00) and Interest expense (250.00).
All amounts included VAT.
Required:
• Calculate each missing amount.
• Prepare only the bank, VAT control, accounts receivable, inventory, accounts payable, sales and cost of
sales accounts in the general ledger of Charlotte’s Chocolate Traders for the month ending 30 June
20X4.
Question 6
Mr Bubbly is the owner of Bubbly Traders, which sells soaps, shower gels and perfumes from around the
world. Mr Bubbly is the sole owner of this retail business. You are provided with the trial balance for the
year ended 31 January 20X6. The trial balance was prepared by the previous accountant, who did not
complete it. The periodic inventory method is used.
R R
Accounts Debit Credit
Purchases costs 3 600.00
Bad debts 1 220.00
Capital ?
Accounts payable 90 000.00
Bank charges 2 000.00
Accounts receivable 13 280.00
Bank 5 000.00
Land & buildings 1 400 000.00
Vehicles 200 000.00
Rent income 52 000.00
Rates & taxes 6 400.00
Printing & stationery 3 600.00
Fixed deposit: Aplus Bank 40 000.00
Salaries and wages 100 000.00
Insurance 12 000.00
Interest income 5 100.00
Interest expense 9 600.00
Loan: Go4 Loans 260 000.00
Inventory (01/02/20X5) 70 000.00
Petty cash 1 000.00
Mortgage bond: House Bonds 1 200 000.00
Equipment 60 000.00
Advertising 8 400.00
Purchases 180 000.00
Sales 460 000.00
Telephone 8 000.00
Furniture and fittings 80 000.00
Drawings 8 000.00
Water and electricity 75 000.00
Donations expense 660.00
? ?
According to a stocktake, the inventory on hand at year end was R53 600.00
Required:
• Complete and neaten the trial balance for January 20X6.
• Prepare the statement of comprehensive income for the year ended 31 January 20X6.
• Prepare the statement of financial position as at 31 January 20X6.
Question 7
Mrs Sleepy is the owner of Sleep Deep Traders, and sells bedding and curtains that are made from the
most luxurious material. Mrs Sleepy is the sole owner of this business. You are provided with the trial
balance for the year ended 31 December 20X5. The perpetual inventory method is used.
Required:
• Prepare the statement of comprehensive income for the year ended 31 December 20X5.
• Prepare the statement of financial position as at 31 December 20X5.
Group-work exercises
Group-work exercise 1
As a group, discuss – in depth – why the following users would use financial statements:
Owners and management

Potential investors
Lenders
Suppliers (accounts payable)
South African Revenue Service
Employees
Customers
For additional practice, it is strongly recommended that you revisit the end-of-chapter questions for
Chapters 2, 3 and 5 (questions 6 and 7) and complete the relevant general ledger accounts and/or trial
balances where deemed appropriate.
Annexure
Important concepts
Throughout the chapters in this book, we have, and will, come across concepts that are important to
understand and adopt when preparing financial statements.
Assets Chapters 2 and 3

Current Chapter 2
Equity Chapters 2 and 3
Expenses Chapters 2 and 3
Income Chapters 2 and 3
Liabilities Chapters 2 and 3
Non-current assets Chapter 2
Property, plant and equipment Chapter 10
Ratio analysis Chapter 12
Adjustments Chapter 11
The conceptual framework Chapter 15
Going concern Chapter 15
Characteristics of useful financial information Chapter 15
CHAPTER 7
Accounts receivable and accounts payable
Marina Chalmers, Tracy Beck, Juan-Pierré Bruwer and Gauda Johannes Maseko
After working through this chapter, you should be able to:

• Record credit transactions in the relevant subsidiary journals
• Draw up the accounts receivable and accounts payable control accounts in the general ledger, using the
totals from relevant subsidiary journals
• Draw up the accounts receivable and accounts payable subsidiary ledgers, using the subsidiary journals
• Draw up a list of individual accounts receivable and accounts payable balances, using the accounts
receivable and accounts payable subsidiary ledgers
• Reconcile the balance from the general ledger for the accounts receivable and accounts payable control
accounts to the balances from the list of individual accounts receivable and accounts payable balances
• Reconcile the balance from the accounts payable subsidiary ledger for each individual accounts payable
balance to the balance from the supplier statement
7.1 Introduction
As we have discussed previously, there are many different transactions that can take place in a business
entity (see Chapter 5). In this chapter, we will focus specifically on the record-keeping of credit
transactions through individual accounts of accounts receivable and accounts payable, including the two
control accounts of accounts receivable and accounts payable in the general ledger.
If a business entity buys inventory on credit, for example, it may purchase inventory from many
suppliers. For this reason, it is important for the business entity to keep a record of which individual
suppliers are owed money (along with the actual amounts owed), as well as the total amount of accounts
payable. In the same vein, a business entity may have many customers who buy inventory on credit. As
such, the business entity will need to keep track of the individual accounts receivable that owe money, as
well as the total amount of accounts receivable.
To help with the record-keeping and administration of accounts receivable and accounts payable,
official statements are normally sent, on a monthly basis, by individual accounts payable to a business
entity and/or to individual accounts receivable by a business entity. Such official statements serve as
friendly reminders of all outstanding money that is payable/receivable (see Chapter 5, where we spoke
about source documents).
Before we commence with the chapter, let us take a look at an opening practical example:
OPENING PRACTICAL EXAMPLE
Royalty Ltd makes use of the perpetual inventory system. Relevant information was provided to you
relating to accounts receivable and accounts payable for the month of March 20X1 (financial year
end is 31 December). All amounts are inclusive of VAT where applicable.
The list of accounts receivable at the beginning of March looked as follows:

ROYALTY LTD LIST OF ACCOUNTS RECEIVABLE BALANCES AS AT 1 MARCH 20X1
Name Fol. Balance
M. William AR1 40 000.00
T. Harry AR2 55 000.00
J. Kate AR3 35 000.00
I. Charles AR4 50 000.00
M. Elizabeth AR5 20 000.00
Total 200 000.00
The statement received from Monarch Traders, the sole supplier of Royalty Ltd, looked as follows
for the month of March 20X1:
The following transactions (related to accounts receivable only) occurred during March 20X1:
Date Transaction Source document
2 M. Elizabeth purchased R40 000.00 inventory on credit. Invoice 100
4 T. Harry paid R20 000.00. Receipt 200
M. William returned inventory with a selling price of R10
6 Credit note 300
000.00.
7 I. Charles purchased R30 000.00 inventory on credit. Invoice 101
10 T. Harry purchased R15 000.00 inventory on credit. Invoice 102
M. Elizabeth returned inventory with a selling price of R5
14 Credit note 301
000.00.
16 I. Charles paid R25 000.00. Receipt 201
19 M. William purchased R45 000.00 inventory on credit. Invoice 103
20 J. Kate purchased R50 000.00 inventory on credit. Invoice 104
25 M. William paid R10 000.00. Receipt 202
I. Charles and M. Elizabeth both settled their full
Receipt 203
29 outstanding balances, having received a 5% early settlement
Receipt 204
discount.
Required:
• Record the transactions in the relevant subsidiary journals.
• Draw up the accounts receivable control account in the general ledger.
• Draw up the accounts payable control account in the general ledger.
• Draw up the accounts receivable subsidiary ledger.
• Draw up the accounts payable subsidiary ledger.
• Compile a list of individual accounts receivable balances.
To address what is required in the example above, we first need to work through the remainder of this
chapter.
7.2 Important accounting terms

Throughout this chapter, you may be exposed to some unfamiliar words – better known as accounting
jargon. For a clear understanding of what these words mean, Table 7.1 shows a list of accounting terms
that are used throughout this chapter:
Table 7.1: Important accounting terms for Chapter 7
Term Explanation (definition)

A control account in the general ledger (liability) that shows a summary
Accounts payable control of all credit purchases, returns and payments made. These entries will
account stem from the purchases journal, purchases allowances journal and the
cash payments journal.
A control account in the general ledger (asset) that shows a summary of
Accounts receivable control all credit sales, returns and payments received. These entries will stem
account from the sales journal, sales allowances journal, cash receipts journal
and general journal.
A time-based analysis with reference made to due dates relating to debt
owed. This tool is used to determine how much time is left until the due
Age analysis
date to repay debts, or to determine how much time has passed after the
due date.
An account that is used to show any anticipated accounts receivable that
Allowance for doubtful debts will be uncollectible in the foreseeable future. Such anticipations are
usually based on accounts receivable age analyses (see Chapter 11).
Refers to accounts receivable that will not be collected (are
Bad debt
irrecoverable) (see Chapter 11).
A cheque that has not been accepted by the bank due to insufficient
Dishonoured cheque funds or error (a bounced cheque). A dishonoured cheque usually has a
message stating ‘Refer to the Drawer (R/D)’.
A statement that is prepared on a monthly basis to reconcile the
Reconciliation statement differences between general ledger accounts (e.g. accounts receivable
and accounts payable control accounts) and statements.
DID YOU KNOW?

In practice, you can use a computerised software system to manage your accounts receivable and
accounts payable in a timely and accurate way.
7.3 A brief theory of credit

The term ‘credit’ refers to a transaction that took place between a buyer and a seller where no money was
used as a medium of exchange. In the modern business environment, credit is popular as it allows a
person or business entity to buy items without actually having money on hand to do so. In such cases, the
buyer can buy and sell, and only has to pay the purchase off at a later stage. The downside of such an
arrangement is that credit can (and is, in most cases) be subject to interest – a percentage fee charged on
money that is owed. The upside of this arrangement is that the business can use credit to expand its
working capital (leveraging on current assets).
In order to manage credit, each business entity should have a credit policy that contains clearly written
guidelines that set out the terms and conditions for granting credit to customers. The credit policy should
contain important information such as the customer credit qualification criteria, procedures for making
collections from accounts receivable, and steps to be taken in case accounts receivable cannot repay its
debt. The credit policy should also stipulate information regarding discounts.
In order to encourage prompt repayments by accounts receivable, discounts are often offered. Such
discounts can take place at the start of a credit purchase (trade discount), which may result from a
relationship of good standing between the supplier and accounts receivable, or during the settlement of
outstanding debt (settlement discount) as a result of paying back outstanding debt earlier than expected.
As an example, a credit term can be expressed as 5/10 net 30, which means that payment must be made
within 30 days of a sale being made. If payment is made within 10 days, then 5% discount may be
deducted from the amount owing (see Chapter 4).
DID YOU KNOW?

Approximately 10 million South Africans had a combined debt of R1.63 trillion (R1 630 000 000 000)
in March 2016 (Anglo American, 2016).
When a business entity sells goods on credit, it assumes that the customer will repay the full amount
owed. Unfortunately, the reality is that not all customers repay their debt. For this reason, it is important
to keep track of accounts receivable. When it becomes known that a customer is unable to repay amounts
that it owes to a supplier, the customer should be removed from the books of a business entity and
classified as a bad debt. This is done by debiting both the bad debts and VAT control accounts, and
crediting the accounts receivable account in the general ledger.
It is also possible that a customer whose debt has been written off as irrecoverable will pay the amount
that it initially owed. In such cases, it will be known as a bad debt recovered (income account) (see
Chapter 11). Both the bad debts recovered and VAT control will then be credited, and the bank account
will be debited. Remember that the accounts receivable control account will not be affected by this
transaction, as the balance should already have been written off and, since then, the customer has not
been regarded as an accounts receivable.
It is customary for business entities that sell goods on credit to create an allowance for doubtful debts.
While some debts are definitely irrecoverable (it is known for certain that the customer will not be able to
pay), others may be doubtful. This is especially the case in a harsh economic environment, as in South
Africa. Therefore, it would be appropriate to recognise the fact that not all money appearing in accounts
receivable will be received in the foreseeable future. This will result in an allowance for doubtful debts.
The allowance for doubtful debts should be updated constantly, with new estimates of bad debts on a
continual basis (see Chapter 11 for more information).
Many entities charge interest on outstanding debt if an account is not paid within the entity’s credit
terms. Interest charged on outstanding balances will increase the outstanding balance of individual
accounts receivable, as well as the accounts receivable control account (see Chapter 4).
7.4 The general ledger and the subsidiary ledger

After a transaction has taken place, a source document needs to be generated as proof of the transaction –
which, in turn, will be captured in the subsidiary journals. When a credit sale takes place, it is captured in
the sales journal. For a credit purchase, the transaction is captured in the purchases journal. At the end of
the month, the totals from the subsidiary journals are posted to the general ledger. This will result in the
total credit sales (as per the sales journal) to be posted to the accounts receivable control account in the
general ledger, and the total credit purchases (as per the purchases journal) to be posted to the accounts
payable control account in the general ledger. Other relevant transactions, such as returns (sales
allowances journal and purchase allowances journal) and payments made and payments received (cash
receipts journal and cash payments journal), will also impact the accounts receivable control account and
accounts payable control account in the general ledger (see Chapter 5).
At the end of each month, the general ledger control accounts need to be balanced or totalled. The
balances in the accounts receivable account and the accounts payable account will show us all relevant
outstanding debt owed by customers (accounts receivable) and amounts owed to suppliers (accounts
payable).
The problem with the accounts receivable control account and the accounts payable control account is
that it does not provide us with detailed information about individual accounts receivable and accounts
payable. In other words, the general ledger does not provide us with detailed information about who owes
how much and to whom – it is simply a holistic summary of accounts payable and accounts receivable.
This information is vital to any business as individual customers need to be reminded what their
outstanding balances are and individual suppliers need to be paid their outstanding balances. This is
where we introduce the subsidiary ledger.
A business entity uses the subsidiary ledger to keep a detailed record of the individual transactions for
individual accounts receivable and accounts payable. It is important to note that the subsidiary ledger
does not form part of the double entry system – it is simply an additional ledger that maintains a detailed
record of individual accounts receivable and accounts payable.
HINT – Completing the accounts receivable subsidiary ledger can prove tricky from a practical point
of view as there are many transactions that may relate to individual accounts receivable. As an
organising tool, use highlighters of different colours to mark relevant transactions in the subsidiary
journals. For example, mark all transactions that relate to a specific accounts receivable in pink.
With the above in mind, let us practise posting from the subsidiary journals to the general ledger and the
subsidiary ledgers with Example 7.1:
EXAMPLE 7.1
On 30 June 20X3, the accountant of Coffee Ltd provided you with the following completed subsidiary
journals:
In addition, you are provided with the following list of accounts receivable balances.
COFFEE LTD LIST OF ACCOUNTS RECEIVABLE AS AT 1 JUNE 20X3
Name Fol. Balance
L. Fletcher AR1 1 000.00
J. Doe AR2 2 000.00
S. African AR3 1 500.00
B. Smurf AR4 500.00
Total R5 000.00
Lastly, you are also provided with the following list of accounts payable balances. All balances relate
to 1 June 20X3:
COFFEE LTD LIST OF ACCOUNTS PA YABLE AS AT 1 JUNE 20X3
Name Fol. Balance
Bean Ltd. AP1 3 000.00
Sugar Ltd. AP2 5 000.00
Milk Ltd. AP3 1 500.00
Total R9 500.00
Required:
a. Draw up the accounts receivable and accounts payable control accounts in the general ledger.
b. Draw up the accounts receivable and accounts payable subsidiary ledgers.
c. Compile a list of individual accounts receivable and accounts payable balances.
Solution
a.
c.
COFFEE LTD LIST OF ACCOUNTS RECEIVABLE AS AT 30 JUNE 20X3

Name Fol. Balance
L. Fletcher AR1 1 241.00
J. Doe AR2 7 726.00
S. African AR3 1 026.00
B. Smurf AR4 –
Total R9 993.00
COFFEE LTD LIST OF ACCOUNTS PA YABLE AS AT 30 JUNE 20X3
Name Fol. Balance
Bean Ltd AP1 798.00
Sugar Ltd AP2 3 006.00
Milk Ltd AP3 1 513.00
Cocoa Ltd AP4 1 938.00
Total R7 255.00
Finally, you should check to ensure that your balance per the general ledger accounts is the same as
the balance per the individual lists. If these balances are not the same, you should revisit both the
general ledger and the list to find the mistake. If you are still unable to locate the problem, you will
have to revert further to the subsidiary journals and the subsidiary ledger.
From Example 7.1 we can see how the sales journal, sales allowances journal, purchases journal and
purchases allowances journal (and the general journal, at times) are linked to the control accounts
(accounts receivable and the accounts payable) in the general ledger. In addition, we can see that the total
in the list of accounts receivable should be equivalent to the balance in the accounts receivable general
ledger account; the total in the list of accounts payable should also be equivalent to the balance in the
accounts payable general ledger account.
With the above in mind, let us take a closer look at the reconciliation between the general ledger and
the subsidiary ledger.
7.5 The reconciliation between the general ledger and the subsidiary ledger
In the previous section, we spoke about a list of accounts receivable and a list of accounts payable. These
lists should not only correspond to the control account balances (accounts receivable and accounts
payable) in the general ledger, but also to the individual balances of accounts receivable and accounts
payable in the subsidiary ledger. Take a look at Figure 7.1:
Figure 7.1: The link between control accounts and subsidiary ledger accounts
The balance of the control accounts (accounts receivable and accounts payable) in the general ledger must
correspond with the totals from the subsidiary ledger (accounts receivable ledger and accounts payable
ledger). However, this is not always the case as there may be information entered in the sales journal that
has not yet been captured in the individual accounts receivable ledger account, or vice versa. In addition,
it is also possible that errors were made, omissions were evident, and/or returns or discounts have not yet
been taken into account. For this reason, it is important to reconcile the control accounts in the general
ledger to the totals per the subsidiary ledger on a monthly basis.
Let us take a look at Example 7.2:
EXAMPLE 7.2
The following information relates to Rainbow Ltd at 31 March 20X1.
Balances
• Balance per the accounts receivable control account in the general ledger: R128 106.00
• Total of individual balances from the accounts receivable subsidiary ledger: R128 455.00
RAINBOW LTD LIST OF ACCOUNTS RECEIVABLE AS AT 31 MARCH 20X1
Name Fol. Balance
R. Red AR1 20 000.00
O. Orange AR2 78 215.00
Y. Yellow AR3 30 000.00
G. Green AR4 240.00
Total R128 455.00
Additional information
• The total of R48 455.00 for sales in the sales journal has been posted as R48 545.00 in the general
ledger.
• A credit entry of R128.00 in the accounts receivable control account was posted incorrectly to the
debit side.
• A bad debt of R240.00, relating to G. Green, was correctly written off in the accounts receivable
control account, but no entry was made in the subsidiary ledger.
• A discount allowed of R185.00, relating to O. Orange, was entered on the wrong side of the
subsidiary ledger.
• A credit balance of R95.00, relating to R. Red, from the accounts payable control account was set
off against the accounts receivable control account in the general ledger with a general journal,
but no entries have been made in the subsidiary ledgers.
Required:
Reconstruct the list per the accounts receivable subsidiary ledger control account as well as the
accounts receivable control account, correcting the mistakes mentioned above.
Solution
RAINBOW LTD LIST OF ACCOUNTS RECEIVABLE AS AT 31 MARCH 20X1
Name Fol. Balance
R. Red (20 000.00 – 95.00) AR1 19 905.00
O. Orange (78 215.00 – 185.00 – 185.00) AR2 77 845.00
Y. Yellow AR3 30 000.00
G. Green (240.00 – 240.00) AR4 –
Total R127 750.00
Note: Start by drawing up the same list as the information given. Then make adjustments to the
original totals. Show your workings.
Another important point to note is the way in which the mistake on O. Orange’s account was
corrected. Because the mistake was made by posting the entry to the incorrect side, you should pass an
entry of the same amount to the opposite side twice: once to cancel the original mistake, and once to
record the entry that should have been there in the first place.
Prepare the general ledger account by reconstructing the account given. Then adjust the amounts one
by one to correct the errors. Alternatively, you can leave the amounts given as is and add additional
entries to correct the mistakes.
By the end of the exercise, your balance per the list should be equal to the balance per the control
account. If these totals are not the same, you should revisit both the list and the control account until
the two balance.
From Example 7.2, we can see that when the accounts receivable control account in the general ledger is
reconciled with the subsidiary ledger accounts of accounts receivable, the sum of the balances in the
subsidiary ledger accounts for accounts receivable should equal the balance of the relevant accounts
receivable control account in the general ledger.
When we are dealing with accounts payable, a business entity may receive a statement from suppliers
(who we owe money to) stating that a certain amount is due to them (a liability) on a monthly basis. Such
a statement will reflect the amount owing at the beginning of the month as well as the transactions that
took place between the two parties during the month. Ideally, the balance on the monthly statement
should agree with the balance of the individual accounts payable subsidiary ledger accounts. However,
there are always differences between these two balances resulting from, among others:
• items that already appear on the statement, but not on the individual accounts payable ledger account;
• items that already appear in the individual accounts payable ledger account, but not on the statement;
• errors as a result of omissions or arithmetic appearing on either on the statement or in the individual
accounts payable ledger account; or
• a timing difference resulting from a cheque not yet presented for payment.
Because of the above-mentioned differences, accounts payable reconciliation has to be performed on

monthly basis. The purpose of accounts payable reconciliation is to reconcile the balances of the
subsidiary accounts payable ledger accounts with the balance appearing on the accounts payable
statement.
To prepare a monthly accounts payable reconciliation statement, we need three items: 1) the previous
month’s accounts payable reconciliation statement; 2) the balanced-off individual accounts payable
ledger account; and 3) the accounts payable statement of account.
EXAMPLE 7.3
You are the accounts payable clerk of Future Traders. You received the following statement from
Kallagte (Pty) Ltd for the month of December 20X1.
The individual accounts payable ledger account of Kallagte (Pty) Ltd in the books of Future Traders
reflected the following information for the month of December 20X1:
Additional information
• The transaction on 8 December was for the return of trading inventory.
• For invoice 300, the correct amount is R3 999.00.
• The correct entry was made for credit note 14 on the statement received from Kallagte (Pty) Ltd.
• Future Traders bought goods, but did not receive invoice 480.
• Kallagte (Pty) Ltd allowed a discount of 2% when the net purchases for the month exceeded R4
000.00
• A settlement discount of 5% was allowed if payments were made before the 15th of the month after
the sale. The cheque issued to Kallagte (Pty) Ltd was dated 14 January 20X2.
Required:
Draw up the accounts payable reconciliation statement on 31 December 20X1. Start with the balance
on the statement rendered by Kallagte (Pty) Ltd and show adjustments that they have to effect.
Solution
FUTURE TRADERS ACCOUNTS PA YABLE RECONCILIAT ION STATE MENT AS AT 31
DECEMBER
Balance as per statement 8 700.00
Correct invoice 405 (3 000.00 × 2) 6 000.00
14 700.00
Less: 2% bonus discount (if net purchases > R4 000.00) (294.00)
14 406.00
5% settlement discount (14 406.00 × 5%) (720.30)
Balance as per accounts payable ledger 13 685.70
Calculation of net purchases: (4 000.00 + 3 999.00 – 999.00 + 3 000.00 – 300.00 + 5 000.00) = R14
700.00
Therefore: R14 700.00 × 2% = R294.00
Stemming from Example 7.3, we can see that the statement received from an account payable should
always reconcile with the accounts payable reconciliation statement as well as the accounts payable
ledger account. Otherwise stated, the balance in the accounts payable ledger should be exactly the same
as the balance on the accounts payable reconciliation statement.
7.6 Conclusion
In a modern accounting environment, credit transactions form an integral part of the economy and
business entities usually have large numbers of accounts receivable and payable. The management of
these accounts is an essential part of the accounting cycle.
The accountant must prepare the accounts receivable and payable reconciliations on a monthly basis,
manually or electronically. This is primarily done to ensure that the financial records of a business entity
correspond with the monthly statement received from accounts payable. It is also important that
customers’ remittance advices (which will be sent by the entity) are correct as per the customer’s records.
Differences between accounts always arise as a result of omissions of discounts, dishonoured cheques,
credit notes, etc. It is important that the total of accounts payable control always corresponds with the list
of individual accounts payable ledgers, and that the total of accounts receivable control corresponds with
the list of individual accounts receivable ledgers.
With the above in mind, let us go back to the opening practical example.
OPENING PRACTICAL EXAMPLE (ANSWERED)
Royalty Ltd makes use of the perpetual inventory system. Relevant information was provided to you
relating to accounts receivable and accounts payable for the month of March 20X1 (financial year
end is 31 December). All amounts are inclusive of VAT where applicable.
The list of accounts receivable at the beginning of March looked as follows:

ROYALTY LTD LIST OF ACCOUNTS RECEIVABLE BALANCES AS AT 1 MARCH 20X1
Name Fol. Balance
T. Harry AR2 55 000.00
J. Kate AR3 35 000.00
I. Charles AR4 50 000.00
M. Elizabeth AR5 20 000.00
Total R200 000.00
The statement received from Monarch Traders, the sole supplier of Royalty Ltd, looked as follows
for the month of March 20X1:
The following transactions (related to accounts receivable only) occurred during March 20X1:
Date Transaction Source document
2 M. Elizabeth purchased R40 000.00 inventory on credit. Invoice 100
4 T. Harry paid R20 000.00. Receipt 200
M. William returned inventory with a selling price of R10 Credit note 300
6
000.00.
7 I. Charles purchased R30 000.00 inventory on credit. Invoice 101
10 T. Harry purchased R15 000.00 inventory on credit. Invoice 102
M. Elizabeth returned inventory with a selling price of R5 Credit note 301
14
000.00.
16 I. Charles paid R25 000.00. Receipt 201
19 M. William purchased R45 000.00 inventory on credit. Invoice 103
20 J. Kate purchased R50 000.00 inventory on credit. Invoice 104
25 M. William paid R10 000.00. Receipt 202
I. Charles and M. Elizabeth both settled their full Receipt 203
29 outstanding balances, having received a 5% early settlement Receipt 204
discount.
Required:
a. Record the above transactions in the relevant subsidiary journals.

b. Draw up the accounts receivable control account in the general ledger.
c. Draw up the accounts payable control account in the general ledger.
d. Draw up the accounts receivable subsidiary ledger.
e. Draw up the accounts payable subsidiary ledger.
f. Compile a list of individual accounts receivable balances.
Solution
a. You should be able to record the entries with ease in the subsidiary journals. Refer to Chapter 5 if
you are struggling.
Note: the calculation for the early settlement discount can be done as follows.
Step 1: Calculate the balances outstanding.
I. Charles = 50 000.00 + 30 000.00 – 25 000.00 = 55 000.00
M. William = 20 000.00 + 40 000.00 – 5 000.00 = 55 000.00
Step 2: Calculate the early settlement discount amount, including VAT.
55 000.00 × 5% = 2 750.00
Step 3: Calculate the VAT included in the early settlement discount amount.
2 750.00 ÷ 114 × 14 = 337.72
Step 4: Calculate the early settlement discount amount excluding VAT.
2 750.00 – 337.72 = 2 412.28
b. You should be able to complete the posting from the subsidiary journals to the general ledger with
ease. If you are struggling, refer to Chapter 5.
f.
ROYALTY LTD. LIST OF ACCOUNTS RECEIVABLE AT 31 MARCH 20X1
Name Fol. Balance
T. Harry AR2 50 000.00
J. Kate AR3 85 000.00
I. Charles AR4 –
M. Elizabeth AR5 –
Total R200 000.00

• How to draw up accounts receivable and accounts payable controls accounts in the general ledger, using
the totals from the subsidiary journals
• How to draw up the accounts receivable and accounts payable subsidiary ledgers, using the subsidiary
journals
• How to draw up a list of individual accounts receivable and accounts payable balances, using the
accounts receivable and accounts payable subsidiary ledgers
• How to reconcile the balance from the general ledger for the accounts receivable and accounts payable
control accounts to the balance from the list of individual accounts receivable and accounts payable
balances
• How to reconcile the balance from the accounts payable subsidiary ledger for each individual accounts
payable balance to the balance from the supplier statement
• How to reconcile the individual balances of accounts receivable in the accounts receivable subsidiary
ledger with the account receivable balance in the general ledger
Question 1
In each case, state whether the following statement is true or false:

1.1 When an invoice is issued to a customer, it should be shown in the customer’s accounts receivable
subsidiary ledger account.
1.2 When an invoice is issued to a business entity from a supplier, the business entity should show the
transaction in the supplier’s accounts payable subsidiary ledger account.
1.3 The balance of the accounts receivable control account in the general ledger should reflect the same
total as shown in the accounts payable list.
1.4 When a supplier allows a discount to a business entity, it will be reflected as a debit entry on the
supplier’s statement.
1.5 A credit entry in the accounts receivable subsidiary ledger means that the debt of a customer has
increased.
Question 2
The Yellow Brick Road Traders sells Legola blocks to the general public. The business makes use of the
perpetual inventory system. The year end is 31 December, while VAT has already been considered where
necessary for all transactions.
The following balances appeared in the general ledger for the accounts payable control account:
• 1 February 20X6, R17 400.00
• 29 February 20X6, R27 450.00
The closing balance of accounts payable, based on the list of accounts payable balances, was R35 850.00.
After a comparison of the accounts payable control account in the general ledger and the list of
balances from the balances of the accounts payable ledger accounts, the following differences were
identified:
• An amount of R2 820.00, which was paid to KiddiBlinks (AP2), was incorrectly entered as R2 712.00 in
the cash payments journal.
• An accounts payable, Bulk Buy Traders (AP1), account of R14 970.00 was mistakenly not included in
the list of balances.
• The accounts payable column in the purchases journal for February had not been posted to the general
ledger. The amount was R20 190.00.
• A credit note had been incorrectly recorded in the purchases journal as an invoice. However, the amount
of R141.00 had been correctly recorded as a credit note against Toys for All Distributors (AP4) in the
accounts payable ledger.
• An amount of R1 950.00 was entered twice on the list of balances. The amount was owed to B. Dinosaur
(AP5).
• The amount of the accounts payable column in the purchases allowances journal for February was
R522.00, but was posted to the general ledger as R441.00.
• A payment of R936.00, which was meant for L. Teletubbie (AP3), was debited against P. Teletubbie’s
(AP6) account as R963.00.
• A discount of R630.00, which was received from an account payable, was not entered in the cash
payments journal.
• An amount of R162.00, which was received from Legola Land (AR5) – an account receivable – had
been entered in the accounts payable control account in the general ledger. The bank account had
been debited with this amount as well.
• A payment of R1 260.00, which had been made to Toys Distributors (AP8), had been credited in the
accounts payable ledger.
Required:
• Prepare the corrected accounts payable control account in the general ledger for February 20X6.
• Reconcile the balance of the list of accounts payable balances with the accounts payable control account.
Question 3
Frozen Food Wholesalers sells frozen food. The business makes use of the perpetual inventory system.
The year end is March 20X5. You are provided with the accounts receivable control account and list of
accounts receivable for the month of January 20X5.
Additional information:
• G. Yoghurt’s balance was incorrectly recorded as a debit balance in the list of accounts receivable.
• A credit note of R464.00 had been issued to B. Sausage for the return of inventory. This transaction has
not been recorded in the books of the business.
• There is only one accounts receivable with the name of D. Pies with a debit balance of R1 872.00. This
accounts receivable has been duplicated.
• The opening balance in the accounts receivable control account in the general ledger has been overcast
by R4 000.00. This was an adding error made in the previous month.
• In the cash receipts journal, an amount of R216.00 was added to the accounts receivable column. This
amount had been recovered from H. Veggies, and had previously been written off as irrecoverable.
The amount had also been credited against H. Veggies’ original account.
• The accounts receivable J. Juice had a credit balance of R2 128.00. The balance had been transferred
from the accounts receivable ledger to the accounts payable ledger. This transfer has not yet been
taken into consideration in the subsidiary journals.
• An amount of R424.00 had been correctly entered in the sales allowances journal. The amount had been
correctly posted to the account of F. Chicken, but it was posted as a sale.
• Both the discount portion and the amount from the accounts receivable column from the cash receipts
journal has been entered in the accounts receivable control account.
• Inventory that was sold to E. Pizza for 1 112.00 was posted to the account of A. Pumpkin in the accounts
receivable ledger.
• Inventory sold to C. Bacon on credit for R1 032.00 was incorrectly entered in both the sales journal and
the accounts receivable ledger as R1 536.00.
Question 4
Graduate Traders sells affordable graduation outfits to South African universities of technology. On 1
May 20X1, the following balances were available:
Accounts receivable Fol. Balance
CPUT AR1 170 999.00
VUT AR2 90 500.00
NMMU AR3 60 700.00
DUT AR4 120 750.00
In addition, the following cash receipts journal, sales journal and sales allowances journal were provided
to you:
The opening balance of the accounts receivable control account was R442 949.00.
Required:
• Prepare the accounts receivable control account for the month ended 31 May 20X1.
• Prepare the subsidiary ledger accounts of all accounts receivable for the month ended 31 May 20X1.
Question 5
Take-Note Traders is a manufacturer of examination pads. In order to produce these examination pads,
Take-Note Traders makes use of an array of material that is supplied by a variety of suppliers. On 1
March 20X1, the following balances were available:
Accounts payable Fol. Balance
Pulp-able Suppliers AP1 57 800.00
Glue-ten-tag Suppliers AP2 16 300.00
Ink-oming Suppliers AP3 33 900.00
In addition, the following cash payments journal, purchases journal and purchases allowances journal
were provided to you:
The opening balance of the accounts payable control account was R108 000.00.
Required:
• Prepare the accounts payable control account for the month ended 31 March 20X1.
• Prepare the subsidiary ledger accounts of all accounts payable for the month ended 31 March 20X1.
The following account appeared in the accounts payable ledger of Drifter Traders:
Additional information:
• Invoice 900 was received as R3 468.76. It was established that 15% trade discount was not calculated on
the invoice.
• Credit note 48 was issued to Drifter Traders.
• Invoice 998 was for 50 items at R15 each, less 20% trade discount. Drifter Traders incorrectly entered
VAT on this invoice, since BHL Carriers is not a registered VAT vendor.
• Invoice 950 was received on 3 June 20X1.
• A 10% incentive discount was agreed upon when net purchases exceed R15 000 per month.
• Cheque 330 for R9 500 was posted on 31 May 20X1 in full settlement of BHL Carriers’ account.
Required:
In a group of five, reconcile the statement with the accounts payable ledger account.
References
Anglo American. (2016). Shocker! South Africa’s debt stats. Available at http://www.news24.com
/PartnerContent/shocker-south-africas-debt-stats-20151204. [Accessed 1 June 2016].
CHAPTER 8
Bank reconciliation and the bank reconciliation statement
Tracy Beck and Richard Beck

• Understand the meaning and purpose of the bank reconciliation
• Understand the meaning and purpose of the bank reconciliation statement
• Compare a business entity’s bank statement to the bank account in the books of the business entity
• Prepare the bank reconciliation statement and adjust the books of the business entity accordingly
8.1 Introduction
Cash is important to any business entity, as it always needs to be managed with accuracy. If cash is
managed poorly, it can result in the downward spiral of a business entity – its ability to remain in
operation for the foreseeable future. In order to help with the accuracy of cash management, a sound bank
reconciliation system is often used.
Before we get ahead of ourselves, we first need to understand what bank reconciliation means. In
laypersons’ terms, bank reconciliation is where we ensure that the actual money that is in the bank is the
same amount of money that we have on records in our books. Otherwise put, we need to confirm that the
final balance of a business entity’s bank statement is the same as the final balance shown in the business
entity’s bank account.
As previously discussed (see Chapter 5), all cash transactions are captured in the books of a business
entity through its cash receipts journal and cash payments journal. The cash receipts journal shows all
transactions in which cash was received (increasing the bank account – debit), while the cash payments
journal shows all transactions in which cash was paid (decreasing the bank account – credit). All cash
transactions will have a direct influence on the bank account of a business entity. The bank account is
normally classified as an asset (if it has a favourable balance). Also (based on Chapter 3), assets will
always increase on the debit side and always decrease on the credit side.
Not only does a business entity keep track of its cash transactions, but the bank also keeps track of
these. To do so, the bank uses a bank statement. The bank statement is a little tricky, because it shows
cash receipts as credit entries and cash payments as debit entries. The main reason why the bank
statement is opposite to the bank account of a business entity is because when a business entity has a
favourable bank account, the bank will view the business entity as an account payable (the money in the
bank is owed to the business entity by the bank). Alternatively, when a business entity has a bank
overdraft, the bank will view the business entity as an account receivable (the money in the bank is owed
to the bank by the business entity). Table 8.1 makes more sense of transactions shown in the bank
accounts of a business entity and on the bank statement from the bank:
Table 8.1: How transactions are shown in the bank account versus on the bank statement
Transaction Bank account Bank statement

(books of the business entity) (statement from the bank)
Cash receipt Debit Credit
Cash payment Credit Debit
From Table 8.1, we can see that the manner in which cash transactions will be treated in the bank account
(books of the business entity) will always mirror the bank statement (statement from the bank).
Although the amounts in the bank account and on the bank statement should always be the same,
delays, errors, bounced cheques and timing differences (among other things) cause them to be out of
sync. As such, we have to prepare a bank reconciliation statement to ensure that the bank account and the
bank statement balance have the same totals.
Before we continue with the chapter, let us take a look at an opening practical example:
White Rose Traders is owned by Mrs Blooming, a sole trader. White Rose Traders sells designer
perfume to the general public at very competitive prices. During the course of early February, the
accountant of White Rose Traders received the business entity’s bank statement for January 20X1.
Ms Smarty (the accountant) noticed that the closing balance of the business entity’s bank account in
the general ledger and the closing balance of the bank statement from the bank did not match.
This is what Ms Smarty saw:
WHITE ROS E TRADERS

BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20X1
Debit Credit
Overdraft Favourable
Debit/credit balance as per bank statement 6 680.00
Credit outstanding deposits 1 255.00
Debit outstanding cheques:
No. 108 370.00
No. 113 1 715.00
Debit/credit balance as per bank account 5 850.00
7 935.00 7 935.00
The deposit on 22/01/20X1 was correctly reflected in the cash receipts journal.
Required:
Prepare the bank account in the general ledger and the bank reconciliation statement of White Rose
Traders for the month ended 31 January 20X1.
Before we can help Ms Smarty to reconcile the bank account of the business entity with the bank
statement from the bank, it is important that we work through the remainder of the chapter in order to get
a better understanding of the process of bank reconciliation.
8.2 The bank reconciliation and the bank reconciliation statement

The need for bank reconciliation arises when the closing balance of the bank account in the general ledger
and the closing balance on the bank statement differ. In order to reconcile the bank account and the bank
statement, we will have to pay close attention to five items:
• The bank statement provided by the bank;
• The cash receipts journal (CRJ);
• The cash payments journal (CPJ);
• The bank account (in the general ledger); and
• The previous month’s bank reconciliation statement.
We need all of these items to draw up a bank reconciliation statement. The bank reconciliation statement
will prove that the closing balance in the bank account equals the closing balance on the bank statement.
8.2.1 Steps to follow when preparing a bank reconciliation statement and a corrected bank
account
Step 1 The bank reconciliation statement is an extension of the bank statement. Therefore, we
use the closing balance from the bank statement as a starting point. The closing balances
at month end are then adjusted and corrected in the bank reconciliation statement to
match the closing balance in the general ledger (the bank account).
EXAMPLE 8.1
Meringue Traders is a sole trader that is owned by Ms Meringue. She has provided you with the
December 20X0 bank reconciliation statement as well as her cash receipts journal, cash payments
journal and bank statement for January 20X1.
Required:
Show the first step that needs to be followed in the bank reconciliation process.
Solution
Above are the bank statement and a bank reconciliation statement for the same period. The closing
balance on the bank statement will be the same as that on the bank reconciliation statement. The bank
reconciliation statement should be regarded as an extension of the bank statement.
Step 2 Compare the current month’s bank statement with the previous month’s bank
reconciliation statement. Any cheques and deposits that were recorded as outstanding
on the previous month’s bank reconciliation statement must be compared to the
amounts that appear on the current month’s bank statement. Should these cheques and
deposits appear on the current month’s bank statement, they must be deleted on the
previous month’s bank reconciliation statement, as these amounts are no longer
outstanding. The reconciling items on the previous month’s bank reconciliation
statement, which do not appear on the current month’s bank statement, must be
re-entered on the current month’s bank reconciliation statement as outstanding. Should
a cheque now be stale, the reversal will be made in the books of the business.
DID YOU KNOW?

A cheque is regarded as being stale should it not be deposited at the bank within six months of the date
that appears on the cheque.
EXAMPLE 8.2
Meringue Traders is a sole trader, which is owned by Ms Meringue. She has provided you with the
Required:
Show the second step that needs to be followed in the bank reconciliation process.
Solution
Bank reconciliation statement as at 31 December 20X0
Debit Credit
No. 451 490.00
5 800.00 5 800.00
The previous month’s bank reconciliation statement must be compared with the current month’s bank
statement. Reconciling items on the previous month’s bank reconciliation statement should be
matched with the transactions on the bank statement. Any reconciling items that have been matched
must be removed from the bank reconciliation statement, as these amounts are no longer outstanding.
If an amount on the bank reconciliation statement does not reflect on the current month’s bank
statement, it must to be carried forward to the current month’s reconciliation until it does reflect on the
bank statement, unless it is a stale cheque. In this case, this amount must be reversed in the books of
the business.
HINT – There may be outstanding deposits and cheques from the previous month’s bank
reconciliation statement (step 1) that will appear together with any outstanding deposits and cheques
from the current month.
Step 3 Compare the transactions on the bank statement with the cash receipts and cash
payments journals by matching amounts. Credits on the bank statement should
correspond with the receipts in the cash receipts journal. Debits on the bank statement
should correspond with the payments in the cash payments journal. Highlight any items
on the bank statement that do not appear on the previous month’s bank reconciliation
statement, current month’s cash receipts journal or cash payments journal. These
amounts are outstanding in the books of the business and must be corrected in the
general ledger (bank account).
EXAMPLE 8.3
Required:
Show the third step that needs to be followed in the bank reconciliation process.
Solution
Ad mag had invoiced for R860.00.

Debit order 10/01/20X1 was payment of account to supplier R1 100.00.
Debit order 31/01/20X1 is for insurance.
BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20X1
Debit Credit
Credit outstanding deposits:
No. 367 1 280.00
No. 368 2 875.00
No. 455 750.00
No. 456 1 020.00
No. 457 2 040.00
In this example, the bank statement is compared with the bank amounts in the cash receipts journal.
Items that appear on the cash receipts journal and not on the bank statement need to be included in the
bank reconciliation statement as outstanding deposits. It can be seen that deposit 367 and deposit 368
have been identified as deposits not reflected on the bank statement. These deposits are entered into
the bank reconciliation statement as reconciling items. Deposit 366 appears on both the bank statement
and the cash receipts journal, and is therefore ignored.
The bank statement is then compared with the cash payments journal. Items that appear in the cash
payments journal and not on the bank statement need to be included on the bank reconciliation
statement. In this example, we have identified cheques 455, 456 and 457 as items that do not appear on
the bank statement. These payments are now entered into the bank reconciliation statement as
reconciling items. Cheque 454 appears on both the bank statement and the cash payments journal, and
must therefore be ignored.
Step 4 Transactions in the cash receipts journal must be compared with the deposits on the
bank statement. The entries in the cash receipts journal should represent all the cash
inflows on the bank statement (deposits). If a deposit on the bank statement does not
appear in the cash receipts journal, it needs to be corrected through an entry made in
the general ledger – bank account. In some instances, a cash receipt posted in the
journal could have been entered erroneously. Errors posted in the cash receipts journal
must be corrected by entering the corrected amount in the general ledger – bank
account.
How does this affect the bank account in the general ledger?
• A deposit on the bank statement that does not appear in the cash receipts journal will
need to be entered in the general ledger – bank account on the debit side
(remember, the bank is an asset and assets increase on the debit side and decrease
on the credit side).
• A deposit or receipt in the cash receipts journal that was erroneously entered at a
lesser amount than the amount that appears on the bank statement will result in the
general ledger – bank account being debited with the difference between the
amount on the bank statement and the amount entered into the cash receipts
journal.
• A deposit or receipt in the cash receipts journal that was erroneously entered as more
than the amount that appears on the bank statement will result in the general
ledger – bank account being credited with the difference between the bank
statement and the amount entered into the cash receipts journal.
EXAMPLE 8.4
Required:
Show the fourth step that needs to be followed in the bank reconciliation process.
Solution
After comparing the transactions on the bank statement with the transactions in the cash receipts
journal, two deposits on the 22nd and 25th were highlighted as unrecorded in the books of the
business. As illustrated in the general ledger bank account, these transactions have now been recorded.
Step 5 Compare transactions in the cash payments journal with the payments that are
reflected on the bank statement. The entries in the cash payments journal should
represent all the cash outflows on the bank statement (payments). If a payment on the
bank statement does not appear in the cash payments journal, such entries need to be
corrected by recording the amount in the general ledger – bank account. In some
instances, a cash payment posted in the journal could have been entered erroneously.
Errors posted in the cash payments journal need to be corrected by recording the
difference between the correct amount and incorrect amount in the general ledger –
bank account.
How does this affect the general ledger – bank account?
• A payment on the bank statement that does not appear in the cash payments journal
will need to be entered into the general ledger – bank account on the credit side
(remember, the bank is an asset and assets increase on the debit side and decrease
on the credit side).
• A payment in the cash payments journal that was erroneously entered at a lesser
amount than the amount that appears on the bank statement will result in the
general ledger – bank account being credited by the difference between the
amount on the bank statement and the amount entered into the cash payments
journal.
• A payment in the cash payments journal that was erroneously entered as more than
the amount that appears on the bank statement will result in the general ledger –
bank account being debited by the difference between the amount on the bank
statement and the amount entered into the cash payments journal.
EXAMPLE 8.5
Required:
Show the fifth step that needs to be followed in the bank reconciliation process.
Solution
After comparing the transactions on the bank statement with the transactions in the cash payments
journal, three payments on the 10th, 28th and 31st were highlighted as unrecorded in the books of the
business. As illustrated in the general ledger – bank account, these transactions have been recorded.
Step 6 Bring errors that you identified on the bank statement to the bank’s attention during
the reconciliation process. These errors must be reconciled in the bank reconciliation
statement until such time as the bank has made the necessary correction. Such errors
could result in either a debit or credit entry in the bank reconciliation statement,
depending on the nature of the error.
EXAMPLE 8.6
Required:
Show the sixth step that needs to be followed in the bank reconciliation process.
Solution
Ad Mag had invoiced for R860.00.

Debit order 10/01/20X1 was payment of account to supplier R1 100.00.
Debit order 31/01/20X1 is for insurance.
Bank Reconciliation Statement as at 31 January 20X1
Debit Credit
No. 367 1 280.00
No. 368 2 875.00
No. 455 750.00
No. 456 1 020.00
No. 457 2 040.00
Error – cheque 454 180.00
The payment made to Ad Mag was correctly recorded in the cash payments journal as R860.00, as
indicated on the source document (invoice). However, the bank erroneously entered the payment
(reflected on the bank statement) as R680.00. This correction needs to be made in the bank
reconciliation statement, as the bank made the error. Such errors need to be reported to the bank for
correction. The difference between the correct amount of R860.00 and the error amount of R680.00 is
short by R180.00. Therefore, this amount must be debited (added to) and corrected in the bank
reconciliation statement.
Step 7 Once all the reconciling items have been listed in the bank reconciliation statement and
all necessary corrections have been made in the general ledger – bank account, perform
a balance test. The closing balance from the general ledger – bank account should agree
with the closing balance of the bank reconciliation statement.
EXAMPLE 8.7
Required:
Show the seventh step that needs to be followed in the bank reconciliation process.
Solution
Bank Reconciliation Statement as at 31 January 20X1

Debit Credit
No. 367 1 280.00
No. 368 2 875.00
No. 455 750.00
No. 456 1 020.00
No. 457 2 040.00
Error – cheque 454 180.00
Balance as per bank account 6 766.00
10 756.00 10 756.00
Once all the reconciling items have been entered into the bank reconciliation statement and the
unrecorded transactions on the bank statement have been entered into the general ledger – bank
account, the bank reconciliation should balance. Here, we see a completed bank reconciliation
statement and the closed off general ledger – bank account. The closing balance in the bank account is
carried over to the bank reconciliation statement. If you have completed all the necessary steps, the
bank balance in the general ledger – bank account and the bank reconciliation statement will balance.
It is important to remember that transactions that appear on the bank statement and correspond to the
transactions recorded in the cash receipts and cash payments journal are not necessarily correct. These
amounts must be correctly reflected in both the books of the business and the bank statement, according
to the amounts found on the relevant source documents. These differences are identified as errors and
need to be rectified in the appropriate manner.
The likelihood of errors and omissions occurring in the business entity’s cash receipts and cash payments
journal is far higher than the likelihood of errors on the bank statement. This is due to human error. The
total receipts (CRJ) and total payments (CPJ) from the cash books are posted to the bank account in the
general ledger (refer to Chapter 6). It is acceptable for these errors and omissions to be corrected in either
the cash receipts and cash payments journals or the bank account in the general ledger. The items to be
reconciled are exactly the same as in section 8.2.
HINT – When we draw up the bank reconciliation statement, we will always compare the closing
balance of the bank statement with the updated closing balance of the bank account.
8.3 Conclusion
In this chapter, we discussed the importance of managing and controlling a business entity’s money
through a sound bank reconciliation system. We also explained how bank reconciliation works, as well as
the steps that need to be followed to reconcile the closing balance in the bank account (in the general
ledger) with the closing balance on the bank statement.
With this knowledge, now would be a good time to go back to our opening example and answer White
Rose Traders’ questions.
OPENING PRACTICAL EXAMPLE (ANSWERED)
White Rose Traders is owned by Mrs Blooming, a sole trader. White Rose Traders sells designer
perfume to the general public at very competitive prices. During the course of early February, the
accountant of White Rose Traders received the business entity’s bank statement for January 20X1.
Ms Smarty (the accountant) noticed that the closing balance of the business entity’s bank account in
the general ledger and the closing balance of the bank statement from the bank did not match.
The following information has been provided to Ms Smarty:
WHITE ROS E TRADERS

BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20X1
Debit Credit
No. 108 370.00
No. 113 1 715.00
7 935.00 7 935.00
The deposit on 22/01/20X1 was correctly reflected in the cash receipts journal.
Required:
Prepare the bank account in the general ledger and the bank reconciliation statement of White Rose
Traders for the month ended 31 January 20X1.
Solution
Bank reconciliation statement as at 31 January 20X1

Debit Credit
Credit outstanding deposits
No. 262 3 260.00
No. 263 1 780.00
Debit outastanding cheques
No. 113 1 715.00
No. 122 1 000.00
No. 123 895.00
No. 124 2 640.00
Error – deposit 261 198.00
14 151.00 14 151.00
• The meaning of bank reconciliation
• The purpose of the bank reconciliation statement
• How to compare the bank statement with the bank account of a business entity
• The steps that should be followed to reconcile the bank statement with the bank account in a business
entity
• How to reconcile the bank statement with the bank account in a business entity.
Question 1
Indicate whether the following statements are true or false. Correct any false statements with true
statements.
1.1 The bank reconciliation statement serves as a balance control between the bank statement and the bank
account in the books of the business.
1.2 A positive bank balance on the bank statement is reflected as a debit.
1.3 A negative (bank overdraft) balance on the bank account in the books of the business is reflected as a
credit.
1.4 Outstanding cheques and deposits recorded in the cash receipts and payments journal and not reflected
on the bank statement need to be recorded in the bank account in the general ledger.
1.5 Debit orders, bank charges and interest reflected on the bank statement and not in the books of the
business are disclosed as reconciling items in the bank reconciliation statement.
1.6 Errors on the bank statement are corrected in the bank reconciliation statement.
1.7 The opening balance in the bank reconciliation statement represents the opening balance on the bank
statement.
1.8 Once the bank account in the general ledger has been corrected and the bank reconciliation statement
has been performed, the closing balance should agree.
1.9 Outstanding deposits and cheques in the previous month’s bank reconciliation statement should be
ignored in the month thereafter.
1.10 A bank reconciliation statement should be compiled on an annual basis.
Question 2
You are required to prepare the bank reconciliation statement for the month of August 20X8 and the bank
account in the general ledger of Lighthouse Traders. The following information was presented:
• The bank reconciliation statement for July 20X8 had cheques 425 and 428 outstanding for R1 785.00
and R745.00 respectively. A deposit of R3 770.00 was also outstanding. The closing bank balance on
the July 20X8 reconciliation amounted to R9 870.00 (favourable).
• The bank statement had a favourable closing balance of R 13 981.00.
• At the end of August 20X8, the bank column in the cash receipts journal and cash payments journal
reflected a closing balance of R19 850.00 and R12 274.00 respectively.
• Cheque 425 and the deposit of R3 770.00 were reflected on the August 20X8 bank statement.
• The following cheques were not reflected on the bank statement for the month:
• Cheque 439 R669.00
• Cheque 444 R987.00
• Cheque 447 R270.00
• The following deposits were not reflected on the bank statement for the month:
• Deposit R4 100.00
• Deposit R1 980.00
• The following debit orders and bank-generated transactions were reflected on the bank statement:
• Service fees R114.00
• Interest R89.00 (credit balance)
• Management fee R79.00
• Monthly deposit fee R65.00
• Insurance (debit order) R557.00
• Rental (debit order) R1 780.00
• A deposit of R2 450.00 from a customer (on account) was deposited at the bank, but not recorded in the
books of the business.
Question 3
With the information that follows, you are required to prepare the bank reconciliation statement and bank
account in the general ledger for December 20X7 for Northern Lights Ltd.
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 20X7
Debit Credit
Debit outstanding cheques
No. 111 1 756.00
No. 115 271.00
15 705.00 15 705.00
Cheque 118 was correctly entered in the cash payments journal.
Question 4
Sea Shellz Wholesalers has captured all the receipts and payments for the month of October 20X5 in the
books of the business. Upon inspection of the bank statement, the closing balance did not agree with the
closing balance of the bank account in the general ledger. You are required to prepare the bank
reconciliation statement for October 20X5 and the bank account in the general ledger. The following
information is available:
• The closing balance as per the bank statement is R7 755.65 (favourable).
• The closing balance of the bank account in the books of the business reflected R3 429.19 less than the
bank statement.
• It was found that cheque 859 for R855.00, which appeared on the previous month’s bank reconciliation
statement, has yet to reflect on the bank statement.
• The following cheques do not reflect on the bank statement:
• Cheque 862 R1 422.58
• Cheque 863 R1 947.88
• Cheque 865 R 966.85
• Cheque 866 R1 754.00
• On the last day of the month, cash amounting to R4 850.00 was deposited but is yet to reflect on the
bank statement.
• Debit transactions on the bank statement yet to be recorded:
• Service fees R99.00
• Monthly transaction fee R129.00
• Interest on favourable balance R175.88
• Debit orders on the bank statement to be recorded in the books of the business:
• Insurance R1 250.00
• Rent expense R2 580.00
• Direct deposits on the bank statement to be recorded in the books of the business:
• Mr P Peters R1 250.00
• Ms S Saunders R875.00
• Cheque 866 was erroneously raised in the cash payments journal as R1 574.00. This cheque was drawn
for salaries and wages.
• An amount of R3 000.00 was credited on the bank statement. The amount is from the owner’s personal
account as a capital contribution. This was not raised in the books of the business.
You are required to prepare the bank reconciliation statement of Butterfly Beauty Supplies for the month
of June 20X8 as well as the bank account in the general ledger for the same period.
You have been provided with the following information:
BANK RECONCILIATION STATEMENT AS AT 31 MAY 20X8
Debit Credit
No. 333 245.00
Debit/credit balance per bank account 12 455.00
12 700.00 12 700.00
Cheque 340 was raised correctly in the books of the business.
CHAPTER 9
Inventory
Tracy Beck, Richard Beck and Juan-Pierré Bruwer

• Understand what inventory is
• Understand the perpetual inventory system
• Record transactions in the general journal using the perpetual inventory system
• Record transactions in the general ledger using the perpetual inventory system
• Understand the periodic inventory system
• Record transactions in the general journal using the periodic inventory system
• Record transactions in the general ledger using the periodic inventory system
9.1 Introduction
Although there are many different types of business entities all around the world, most business entities
are regarded as trading businesses. As mentioned in Chapter 2, trading business entities are those business
entities that purchase inventory for resale to other business entities and/or customers, with the main intent
of making a profit.
For this chapter, we have to take into account that some trading business entities are larger than others.
A small trading business entity will most likely make use of the perpetual inventory system, whereas a
large trading business entity will most likely make use of the periodic inventory system. The manner in
which inventory is dealt with in the books of a business entity differs slightly from one inventory system
to the next.
With the above in mind, it is important to take note that inventory is subject to VAT (see Chapter 4) in
most cases. For the remainder of this chapter, however, VAT will not be taken into account.
Before we get ahead of ourselves, let us take a look at an opening practical example:
Johnny Bell owns a beverage store called The Buzz. The Buzz is not a registered VAT vendor and
sells exclusive bottles of non-alcoholic drinks to the general public at affordable prices by only
charging a 30% mark-up on the selling price on all inventory sold. The following transactions took
place during the month of May 20X1:
• 2 May 20X1: Bought 50 exclusive bottles of non-alcoholic drinks at R250.00 per bottle. These
purchases were made on credit and obtained from Bottled-up Traders.
• 5 May 20X1: Sold 10 exclusive bottles of non-alcoholic drinks to Ms Tops on credit.
• 10 May 20X1: Sold 5 exclusive bottles of non-alcoholic drinks for cash to Mr Glass.
• 14 May 20X1: Returned 2 damaged exclusive bottles of non-alcoholic drinks to Bottled-up Traders
and received a full refund.
• 18 May 20X1: Paid R12 000.00 to Bottled-up Traders in partial settlement of debt owed.
• 22 May 20X1: Received R2 000.00 from Ms Tops in partial settlement of debt owed.
• 27 May 20X1: Mr Glass returned 3 exclusive bottles of non-alcoholic drinks for a full refund.
• 31 May 20X1: Sold 4 exclusive bottles of non-alcoholic drinks on credit to Dr Bubbles.
Johnny asks you the following questions:
• Should he make use of the perpetual inventory system or the periodic inventory system?
• How should he go about capturing the transactions in the general journal?
• Which amount of inventory is left at the end of May 20X1?
Before we can answer Johnny’s questions, we need to work through this chapter to get a better
understanding of inventory.
9.2 The concept of inventory

When we speak of inventory, we refer to the items that a business entity buys from a supplier in order to
resell to a customer or a business entity. For example, the inventory of a tuck shop could include chips,
cold drinks and sweets; the inventory of a clothing shop could include pants, shirts, shoes and socks; the
inventory of a car dealership could include luxury cars and ordinary cars. In addition, inventory can also
include raw materials (unprocessed material used in production), work-in-process goods (partially
manufactured goods) and finished goods (final manufactured goods). For our purposes, the most
important aspect to keep in mind is that inventory is a current asset. Let us take a look at an example:
EXAMPLE 9.1
Fedora Funk is the owner of Funky Fone Traders. The business entity has the following assets:
• Two motor vehicles used for deliveries;

• Five pieces of equipment used during business operations;
• Ten red GL cellular phones for resale;
• Twenty blue Snugmas cellular phones for resale; and
• One black Wuahei cellular phone used during business operations.
Required:
Which of the assets above are regarded as inventory?
Solution
The 10 red GL cellular phones and the 20 blue Snugmas cellular phones are regarded as inventory as
they are for resale. All other assets are not regarded as inventory as they are either used in the business
entity or by the business entity for business operations.
Although inventory always refers to assets that are bought for the purpose of resale to a customer or
business entity, the manner in which inventory is treated differs from business entity to business entity. In
practice, inventory can be dealt with in two ways: through the perpetual inventory system, or the periodic
inventory system.
9.3 The perpetual inventory system

A trading business entity that has a small range of inventory can easily keep track of its inventory sold
and its inventory bought. For example, a fish-and-chips shop can keep track of how many potatoes were
bought, how many potato chips have been sold, how many pieces of fish have been bought and how
many pieces of fish have been sold. In such cases, we make use of the perpetual inventory system – to
keep track of a small variety of inventory.
The perpetual inventory system is the easiest inventory system to use. Table 9.1 shows how different
transactions will be treated through this inventory system:
Table 9.1: List of inventory-related transactions when dealing with the perpetual inventory system
Transaction Account debited Account credited

Bought inventory for cash Inventory Bank
Bought inventory on credit Inventory Accounts payable
Returned unsuitable inventory back to suppliers (cash Bank Inventory
purchases)
Returned unsuitable inventory to suppliers (credit Accounts payable Inventory
purchases)
Sold inventory for cash Bank Sales
Cost of sales Inventory
Sold inventory on credit Accounts receivable Sales
Cost of sales Inventory
Received unsuitable inventory back from customers Sales (reversed) Bank (reversed)
(cash sales) Inventory (reversed) Cost of sales (reversed)
Received unsuitable inventory back from customers Sales (reversed) Accounts receivable
(credit sales) Inventory (reversed) (reversed)
Cost of sales (reversed)
Inventory is stolen/damaged (not covered by Inventory loss Inventory
insurance)
Inventory is stolen/damaged (covered by insurance) Inventory loss Inventory
Insurance
company/Bank
Inventory is donated to a charity Donations Inventory
Owner takes inventory for his or her personal use Drawings Inventory
EXAMPLE 9.2
Tywin Lancaster is the owner of Game of Stoves Traders. Game of Stoves Traders is not a registered
VAT vendor and sells stoves to the general public. During the course of November 20X1, the
following transactions took place:
• 3 November 20X1: Bought stoves from Dargon Traders on credit for R250 000.00.
• 4 November 20X1: Sold a stove (cost price of R20 000.00) to Ned Spark for R40 000.00 on credit.
• 8 November 20X1: Sold a stove (cost price of R30 000.00) to Jon Scroll for R60 000.00 for cash.
• 10 November 20X1: Ned Spark returned the stove he had bought, as it was faulty (see 4 November
20X1).
• 12 November 20X1: Sold 2 stoves to Theon Greyway (cost price of R50 000.00) on credit for R100
000.00
• 15 November 20X1: Returned one stove to Dargon Traders as it was damaged. The cost of the stove
was R40 000.00
• 20 November 20X1: Received R15 000.00 from Theon Greyway as partial settlement of his debt (see
12 November 20X1)
• 25 November 20X1: Paid Dargon Traders R10 000.00 as partial settlement of debt owed.
Required:
Assume that Game of Stoves Traders makes use of the perpetual inventory system, and capture the
transactions above in the general journal.
Solution
The transactions for the month are captured in the general journal below:
Throughout this book, we have focused on the purchasing, selling, returns, and withdrawal of inventory
(see Chapters 3 and 5), but we have not placed much emphasis on inventory losses. In layperson’s terms,
many trading business entities make use of control measures to safeguard their inventory. Such control
measures can include alarm systems, access controls to storage locations, CCTV cameras and security
guards. Regardless of the control measures that are put in place, there is always a risk of inventory being
stolen and/or damaged and/or becoming obsolete. For this reason, it is important to understand how
inventory losses and insurance company claims are dealt with when working with the perpetual inventory
system.
HINT – Even though VAT is not taken into account in this chapter, it is important to understand how
VAT is influenced by transactions related to inventory:
• When inventory comes TO the business entity (purchased), there will be INPUT VAT.
• When inventory goes OUT of the business entity (sold), there will be OUTPUT VAT.
• When inventory is returned TO the business entity by customers, OUTPUT VAT will be
REVERSED.
• When inventory is returned FROM the business entity to suppliers, INPUT VAT will be
REVERSED.
There are many reasons why inventory losses can occur in a business entity. These reasons include
inventory being destroyed, damaged, becoming obsolete, or perishing over time. These losses may be
caused by a variety of events such as natural disasters, fire, human error, defects and theft, to mention just
a few. Hence, inventory losses can be viewed as an expense against a business entity, which will result in
the decrease of inventory.
Although the above is true, some business entities have insurance policies in place that will either fully
or partially cover inventory losses. The extent of this insurance coverage will depend entirely on the
agreement between a business entity and an insurance company regarding the value of the inventory on
hand. As such, the insurance company may immediately pay out an amount when inventory losses occur
(resulting in an immediate increase in the bank account) or the insurance company may still owe the
amount (resulting in a future increase of the bank account). The amount paid out by the insurance
company will always represent a current asset.
With this in mind, let us take a look at Example 9.3:
EXAMPLE 9.3
Onele Dyonase, a sole trader, owns Jumbo Stores. Jumbo Stores is not a registered VAT vendor and
sells sweets in bulk to the general public and other business entities – their year end is 28 February.
During the month of September 20X0, strong winds caused a section of Jumbo Stores’ roof to
collapse, which caused damage to inventory. The following scenarios are provided to you:
• Scenario 1: On 5 September 20X0, inventory with a cost price of R5 000.00 was damaged as a result
of the roof collapsing. Jumbo Stores was uninsured.
of the roof collapsing. Jumbo Stores was insured, and its insurance company agreed to cover 80%
of the damage to inventory.
of the roof collapsing. Jumbo Stores was insured, and its insurance company paid 60% of the cost
of the damages to inventory into the business’s bank account on 10 September 20X0.
of the roof collapsing. Jumbo Stores was insured, and its insurance company agreed to cover
100% of damages to inventory. A total of 50% was paid directly into the business’s banking
account on 10 September 20X0.
Required:
For each scenario, show how the transactions on 5 September 20X0 and 10 September 20X0 should be
captured in the general journal.
Solution
Scenario 1: On 5 September 20X0, inventory with a cost price of R5 000.00 was damaged as a result
of the roof collapsing. Jumbo Stores was uninsured.
of the roof collapsing. Jumbo Stores was insured, and its insurance company agreed to cover 80% of
the damages to inventory.
of the roof collapsing. Jumbo Stores was insured for 60% of the damages to inventory. On 10
September 20X0 the insurance company paid the cost of the damages into the business’s bank
account.
of the roof collapsing. Jumbo Stores was insured for 100% of damages to inventory. On 10 September
20X0 the insurance company paid the cost of the damages into the business’s bank account.
Apart from the transactions shown in Table 9.1, a business entity can also incur costs that have to do with
getting inventory to a certain location (the business), in the condition (working/functioning) for intended
use by management (for resale purposes). Such costs include railage inwards (railage on purchases),
carriage inwards (carriage on purchases), customs duties and import costs. When working with the
perpetual inventory system, these costs need to be capitalised to inventory.
With the perpetual inventory system, at the end of each month we are able to see how much inventory
we have on hand by consulting the inventory T-account (balance brought down). We can also see what
the balance of cost of sales is (on a monthly basis) by making reference to the cost of sales T-account. For
this reason, we are able to calculate gross profit very easily. The formula for calculating gross profit is as
follows:
(Sales – Sales returns) – Cost of sales = Gross profit
EXAMPLE 9.4
Throughout the year, Flower Power Traders incurred many transactions and had the following
balances at 31 December 20X1:
• Cash sales: R650 000.00

• Credit sales: R250 000.00
• Sales returns: R52 000.00
• Cost of sales: R420 000.00
Required:
Calculate the gross profit of Flower Power Traders at 31 December 20X1.
Solution
Sales = 650 000.00 + 250 000.00
= R900 000.00
Gross profit = (Sales – Sales returns) – Cost of sales
= (900 000.00 – 52 000.00) – 420 000.00
= R428 000.00
OR
Sales: (900 000.00 – 52 000.00) = R848 000.00
Less: Cost of sales (420 000.00)
Gross profit: R428 000.00
9.4 The periodic inventory system

A trading business entity that has a large range of inventory cannot easily keep track of its inventory sold
and its inventory bought. For example, a large franchise retail convenience store cannot keep track of all
individual items bought and sold, such as bread, fruits, vegetables, noodles, meat, dairy products, cereal,
cookies, alcoholic drinks, non-alcoholic drinks, chips, popcorn, electrical appliances, toiletries, etc. In
such cases, we have to make use of the periodic inventory system – to keep track of a large variety of
inventory.
The periodic inventory system is not a difficult inventory system. However, it is quite different from
the perpetual inventory system. Table 9.2 shows how different transactions will be treated through this
inventory system:
Table 9.2: List of inventory-related transactions when dealing with the periodic inventory system
Transaction Account debited Account credited

Bought inventory for cash Purchases Bank
Bought inventory on credit Purchases Accounts payable
Returned unsuitable inventory to suppliers (cash and Accounts payable Purchases returns
credit purchases) (returns outwards)
Sold inventory for cash Bank Sales
Sold inventory on credit Accounts receivable Sales
Received unsuitable inventory back from customers Sales returns (returns Accounts receivable
(cash and credit sales) inwards) (reversed)
Inventory is stolen/damaged (not covered by Inventory loss Purchases
insurance)
Inventory is stolen/damaged (covered by insurance) Inventory loss Purchases
Insurance
company/Bank
Inventory is donated to a charity Donations Purchases
Owner takes inventory for his or her personal use Drawings Purchases
EXAMPLE 9.5
Tywin Lancaster is the owner of Game of Stoves Traders. Game of Stoves Traders is not a registered
VAT vendor and sells stoves to the general public. During the course of November 20X1, the
following transactions took place:
• 3 November 20X1: Bought stoves from Dargon Traders on credit for R250 000.00.
• 4 November 20X1: Sold a stove (cost price of R20 000.00) to Ned Spark for R40 000.00 on credit.
• 8 November 20X1: Sold a stove (cost price of R30 000.00) to Jon Scroll for R60 000.00 for cash.
• 10 November 20X1: Ned Spark returned the stove he had bought as it was faulty (see
• 4 November 20X1).
• 12 November 20X1: Sold 2 stoves to Theon Greyway (cost price of R50 000.00) on credit for R100
000.00.
• 15 November 20X1: Returned one stove to Dargon Traders as it was damaged. The cost of the stove
was R40 000.00.
• 20 November 20X1: Received R15 000.00 from Theon Greyway as partial settlement of his debt (see
12 November 20X1).
• 25 November 20X1: Paid Dargon Traders R10 000.00 as partial settlement of debt owed.
Required:
Assume that Game of Stoves Traders makes use of the periodic inventory system, and capture the
transactions above in the general journal.
Solution
The transactions for the month are captured in the following general journal:
With the periodic inventory system, it is important to note that inventory losses and claims against
insurance companies are dealt with in a similar way to the perpetual inventory system. The only
difference is that the purchases account will be used instead of the inventory account.
Apart from the transactions in Table 9.2, a business entity can also incur costs that have to do with
getting inventory to a certain location (the business), in the condition (working/functioning) for intended
use by management (for resale purposes). Such costs include railage inwards (railage on purchases),
carriage inwards (carriage on purchases), customs duties and import costs. When working with the
periodic inventory system, these costs need to be kept separate from inventory.
Due to the nature of the periodic inventory system, we cannot see how much inventory we have on
hand at the end of each month by means of consulting the inventory T-account (balance brought down).
The only way in which we can get an idea of the amount of inventory we have (in rands) is by means of a
physical inventory count every year.
Since we do not make use of the cost of sales account with the periodic inventory system, we need to
calculate cost of sales to determine gross profit. The formula for calculating cost of sales reads as follows:
Cost of sales = Opening inventory + Purchases + Purchase costs* – Purchases returns (returns outwards)
– Closing inventory
* Purchase costs include carriage inwards, railage inwards, customs duties, import duties, etc.
EXAMPLE 9.6
Shopmart Traders had the following balances at 31 December 20X1:
• Opening inventory balance: R85 500.00

• Purchases: R560 800.00
• Railage outwards: R46 000.00
• Carriage inwards: R23 000.00
• Carriage outwards: R31 000.00
• Customs duties: R10 000.00
• Closing inventory balance: R66 700.00
• Purchases returns: R8 900.00
• Sales: R987 600.00
• Sales returns: R6 700.00
Required:
Calculate the gross profit of Shopmart Traders at 31 December 20X1.
Solution
Cost of sales = Opening inventory + Purchases + Purchase costs – Purchases returns – Closing
inventory
= 85 500.00 + 560 800.00 + 23 000.00 + 10 000.00 – 66 700.00 – 8 900.00
= R603 700.00
Gross profit = (Sales – Sales returns) – Cost of sales
= (987 600.00 – 6 700.00) – 603 700.00
= R377 200.00
Or
Sales (987 600.00 – 6 700.00) 980 900.00
Less: Cost of sales 603 700.00
Opening inventory 85 500.00
Plus: Purchases (560 800.00 - 66 700.00) 494 100.00
Purchase costs (23 000.00 + 10 000.00) 33 000.00
Closing inventory (8 900.00)
Gross profit 377 200.00
9.5 The perpetual inventory system versus the periodic inventory system
Throughout this chapter, we have focused on both the perpetual inventory system and the periodic
inventory system. To make things a bit easier, Table 9.3 shows the differences between the perpetual and
periodic inventory systems:
Table 9.3: The differences between the perpetual and periodic inventory system
Aspect Perpetual inventory system Periodic inventory system

Accounts used when Accounts receivable (Dr) Accounts receivable (Dr)
inventory is sold (sales) Sales (Cr) Sales (Cr)
Cost of sales (Dr) Inventory (Cr)
OR
OR Bank (Dr)
Sales
Bank (Dr)
Sales (Cr)
Cost of sales (Dr)
Inventory (Cr)
Accounts used when Inventory (Dr) Purchases (Dr)
inventory is purchased Accounts payable (Cr) Accounts payable (Cr)
OR OR
Inventory (Dr) Purchases (Dr)

Bank (Cr) Bank (Cr)
Accounts used when Sales (Dr) Sales returns (Dr)
inventory is returned by Accounts receivable (Cr) Accounts receivable (Cr)
customers Inventory (Dr)
Cost of sales (Cr) OR
OR Sales returns (Dr)

Bank (Cr)
Sales (Dr)
Bank (Cr)
Inventory (Dr)
Cost of sales (Cr)
Accounts used when Accounts payable (Dr) Accounts payable (Dr)
inventory is returned to Inventory (Cr) Purchases returns (Cr)
suppliers
OR OR
Bank (Dr) Bank (Dr)

Inventory (Cr) Purchases returns (Cr)
Incurring purchase costs Inventory (Dr) Purchase costs* (Dr)
Accounts payable (Cr) Accounts payable (Cr)
OR OR
Inventory (Dr)
Bank (Cr) Purchase costs* (Dr)
Bank (Cr)
*Purchase costs include

carriage inwards, railage
inwards, customs duties and
import duties.
Value of cost of sales Can be determined after any sale Has to be calculated at year
transaction (inventory) has taken end
place – balance in the cost of sales
T-account
Value of closing inventory Can be determined after any Has to be physically counted at
balance inventory-related transaction – year end
balance in the inventory T-account
Donation of inventory Donation expense (Dr) Donation expense (Dr)
Inventory (Cr) Purchases (Cr)
Drawings of inventory by Drawings (Dr) Drawings (Dr)
the owner Inventory (Cr) Purchases (Cr)
Loss of inventory due to Inventory loss (Dr) Inventory loss (Dr)
damage or theft Inventory (Cr) Purchases (Cr)
Loss of inventory but Insurance company (Dr) Insurance company (Dr)
business entity is covered Inventory (Cr) Purchases (Cr)
by insurance (see Example
9.3) OR OR
Bank (Dr) Bank (Dr)

Inventory (Cr) Purchases (Cr)
In order to make sense of the above, let us take a look at Example 9.7:
EXAMPLE 9.7
Bennie Bookworm Traders is a small bookstore in Port Elizabeth. The bookstore sells all types of
books imaginable and if it doesn’t have a book in stock, it will get it for you. Its mark-up on the books
varies, depending on the demand for the book. The business’s year end is 31 December. The following
balances (among others) appeared in the books of Bennie Bookworm Traders on 1 December 20X1:
R R
Debit Credit
Bank 16 000.00
Inventory (01/01/20X1) 55 000.00
Accounts receivable 8 300.00
Accounts payable 12 200.00
During the month of December 20X1, Bennie Bookworm Traders provide you with the following
transactions:
• 3 December 20X1: Purchased 5 World Atlas books from Best Book Suppliers for R500.00 each. Paid
delivery charges of R110.00 to have all 5 books delivered to the shop. This was a cash transaction.
• 6 December 20X1: Sold a bundle pack of famous children’s books by the author Roll Doll on credit
to Ms Inéz. The cost price of the bundle pack was R500.00. Bennie Bookworm Traders sold the
books at a mark-up on cost of 75%.
• 8 December 20X1: Returned 2 of the World Atlas books to Best Book Suppliers as the books were
damaged, and received a full refund. Best Book Suppliers covered the delivery charges for the
books to be delivered back to their warehouse.
• 11 December 20X1: Sold 25 copies of the accounting textbook titled Applied Accounting to the
University of Excellence for cash. The selling price of each textbook was R390.00; a mark-up on
cost of 25% was charged.
• 15 December 20X1: Bennie Bookworm Traders donated children’s books to a local orphanage. The
cost price of the books was R2 250.00.
• 18 December 20X1: The University of Excellence returned 10 of the accounting textbooks they had
purchased on the 11 December 20X1. They were reimbursed in full and these books were placed
back into stock.
• 20 December 20X1: A severe storm caused the roof to leak onto a section of books with a cost price
of R5 000.00. These books were damaged. The insurance company agreed to cover only 50% of
the value of the damages. This amount is still to be received.
• 22 December 20X1: Purchased, on credit, classic novels from Read for Love Traders. The cost price
of all books was R1 600.00. Bennie Bookworm Traders paid carriage on purchases of R110.00
and custom duties of R220.00. This was paid for in cash.
• 23 December 20X1: The owner, Mr Benji, took books for Christmas gifts from the business’s
shelves. The cost price of these books was R745.00.
• 31 December 20X1: The annual stocktake took place, which revealed that inventory worth R45
365.00 was on hand.
Required:
Assume that the perpetual inventory system is used. Capture all transactions in the general journal and
general ledger.
Assume that the periodic inventory system is used. Capture all transactions in the general journal and
general ledger.

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What have we covered in this chapter?

In this chapter, we have covered the following:

For each statement, indicate whether it is true or false:

Owners and management

Assets Chapters 2 and 3

Accounts receivable and accounts payable

After working through this chapter, you should be able to:

The list of accounts receivable at the beginning of March looked as follows:

7.2 Important accounting terms

Term Explanation (definition)

DID YOU KNOW?

7.3 A brief theory of credit

DID YOU KNOW?

7.4 The general ledger and the subsidiary ledger

COFFEE LTD LIST OF ACCOUNTS RECEIVABLE AS AT 30 JUNE 20X3

COFFEE LTD LIST OF ACCOUNTS PA YABLE AS AT 30 JUNE 20X3

Because of the above-mentioned differences, accounts payable reconciliation has to be performed on

The list of accounts receivable at the beginning of March looked as follows:

a. Record the above transactions in the relevant subsidiary journals.

ROYALTY LTD. LIST OF ACCOUNTS RECEIVABLE AT 31 MARCH 20X1

What have we covered in this chapter?

In each case, state whether the following statement is true or false:

Bank reconciliation and the bank reconciliation statement

Tracy Beck and Richard Beck

After working through this chapter, you should be able to:

Transaction Bank account Bank statement

This is what Ms Smarty saw:

WHITE ROS E TRADERS

8.2 The bank reconciliation and the bank reconciliation statement

Let us take a look at Example 8.1:

DID YOU KNOW?

Let us take a look at Example 8.2:

Let us take a look at Example 8.3:

Ad mag had invoiced for R860.00.

Let us take a look at Example 8.4:

Let us take a look at Example 8.5:

Let us take a look at Example 8.6:

Ad Mag had invoiced for R860.00.

Let us take a look at Example 8.7:

Bank Reconciliation Statement as at 31 January 20X1

The following information has been provided to Ms Smarty:

WHITE ROS E TRADERS

Bank reconciliation statement as at 31 January 20X1

What have we covered in this chapter?

Cheque 340 was raised correctly in the books of the business.

Tracy Beck, Richard Beck and Juan-Pierré Bruwer

After working through this chapter, you should be able to:

Johnny asks you the following questions:

9.2 The concept of inventory

• Two motor vehicles used for deliveries;

9.3 The perpetual inventory system

Transaction Account debited Account credited

Let us take a look at Example 9.2:

Let us take a look at Example 9.4:

• Cash sales: R650 000.00

9.4 The periodic inventory system

Transaction Account debited Account credited

Let us take a look at Example 9.5:

Let us take a look at Example 9.6:

• Opening inventory balance: R85 500.00

Aspect Perpetual inventory system Periodic inventory system

Inventory (Dr) Purchases (Dr)

OR Sales returns (Dr)