Faculty of Engineering,

the Built Environment & Information Technology

Study Guide

Construction Accounting III

DCA3010/3000

Compiled by: J.P. Bekker

Amended by: L Roodt

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 NATIONAL DIPLOMA: BUILDING
CONSTRUCTION ACCOUNTING III – DCA3010

CONTENT

Chapter Topic
Page

Chapter 1 – Introduction

Chapter 2 – The Business Enterprise

Chapter 3 – Basic Accounting Terminology and the Accounting Cycle

Chapter 4 – Fundamentals of Accounting as a System

Chapter 5 – Source Documents and Basic Principles of Recording Transaction

Chapter 6 – The Fundamentals and Basic of the Recording Process

Chapter 7 – Expanding the Set of Ledger Accounts

Chapter 8 – The General Ledger with Detailed Accounts

Chapter 9 – Value Added Tax (VAT)

Chapter 10 – Contract Accounts

Chapter 11 – Adjustments and Allowances

Chapter 12 – Trading and Profit & Loss Accounts

Chapter 13 – Financial Statements

Chapter 14 – Journals

Chapter 15 – Bank Reconciliation

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Chapter 1

Introduction
Goals:
At the end of this chapter the student must be orientated in terms of the subject and be
able to identify the reasons, necessity and purposes of accounting.

Study objectives:
After attending lectures and studying the notes, the student must me able to:

1. Summarise in approximately one paragraph the reasons why a person will

participate in trading.

2. Explain in one paragraph the basic concept of Accounting.

3. Explain in one paragraph the differences between Accounting and Costing.

4. State the necessity of accounting.

5. Summarise the purposes of accounting and state the eight requirements for an
effective functioning accounting system.

6. Identify and discuss the accounting systems available to the builder.

7. Explain the meaning of accounting control policies and procedures.

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CHAPTER 1

1. Introduction
1.1 Historical review of accounting:
Since the 15th century it has been customary for every business or owner of a
concern to measure and express the trading results of their firm in money
terms. The Italian writer, Lucas Pacioli, published the first document on
Bookkeeping or accounting in the year 1495. Pacioli's system provided for a
memorandum book, Journal and Ledger and was based on the principle of
double entry. The original system has been developed further over the years
and consistently adapted to the requirements of the time. Handwritten records
have been kept through the ages according to this system and, although
bookkeeping machines and electronic computers are in use today, the basic
principles remained the same. All actions performed within a concern are still
expressed in money terms and placed on record as history.
The main purpose why any person will participate in trading is because s/he
expects to make a profit on the selling of goods or the providing of a service.
This profit is regarded as remuneration (reward) for the services provided, for
initiative displayed and for the risk attached to the investment of capital in a
concern. To conduct a business successfully, i.e. to make a profit, it is most
important that all information pertaining to conducting of the business should
be readily available to the owner or entrepreneur. The financial history of a
concern that has been placed on record can be made available in the form of
financial reports. These reports assist the owner(s) or entrepreneur in planning
future activities and to manage the concern more effectively.

1.2 What is accounting?

In the subject Accountancy we study the methods that we use to keep records
in a systematic and scientific way of all the actions in the business concern or
by an individual, expressed in money terms. Such an action is normally termed
a transaction and it signifies the transfer of money and/or value. (Or
accounting is the systematic recording of the flow of value and money.)

1.3 Is accounting the same as costing?

The question is often asked if costing and accounting is the same thing. The
answer to this is a very definite "no". Costing as a broader concept than
accounting, can be measured in terms of productivity, money or time and can
be directed to a single cost centre in the enterprise. Accounting on the other
hand, directs itself at the assessment of the financial situation only. The results
of comprehensive costing will however correlate with accounting results in that
findings from the cost system, like low productivity, will be supported.

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1.4 Why is accounting necessary?
The interpretation of the results of the recording process enables us to
formulate financial strategies that will be vital for the success of a building firm.
Decisions not based on accurate information or on instinct can only result in
over-commitment, cash flow problems and possible bankruptcy.
It is obviously beneficial to know where the profits and losses are made, what
money is owed to the firm, by the firm to others and depending on the scale of
operations, a proper accounting system must enable the owner(s) to determine
profitability, liquidity, solvency and the owner's equity. (The meaning of these
terms will be discussed later).
Where the keeping of proper financial records in the case of a one-man
concern or partnership is a practical necessity, it becomes a legal
requirement for companies, where the factual accuracy of records will be
verified by an auditor on an annual (yearly) basis.

1.5 The Purpose of Accounting:

The purpose of accounting is thus to provide the owners and management of a
business with information that will assist in determining whether the business is
performing as was expected and whether its financial position is sound.

1.6 Requirements for an effective functioning accounting system:

Any accounting system must conform to the following requirements to function
efficiently and to provide the correct and detailed information required by the
owner(s) who will require the following information:
a) How much money the firm owes other concerns
b) How much money others owe the firm;
c) The nature and value of all the firm’s possessions (assets);
d) The nature and amount of all expenses paid by the firm or losses
sustained during a specific period;
e) The nature and amount of all income and profits during a specific period;
f) The end results of the firm’s actions (transactions) during a specific period,
i.e. the profit or loss;
g) The amount of the owner’s capital;
h) The actual financial position of the firm.

1.7 Should I do my own accounting?

The student with prior knowledge and experience of accounting can adapt the
generic accounting system, as taught at school, to use in the building industry,
but the question remains if s/he should do this work. It can be argued that
builders with this knowledge and computer capabilities can cope with
accounting as part of their daily task but proper time management will quickly

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 define daily accounting as a task that can best be performed by a specialist on
contract. The interpretation of the results of accounting will however remain the
function of the manager and input from a trained accountant will be strongly
advised.
The purpose of this course is therefore not to bring the complete novice to
accounting to the fully skill level of a charted accountant. (Training to achieve
this will require extensive study and practice) It is however possible to achieve
a level of understanding of the accounting principals that will enable a building
student without accounting skills to communicate in a structured way with any
bookkeeper or accountant. (This course is directed towards that objective).

1.8 Accounting systems

A large spectrum of building firms, ranging from small informal labour only
contractors to large national companies, all require a careful needs
assessment of their financial recording systems. The informal emerging
contractor usually deals only with cash transactions in terms of expenses and
income and will need a very basic and quick system of financial recording.
The single entry system will in most cases be able to deal effectively with all
the financial recording requirements of an informal emerging contractor.
However, when a one-man concern, partnership or company enter into credit
transactions, the single entry system becomes inadequate. Here, the "Double
entry system" of financial recording, as practised by other business enterprises
and with small adaptations, are used most successfully.

1.9 Financial policies and procedures

Accounting is an activity that requires regular attention within the enterprise
and as with so many other repetitive activities, a need for rules will emerge no
matter how small the operations. One can divide these rules into two groups:
a) Policies are standard decisions pertaining to the handling of money; for
example, all cheque payments must be authorised and signed by the
manager.
b) Procedures are standard ways of dealing with transactions e.g. material
required will necessitate the filling out of a purchase order in duplicate.
Often policies and procedures are established even before the first money is
handled but a word of warning, policies and procedures can restrict fast action.
A golden rule is to have rather less than more, but the minimum must still
render proper control.

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Chapter 2

The Business Enterprise

Goal:
At the end of this chapter the student must be able to identify the organisation types of
business enterprise, choose a type of business enterprise to suit specific needs and
register with all the various legislative bodies as required by law.

Study objectives:
After attending lectures and studying the notes, the student must me able to:

1. Distinguish between a service, sales and manufacturing organisation

2. Distinguish between a wholesaler, retailer and consumer

3. List and discuss the basic types of businesses forms found in South Africa;

4. Distinguish between a public company, private company and a close corporation;

and

5. List the different legislative bodies each type of business must register with, before
or at commencement of business and discuss the registration procedure for each.

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CHAPTER 2

The Business Enterprise

2.1 Introduction:
We daily come across various types of businesses.
Mr. John Leaner, a qualified carpenter, has his own business, which he runs
from home. Mr. Leander does general carpentry work. In order for him to do
so, he needs only his carpenter’s tools. The client must supply any material
required for the work, which he buys from a building supplier. The hardware
store buys these items from a factory (saw mill), where the materials are
manufactured. The factory buys its materials (timber logs) from the plantation
owner.
Mr. Leander runs a service organisation and merely provides a service which
requires him to assemble building materials and components. The people he
provides this service to, are called his clients. The building supplier is called a
sales organisation, which buys and sells building materials and components.
The people and organisations served by the building supplier are called its
customers. The factory is a manufacturing organisation, which buys raw
materials, converts it into another product and sells the manufactured
(converted) items. The people and organisations served by the factory are
called its customers. The farmer/plantation owner is called a raw material
supplier and the people and organisations served by him are called his
customers.
In summary we can explain the above as follows:
 A service is provided to a client and goods are supplied to a customer.
 It can be observe that the goods are sold more than once:
- First by the plantation owner to the manufacturer;
- Then by the manufacturer to the building supplier and;
- Lastly by the hardware store to the person, that uses it.
 The manufacturer is a wholesaler, the hardware store is a retailer and
person who ultimately uses the products, is called the consumer.
 A wholesaler is someone who sells to dealers and a retailer is someone
who sells to the ultimate user. The ultimate users are called consumers.
 Manufacturers and wholesalers may not always be the same party.
Sometimes the chain is longer with the manufacturer selling to
distributors, the distributors selling to a retailer and the retailer selling to
the consumer.

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2.2 Forms of Businesses found in South Africa:
To start any business, one needs to invest money in the business. Some types
of businesses require more money than others to start up, e.g. a transport
contractor needs a few trucks (±R2 million for a truck and trailer), a carpenter
needs his carpentry tools (±R8 000), and an accountant may need only a pen
and a calculator (R120). This means that the capital invested in the firm will
normally determine the most appropriate form of business that can be used.
In South Africa business may be conducted in one of various forms:

2.2.1 Sole ownership

As indicated in the example above, Mr. Leander conducts his business in the
form of a sole ownership (trader). The sole owner is the only owner of the
business.
The owner of a sole ownership is also normally responsible for the day-to-day
activities of the business
The owner is also liable, in his personal capacity, for all the debts of the
business. The profit of the business is taxed in the hands of the owner, i.e. the
owner declares the profit in his personal income tax return. This is so because
the sole ownership is not a juristic person distinct from its owner. We can say
the business has no legal 'personality', or it cannot be summoned to court.
Also, when the owner of the sole ownership dies, the business ceases to exist.
If the business activities are taken over by someone else, a new sole
ownership comes into being.
Features or Characteristics:
 A sole ownership is simple and easy to set up;
 There are not many legal prescriptions to adhere to;
 The owner is the manager and can do as pleases;
 Decisions are made immediately;
 All income belongs to the owner;
 Tax are levied only once in the hands of the owner as personal income;
 The owner is entitled to an income rebate tax deduction;
 The owner has personal interest in the enterprise;
 The enterprise can easily be ended (dissolve);
 The owner himself is liable for all debts;
 All capital in the enterprise comes from the owner and the success of a
credit application for further capital will depend on the owner’s solvency;
 The owner sometimes has very little or no managerial knowledge and it
could lead to the ineffective functioning of the enterprise; and
 There is no continuity in this form of enterprise.

2.2.2 Partnerships
As soon as a business with no legal personality has more than one owner, one
cannot talk of a sole ownership anymore. Medical doctors, stock brokers and

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 accountants often conduct their businesses as partners in a partnership. All the
partners are owners of the business. A partnership has a minimum of two and
generally a maximum of 20 partners.
Like the sole owner, the partners in a partnership are active in the daily running
of the business. However, it is also possible that the partnership includes
“silent partners”. These partners are merely investors and not active in the
daily running of the business.
Because of the lack of legal personality, the owners (partners), like the sole
owner, are also liable in their personal capacities for the debt of the
partnership. The partnership’s profits are taxed in the hands of the partners.
Where a partner dies or withdraws from the partnership, or a new partner is
admitted to the partnership, the old partnership ceases to exist and a new
partnership is formed.
Features or Characteristics of a partnership:
 It is easy and cheap to set up a partnership;
 The partnership is not taxed but each individually partner is taxed
separately in his personal capacity;
 The sharing of income has the effect that individual tax is reduced (block
creep);
 The management of the partnership is determined by the partners and not
by legislation;
 Capital raising possibilities are normally good and each partner can
contribute towards the capital of the enterprise;
 The partners normally have a personal interest in the enterprise and will
work hard to make it a success;
 Partners have different skills and can specialise in their own field;
 A partnership can easily be dissolve if required;
 A partnership may not have more than twenty members;
 Each partner is personally responsible for the debts of the partnership;
 There is a lack of continuity because the partnership must dissolve as a
result of the death, resignation or insolvency of a partner;
 Problems can arise if partners cannot trust each other or do not agree on
the management of the enterprise; and
 Irregularities can arise because no audit of the financial statements is
required;
 The undisciplined conduct of a partner can bind the partnership, unless it is
excluded by agreement.

2.2.3 Corporate Enterprises

Certain forms of businesses have their own legal personality, distinct from their
owners. Legal personality is achieved by virtue of the Act applicable to that
enterprise. Examples of corporate enterprises are the close corporation and
the limited company. Such an enterprise, e.g. a company, may sue and be
sued and be party to an agreement. Obviously the company cannot physically

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stand up in court, but it does so through its agents, e.g. its directors (not
necessarily its owners). The death or withdrawal of one of the owners of a
corporate entity has no effect on the continued existence of the owners of that
entity.
Close corporations and companies submit their own tax returns for their own
profits and pay taxes at the rate applicable to companies. The Income Tax Act
regards a close corporation as a private company.

a) Close corporations or CC’s

In terms of the 2008 Companies Act a close corporation may no longer be
formed. Existing close corporations may however still exist if it was formed
before the 2008 Companies Act came into operation which is the 1 May
2011.
A close corporation may have a minimum of one and a maximum of ten
owners (called members). It has its own legal personality, and its members
are not liable for its debts. However, only where certain conditions prevail
(e.g. reckless trading) or where the member(s) personally sign surety for
debt incurred by the corporation (e.g. a loan to purchase a vehicle), will the
members be accountable to ensure the debt is settled.
The members of a close corporation are normally also involved in the day-
to-day business activities.
The letters CC after the name of a close corporation denotes it as such,
e.g. “Main Manne What Counts” Construction CC (MMWC Construction
cc).
Features or Characteristics of a CC:
 Close corporations have a simple management and decision-making
structure. Most of the decisions are made in an informal way;
 All the members take part in management and have direct interest in
the success of the enterprise;
 It has legal personality with all the advantages attached to it and gives
continuity to the enterprise;
 There are very little legal requirements that will regulate the
establishment of a corporation;
 The set-up cost is low in relation to that of a company;
 Dividends received by members are not taxable in their hands;
 Annual financial statements is only required in a simplified form;
 Each member of the corporation can act on behalf of the corporation
and participate in management.
 If there is a lack of understanding amongst the members, it could lead
to bad management and disputes;
 All the other members must give their permission if one member wants
to sell his/her shares;
 The restriction of only ten natural persons as members in a corporation
can be a restricting factor if the enterprise wants to expand;

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  Situations do exist where a member's conduct, led to personal liability
for unpaid debts;
 The corporation can expect problems with financing, because the
members have limited liabilities in terms of the debt of the enterprise
and this could impede on obtaining credit;

b) Limited companies
For purposes of this course, we will distinguish between two types of
companies only:
 The public company, limited by share capital and listed on the
Johannesburg Stock Exchange (JSE); and
Anybody can buy the shares in public companies on the JSE. We refer
to public companies as a listed company (meaning – listed on the
JSE). The full name of listed a company is followed by the word
“Limited” or Ltd, which denotes these companies as limited by share
capital. A public company must have not less than seven owners
(called shareholders or members), except in the case of a wholly
owned subsidiary, where another company holds all the shares in that
company. The maximum number of shareholders is only limited by the
number of shares issued. The shareholders of a listed company cannot
be held liable for the debts of the company. Should a company go
bankrupt, the shareholders will lose only the share capital contributed
(invested) by them.
The owners (shareholders) of a listed company are not always
employed by the company and the directors of the company will be
responsible for the day-to-day business activities.

 The ordinary private company, limited by share capital and not listed
on the JSE.
Companies, which shares are not traded on the JSE are referred to as
unlisted companies. This means there is a restriction on the free
transferability and ownership of the shares of such companies. This
means the shares are privately owned and therefore unlisted
companies are referred to as private companies. The full name of a
private company is followed by the words “(Proprietary) Limited (Pty)
Ltd. The word 'Proprietary' (or Pty) denotes that it is a private
company. A private company may have a minimum of one and a
maximum of fifty shareholders. Although, as in the case of a public
company, the shareholders of a private company are not personally
liable for the debts of the company, they are, like the members of a
close corporation, often required to sign surety for the debt of that
company. The shareholders and directors are often the same people.
Features or Characteristics of a Company:
 As the result of its legal personality, the company can act in its own
name. This also gives the members the added advantage of limited
liability in terms of debt;
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  The continued existence of the company is not dependent on the
members and this gives continuity to the company;
 With the public company, the shares are transferable and the
enterprise can easily be expanded;
 The company has an organised set-up in terms of its functions,
because it is divided in a rational way;
 As a result of the amount of members it has more financing sources
than a sole ownership or partnership;
 Several extra costs must be paid, e.g. promotion fees, annual
allowance, and the cost attached to the issuing of shares;
 The business of the company is as a result of the compulsory
publication of statements, constitution, etc. known to everybody
including its competitors;
 Detailed prescriptions in terms of the set-up and management,
regulates a company;
 Workers, who do not have a share in the company, will not necessarily
have the same interest in a company as the owners; and
 Companies are not like personal taxpayers, entitled to a tax rebate.

2.3 Business enterprises or Firms

The term business enterprise or firm includes any of the forms of businesses
discussed in paragraph 2.2. Throughout this module, the word enterprise or
firm will include reference to any or all of the following:
 Sole Owner;
 Partnership;
 Close Corporation;
 Company

2.4 The operating activities of a business enterprise

In our initial example in paragraph 2.1, Mr. Leander carries on business as a
sole owner, who runs a service organisation. The sole owner is, however not
limited to a service organisation.
Any type of business, i.e. a sole owner, partnership, close corporation or
company may carry on any type of business operation or combination thereof,
i.e. sales, service, manufacturing, etc.

2.5 Commencement of business activities

Any person can start a business and trade or provide a service. This business
can either be informal or formal. These two classifications can be defined as
follows:
 Informal businesses are normally operated by persons based at home on a
part-time basis and are run on a cash basis. There are normally no official

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 records of these businesses and they do not keep records of their activities
(No record exists of the enterprise).
 As soon as a person opens up a bank account or registers at any
institution for any purpose it becomes a formal enterprise. (A record of the
enterprise is made).
For the purpose of this course we will be looking at the formal enterprise.

2.5.1 Registration on formation with the Registrar

Before any formal enterprise can commence its business activities, it is
required to register with certain statutory and other bodies.

a) Sole ownership
The sole ownership does not have its own legal identity and is not required
to register its business form before it may commence business. However
there are two requirements to adhere to when starting a sole ownership:
i) The enterprise must obtain a name that does not contravene the Act
on business names 1960.
ii) The enterprise must, based on the Act on businesses 1991, obtain a
license if engaged in the following business fields:
 Enterprises where meals or perishable foodstuffs are soled
provided or hawked;
 Enterprises that offer certain health or entertainment facilities.
iii) To separate the owner’s financial affairs and that of the business it is
wise to open a separate cheque account for the business.

b) Partnership
Like the sole owner, the partnership does not have its own legal identity
and is also not required to register its form of business before it may
commence business, although a partnership is deemed to be established
when the prospective partners conclude a partnership agreement with
each other. Like with a sole ownership, it is advisable that a partnership
also have its own separate bank account.
This partnership agreement will address matters as follows:
 The duration of the partnership;
 The nature of the business to be carried on;
 The amount of capital to be contributed, and the manner in which it is
to be provided and maintained;
 The preparation of the final account and the auditing of the books;
 The method of distribution of profits and losses;
 The amount of drawings of the partners;
 The salaries to be paid to the managing partner;
 The rate of interest to be allowed on capital or charged on drawings;
 The management of the affairs of the partnership;

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  The method of treatment of a partner's interest in the event of death or
retirement; and
 The settlement of disputes between the partners.
(Another type of partnership is a joint venture which constitutes a
temporary arrangement)

c) Close corporations
The close corporation becomes a juristic person through its registration
with the Registrar of Companies.
Application is first made on form CK7 in triplicate to reserve an acceptable
name with the Registrar. The application must include a R50 revenue
stamp on one copy of the application. It will take approximately three to six
weeks to get an answer from the Registrar. After a name has been
reserved an application for registration can be lodged to the Registrar by
means of a founding statement on form CK1. This is accompanied by the
written consent to act as accounting officer by the person appointed as
such, a R100 revenue stamp on the CK1 application and must also be
accompanied by the approved name reservation (form CK7). This has to
be done within six weeks from name reservation and will also take
approximately three to six weeks to be processed.
Upon receipt of all the forms mentioned above, the Registrar completes the
certificate of incorporation on form CK1 and assigns a registration number,
which is also entered on the CK1 form. The Registrar retains the original
CK1 form, one copy is returned to the close corporation and the second
copy is sent to the Receiver of Revenue for registration as a taxpayer. The
Receiver will assign an income tax number to the corporation. See
paragraph 2.5.2 below.
A separate bank (cheque) account is opened in the name of the CC from
where all payments and receipts of money are conducted.
Any future changes to the founding statement must be lodged with the
Registrar on form CK2 and CK2A where the changes are in respect of the
accounting officer.

d) Companies
The company becomes a juristic person through its registration with the
Registrar of Companies.
The founder member of the company makes application for registration of
the company to the Registrar of Companies by:
 Lodging an application for registration of the proposed name in
duplicate on form CM5;
 Lodging the original plus two certified copies of the memorandum of
association and article of association of the company, signed by each
subscribed member. Where each member does not sign, the
memorandum and articles it must be accompanied by a power of

15
 attorney, in favour of the person signing, from each member not
signing. The memorandum and articles are the company's constitution.
A public company may use the articles in table A of schedule 1 to the
Companies Act as its articles, and a private company may use table B.
The article can later only be altered by special resolution; and;
 Lodging a notice of registered office and postal address of the
company in duplicate on form CM22.
Registration will take place and a certificate to commence business will
only be issued by the Registrar after the following have been lodged and
processed:
 Particulars of directors, auditors and officers (form CM29);
 Consent to appoint as such by the auditor (form CM31);
 Application for the issue of the certificate to commence business (form
CM46); and
Each director must issue a statement regarding the adequacy of capital
available for the company (form CK47).
A separate bank (cheque) account is opened in the name of the Company
from where all payments and receipts of money are conducted.

2.5.2 Registration with the Receiver of Revenue

a) Registration as an employer
All enterprises which employ people and remunerate them for services
(salary, wage or commission) must register with their local Receiver of
Revenue as an employer. This is done on one form and the registration
process applies to three aspects:
 PAYE and SITE (Pays As You Earn and Standard Income Tax on
Employees)
Employees’ tax is a system in terms of which an employer, as an agent
of government, deducts tax from the earnings of employees and pays it
over to SARS on a monthly basis. This tax serves as a tax credit that is
set off against the final tax liability of an employee, which is determined
on an annual basis. A business, that pays salaries, wages and other
remuneration to its employees that is above the tax thresholds where
liability for tax arises, must register with SARS for employees’ tax
purposes. This is done by completing an EMP101 form and submitting
it to SARS. Once registered, the employer will receive a monthly return
(EMP201) that must be completed and submitted together with the
deducted employees’ tax within seven days of the month following the
month for which the tax was withheld.

 UIF (Unemployment Insurance Fund)

The Unemployment Insurance Fund insures employees against the
loss of earnings due to termination of employment, illness, maternity

16
 leave, etc. A monthly contribution has to be made by the employer
(1%) and the employee (1%) based on the earnings of the employee.
The contributions are calculated as a percentage of the remuneration
paid to the employee for services rendered. An employer who is
registered for employees’ tax or the Skills Development Levy is
automatically registered for U.I. contributions. (The forms used are the
same forms that are used for SDL and PAYE purposes). An employer
that is not liable for the payment of employees’ tax or SDL must
register for U.I. purposes with the Unemployment Insurance
Commissioner at the Department of Labour.
Contributions are paid over to SARS on a monthly basis before or on
the 7th of the following month together with the PAYE and SDL
contributions using the EMP201 form.
The UI Contribution Act applies to all employers and employees, other
than–
- employees employed for less than 24 hours a month with a
particular employer;
- employees who receive remuneration under a learnership
agreement registered in terms of the Skills Development Act,1998
(Act No. 97 of 1998);
- employers and employees in the national and provincial spheres of
government; and
- employees who enter the Republic for the purpose of carrying out a
contract of service, apprenticeship or learnership within the
Republic if upon the termination thereof the employer is required by
law or by the contract of service, apprenticeship or learnership, as
the case may be, or by any other agreement or undertaking to
repatriate that person, or that person is so required to leave the
Republic.

 SDL (Skills Development Levy)

Every employer that is liable for registration with SARS for employees’
tax purposes in respect of employees who are liable to pay PAYE/SITE
irrespective whether the annual payroll is in excess of R250 000 or not
or who pays annual salaries, wages and other remuneration in excess
of R250 000 must pay a skills development levy (SDL). This levy
(currently 1%) is used for the funding of education and training of
employees. It is calculated as a percentage of a leviable amount, which
is more or less equal to the earnings of the employees. The application
form to register for SDL is the same form that is used to register for
employees’ tax (EMP101). The monthly return for SDL is combined
with the monthly return for employees’ tax (EMP201) which means that
the same terms and conditions apply for submission and payment.
Clearly then, a sole owner also register as an employer if s/he employs
people.

17
b) Registration for value added tax (VAT)
All enterprises that have an annual turnover (sales) of R1 million or more
are required to register for VAT (use form VAT 101) with their local
Receiver of Revenue. A reference number is issued and a VAT return,
form VAT201, is submitted monthly or bi-monthly with a payment or for a
refund.

c) Registration of business for income tax (tax on profits)

In addition to the above registration, all enterprises with an own legal
identity must register as taxpayer with the local Receiver of Revenue.
Therefore, companies and close corporations will have a third reference
number with the Receiver.
Income Tax is the State’s main source of income and is levied on taxable
income in terms of the Income Tax Act, 1962.
Provisional tax returns are made twice a year on form IRP6: the first after
the first six months of the financial year and the second at the end of the
financial year. In some instances, a third provisional tax return is submitted
within six months of the end of the financial year.
A final tax return, form IT14, with details of the profit or loss of the company
or close corporation for the year, is submitted within six months of the end
of the financial year.

d) Registration of business owners (members) as provisional tax payer

Provisional tax is not a separate tax but simply a provision for the final tax
liability for a year of assessment, which will be determined upon
assessment. Compulsory provisional tax payments are made six months
after the beginning of a year of assessment and at the end of the year of
assessment and represent tax on income anticipated for the year of
assessment. Provisional tax estimates and payments are made on IRP6
forms.
An individual is regarded as a provisional taxpayer if—
 Income is derived from sources other than remuneration (e.g.
business, farming, interest and rental income) where the taxable
income from those sources exceeds an amount determined by SARS
for the year of assessment;
 He/she is a director of a private company and is resident in South
Africa, unless the Commissioner directs otherwise;
 He/she is a member of a close corporation and is resident in South
Africa, unless the Commissioner directs otherwise;
 The Commissioner notifies the individual that he/she is a provisional
taxpayer.
An individual must apply to SARS for registration as a provisional taxpayer
within 30 days after the date on which the individual qualify as a provisional
taxpayer for the first time.

18
2.5.3 Registration with the Department of Labour (DoL)

a) Compensation for Occupational Injuries and Diseases Act

The Occupational Injuries and Diseases Act 130 of 1993 replaced the
Workmen's Compensation Act 30 of 1941. This Act establishes a fund that
provides compensation to workmen for disablement or death, which results
from accidents and industrial diseases contracted during the course of
employment.
All employers must register with the Compensation Fund and pay an
annual assessment fee based on their workers’ earnings and the risks
associated with the type of work being done.
The Compensation for Occupational Injuries and Diseases Act applies to:
 all employers; and
 casual and full-time workers who, as a result of a workplace accident
or work-related disease:
o are injured, disabled, or killed; or
o become ill.
This excludes -
 workers who are totally or partially disabled for less than 3 days;
 domestic workers;
 anyone receiving military training;
 members of –
o the South African National Defence Force, or
o the South African Police Service;
 any worker guilty of wilful misconduct, unless they are seriously
disabled or killed;
 anyone employed outside the RSA for 12 or more continuous months;
and
 workers working mainly outside the RSA and only temporarily
employed in the RSA.
The commissioner determines the rate of assessment according to an
estimated risk and cost of accidents. This in conjunction with the annual
wages paid by the employer to workmen (the employer must submit wage
statements) determines the contribution to be made to the Fund by each
employer. Fees may increase or decrease according to an employer’s
accident costs. Employers with low costs may qualify for assessment fee
rebates.

2.5.4 Registration with the National Home Builders Registration Council

(NHBRC)
The National Home Builders Registration Council or NHBRC is an
independent, non-governmental, non-profit, statutory organisation. The

19
 NHBRC is one of the most recently introduced councils and was primarily
created to protect the new home owner against registered builders producing
building work of sub-standard quality, by introducing a means of recourse.
To register, a building enterprise will fill out the standard NHBRC application
form and together with an initial application fee, sent it to the Council. As soon
as the Council has approved the application, the building enterprise will pay an
annual registration fee of and the Council on receipt of the registration fee, will
issue a registration certificate.
Whenever a registered building enterprise builds a new house it will apply for a
guarantee certificate and hand it to the new owner. No bank will in future, issue
a bond for a new house or any house younger than five years, unless the
builder or owner provides a NHBRC guarantee certificate. Only registered
builders will be able to apply for guarantee certificates. The guarantee
certificate can be obtained on request from the council at a cost of 3% of the
land and building cost. It will guarantee the house against any structural failure
for five years and other sub-standard workmanship for various periods during
this five-year period. An inspector of the council will monitor the building
process to make sure standards are maintained. Any registered builder not
willing to repair faults shown out by the council, within the five-year guarantee
period, will be de-registered.

2.5.5 Registration with professional organisations

Registration with professional organisations has been covered in the first year
subject of Construction Management. It was however included in this course to
demonstrate the financial implication when registration takes place and annual
membership fees are paid. These two organisations are therefore only
mentioned briefly and further detailed discussions will be given.
a) Master Builders Association (MBA)
b) Charted Institute of Building (SAIB) CIOB

20
CHAPTER 3

Basic Accounting Terminology and the Accounting Cycle

Goal:
At the end of this chapter, the student must understand the basic accounting
terminology and be able to describe the accounting cycle, referring to the procedure that
is followed in the accounting process from the time a transaction occurs until the time
that the information regarding the transaction is recorded in the Statement of Financial
Position.

Study objectives:
After attending lectures and studying the notes, the student must me able to:

1. Define basic accounting terminology

2. Describe the accounting cycle

3. Define a transaction

4. Explain the need for and the use of source documents

5. List the journals involved in the accounting process

6. Understand the posting from journals to the general ledger

7. Explain the purpose of the trial balance; and

8. Explain the role and purpose of the Statement of Comprehensive Income and
Statement of Financial Position

21
CHAPTER 3

Basic Accounting Terminology and the Accounting

Cycle
3.1 Introduction
This chapter is a broad overview of the accounting concepts, which includes
basic terminology and explains the basic cyclical process used to generate
results. This procedure of processing and recording data from the beginning of
a period to the end is known as the accounting cycle. Bookkeepers and
accountants have over many years developed a system of recording data. The
result of this system is to give management an indication of the financial
performance of the business and the state of its financial position.
It is important to fully understand these concepts and processes, as it will
assist you in comprehending the three conceptual steps that must be taken
before being able to record accounting data. These steps are:
 Understanding the equation and effects of transactions on it
 Understanding the use of Ledger accounts
 Coping with large volumes of data and the use of subsidiary journals

3.2 Basic accounting terminology

Value – The quality that makes something useful or worthy.
Owner’s Equity or Capital – This is the owner’s share contribution in the
business and comes in the form of money or goods. Money is always
transferred from the owner’s bank account to that of the business and goods
are indicated as value in the books of the business. Money and goods
contributed by the owner is indicated as value owed to the owner in the books
of the business.
Assets – These are tangible things or money, contributed by the owner or
bought or obtained from other businesses, entities or persons, which is used to
run the business or to trade with.
Liabilities – These are other businesses, entities or persons from whom
money was borrowed or assets and goods where bought on credit, which is
used to run the business or to trade with.
Accounts Payable (creditors) – These are businesses, entities or persons to
whom money is owed.
Accounts Receivable (debtors) - These are businesses, entities or persons
who owes money to the business.
Cash Sales – Departing with assets, goods or delivering services in exchange
for money.

22
 Credit Sales – Departing with assets, goods or delivering services in
exchange for money to be received in the future.
Payments Received – money received for assets, goods or services sold in
the present or the past.
Cash Purchases –To Acquire assets, goods or service in exchange for
money.
Credit Purchases –To Acquire assets, goods or service in exchange for
money to be paid in the future.
Payments made – To depart with money for assets, goods or services
purchased in the present or the past.
Income or Revenue – Is the total value of money for goods or services sold
for cash or on credit.
Receipts – Is the total value of money received and related to goods or
services sold for cash or on credit.
Expenses – Is the total value money paid and related to goods or services
purchased in money terms.
Cost– Is the total value of goods or services purchased in money terms.
Profit – The excess value calculated in the process of buying and selling
products or services in terms of money.
Loss – The deficit value calculated in the process of buying and selling
products or services in terms of money.

3.3 The accounting cycle

The accounting cycle consists of the following steps:
 Transactions occur and the data is captured on source documents;
 Source documents are analysed and recorded in subsidiary journals;
 Data is transferred from the subsidiary journals to the ledger accounts
(general Ledger and subsidiary ledgers);
 A trial balance is prepared to determine the accuracy of the entries in the
general ledger;
 Final adjustments are journalised and recorded;
 Nominal accounts in the general ledger are closed off to the trading
account and profit and loss account;
 The Statement of Comprehensive Income is drawn up;
 The Statement of Financial Position is drawn up; and
 A cash flow statement is drawn up.
Diagrammatically it looks as follows:

23
24
3.3.1 Transactions
A transaction takes place when something of value changes hands.
Transactions affect a business in one of two ways, i.e. through internal
transactions and external transactions. External transactions take place
between the enterprise and outside parties. Internal transactions take place
within an enterprise.
a) External transactions normally take one of two forms i.e. cash transactions
or credit transactions:
 A cash transaction takes place when money changes hands at the
time when goods or services are rendered or acquired, e.g. A
Contractor pays a Car Dealer R15 000 by cheque for a second hand
bakkie. The fact that a cheque was used as payment indicates a cash
transaction. Cash includes cash, cheques, credit cards and bank
transfers (debit orders or stop orders).
 A credit transaction takes place where goods and services are
rendered or acquired but payment is deferred to a future date, e.g.
Penny Pinchers sells building material to the value of R2 000 to
MMWC Construction CC on account and issues invoice no. 11251.
The fact that it is on account and that a credit invoice was used, gives
an indication that this was a credit transaction. No payment was made
at this stage.
Apart from the type of document used, the wording of a transaction that
took place, will also give an indication of what type of transaction it was.
E.g. “Receive a cheque for a service rendered” or “Send an invoice,”
indicates that money was received for a service rendered or an invoice
accompanies the goods but payment is deferred to a later date and
therefore these were sales transaction. “Pay by cheque” and “Receive an
invoice” indicates that either money was paid for a service rendered or that
an invoice accompanies the goods received but payment is deferred to a
later date, which means that these two transactions were purchase
transaction.
b) Internal transactions include correction of errors and the recording of
internal changes, i.e. provision for the depreciation of fixed assets. These
transactions are recorded in the general journal before posting to the
general ledger. General journal entries will be dealt with later.

3.3.2 Source documents

The first step in the accounting process is to prepare a document for each
transaction that takes place, which provides the evidence (proof) that a
transaction took place. These are called source documents and include
cheques, invoices receipts, bank statements and electronic transfers etc.
Three steps are followed when a transaction takes place:
a) Record each transaction on a source document.
b) Enter each transaction from the source document into a subsidiary journal;
and finally
25
 c) Transfer the information in the subsidiary journals to the supplementary
and general ledger accounts.

3.3.3 Subsidiary Journal

Secondly, the information on each source document will be used as data to
write up a particular journal, also known as a book of prime (first) entry. These
journals include:
 Petty Cash Journals;
 Cash Receipts Journal
 Cash Payments Journal
 Sales Journal
 Sales Returns Journal;
 Purchases Journal
 Purchases Returns Journal;
 Salaries and Wages Journal; and
 General Journal.

3.3.4 The General Ledger and Cashbook

The general ledger is the book where all transactions are finally recorded. The
cashbook is an optional addition to the ledger where all cash transactions are
recorded. The ledger and cashbook supply information of all the transactions
affecting the enterprise. The entries in the ledger are governed by the double
entry principle. This principle recognises that for a transaction to be finalised
there are always two parties (entities) involved, both of which are giving and
receiving at the same time. The transaction is recorded in the ledger of each
party and is viewed from each party’s own perspective. This means that the
transaction is recorded in the ledgers of both parties as something that was
given and something that was received, which means that for each transaction,
two (double) entries are made. The double entry principle will be explained in
more detail later in the course.

3.3.5 The Trial Balance

The purpose of the trial balance is to check the accuracy of the double entry
principle as applied in the general ledger.
A trial balance will be drawn up at three distinct stages in the accounting
process.
 The first is a pre-adjustment trial balance, which is prepared after all the
ordinary business transactions of the enterprise have been recorded.
 After completing the normal adjustments with the closing of the financial
year, the post adjustment trial balance is drawn up.
These two steps are commonly applied in what is known as a worksheet.
 The third trial balance is the post closing trial balance. The accounts are
properly closed at the end of the year and the correct balances displayed

26
 in the post closing trial balance. This trial balance will also act as the
opening trial balance on the first day of the new financial year. The post
closing trial balance will contain only balance sheet accounts.

3.3.6 Final adjustments

It is important to provide an accurate financial report at the end of the financial
year and therefore certain adjustments has to be made. The reasons for these
adjustments are in part as follows:
 During the year payments are made in advance for services, which may
extend beyond a particular financial year.
 On the other hand payments for services used during the year are deferred
to a later date and may also extend beyond a particular financial year.
 There may be consumables left over from the previous year, which has to
be shown as assets.
 Certain provisions/allowances in terms of depreciation, bad debts etc. have
to be made.

3.3.7 Final year-end accounts

At the end of the year, after all the adjustments have been made, the final
result of trading has to be determined. The final result could either be a profit or
a loss. The profit or loss must also be distributed amongst the owners and the
business. All these calculations are done during this stage of the accounting
cycle.

3.3.8 Year-end reporting

The final step in the accounting cycle is the preparation of the Statement of
Comprehensive Income and the Statement of Financial Position. They are
prepared from the post adjustment trial balance.
a) The Statement of Comprehensive Income
The Statement of Comprehensive Income is prepared for a certain period
and shows the results of the operations of the enterprise, i.e. the profit or
loss for the financial year. If the income is more than the expenses it will
mean that a profit (net income) has been made. If, on the other hand, the
expenses are more than the income, a net loss has been made.
b) The Statement of Financial Position
The Statement of Financial Position is drawn up as at a specific point in
time i.e. the last day of the financial year. It means that the statement
reflects the financial position of the enterprise on the last day of the
financial year. The purpose of the Statement of Financial Position is to
show the funds acquired by the enterprise and the employment of all these
funds.

27
 TYPES OF SOURCE DOCUMENTS
Documents used to record the business transactions include the following:

1. Quotation - A business makes a written offer to a customer to produce or

deliver goods or services for a certain amount of money.
2. Sales order - A customer writes out or signs an order for goods or services he
requires.
3. Purchase order - A business orders from another business goods or services,
such as material supplies.
4. Goods received note - A list of goods that a business has received from a
supplier. This is usually prepared by the business’s own warehouse or goods
receiving area.
5. Goods despatched note - A list of goods that a business has sent out to a
customer.
6. Statement - A document sent out by a supplier to a customer listing all invoices,
credit notes and payments received from the customer.
7. Credit note - A document sent by a supplier to a customer in respect of goods
returned or overpayments made by the customer. It is a ‘negative’ invoice.
 Journals: PRJ (Original), SRJ (Duplicate)
8. Debit note - A document sent by a customer to a supplier in respect of goods
returned or an overpayment made. It is a formal request for the supplier to issue
a credit note.
9. Remittance advice - A document sent with a payment, detailing which invoices
are being paid and which credit notes offset.
10. Receipt - A written confirmation that money has been paid. This is usually in
respect of cash sales, e.g. a till receipt from a cash register.
 Journals: CRJ (Duplicate), CPJ (Original)
11. Invoices -

An invoice relates to a sales order or a purchase order.

 When a business sells goods or services on credit to a customer, it sends out an

invoice. The details on the invoice should match the details on the sales order.
The invoice is a request for the customer to pay what he owes.

 When a business buys goods or services on credit it receives an invoice from the
supplier. The details on the invoice should match the details on the purchase
order.

28
  Journals: PJ (Original), SJ (Duplicate)

12. Cheque Counterfoil – The business purchases/pays with a cheque NOT cash.

 Journal: CPJ (Original)

13. Petty Cash Voucher

 Journal: Petty Cash Journal (Original)

14. Copy of loan agreement – take out a loan.

 Journal: CRJ (signed copy)

15. Investment – make an investment, source document is a receipt.

 Journal: CPJ (Original)

16. Any other transactions that do not belong in any journal go to General Journal
and the source document is NARRATION.

17. Pay wages CASH (not with a cheque) – source document is a wage slip
(duplicate).

 Journal: CPJ (duplicate)

Types of Journals:

Cash Journals: Cash Receipts Journal (CRJ)/Cash Payments Journal (CPJ)

Credit Journals: Purchases Journal (PJ)/Sales Journal (SJ)

Credit returns/overpayment Journals: Purchases Returns Journal (PRJ)/Sales

Returns Journal (SRJ)

Other Journals: Petty Cash Journal (PCJ)/General Journal (GJ)

29
CHAPTER 4

Fundamentals of Accounting as a System

Goal:

At the end of this chapter, the student must understand the accounting system.

Study objectives:
After attending lectures and studying the notes, the student must be able:

1. To know the following facts:

a) The primary output of the accounting process is a Statement of Financial
Position at the end of a given period and a Statement of Comprehensive Income
for a given period.
b) The input for the accounting process originates from source documents, which
must be completed for every transaction between the business and other
parties.
c) The accounting process is based on the accounting equation, which is a logical
expression of:
ASSETS = OWNER’S EQUITY + LIABILITIES
d) Assets are the items of value over which the business exercises control.
e) Liabilities are the claims, which persons other than the owner(s) have against the
assets.
f) Owner’s Equity is the claim that the owner(s) has against the remaining assets
after repaying the Liabilities.
g) Revenue is income received from the sale of goods or services by the business
h) Expenses are incurred when paying for goods or services, which are not assets,
but are consumed in the process of providing goods or service.

30
CHAPTER 4

Fundamentals of Accounting as a System

A system can only be developed if we know exactly what it should achieve, in other
words we have to know what output the system should achieve. We have already
established that the objective of accounting is to provide information to the owners and
management about the business’s present financial position and its performance. It
is clear that the final objective of accounting is therefore the output required from the
accounting system. This means that the output required should be geared towards the
final objectives.

The Accounting System

4.1 Output
The accounting output required is therefore, to determine the present
financial position and past performance of the business. These are the two
fundamental aspects of the business and each will provide information, which
will assist in estimating the value of the business.
One way of establishing value is to list all the items owned by the business and
attaching a Rand value to these items. If the business owes money to others,
these amounts must be deducted before the net value can be determined.
Another approach of establishing the value is to predict the future financial
benefit that will flow from the business. This can only be done if a statement of
past performance is available.

4.1.1 Present Financial Position

The accounting system must provide information on what the business entity
owns at a given point in time. These possessions are called the assets of the
business. The value of assets could cause a problem, as everybody do not
have the same perspective as to what an item is worth and therefore to
overcome the problem accountants have traditionally used cost as a basis of
determining the financial position. As assets are used and they age, they
depreciate in value and it becomes necessary to deduct amounts for this
purpose, which will result in establishing the true financial position of a
business entity.
It is however important to know that financial position statements is based on
the historical cost of the assets at the time of purchase, less depreciation.
Once the financial position of the business has been established, based on the
historical cost of the assets, it becomes necessary to know who has claims
against these assets. This means that should the business close and all its
assets be sold, to whom the money would go.

31
 The business needs resources to acquire the assets it controls and two entities
provide these resources.
 Firstly there is the owner(s) whose portion of the value of the business is
called Owner’s Equity.
 Secondly there are outsiders who can be anybody from investors, banks
and creditors. Their portion of the value of the business is known as
liabilities.
A business is started at the risk of the owner and therefore the outsiders or
liabilities have first claim on the money invested in the business. The owner
can lay claim to the residual after all the liabilities have been paid.
The financial position is therefore the output that informs users about the
assets held by a business and the persons who have claim against those
assets at a given moment in time, where the owner’s claim is known as the
Owner’s Equity and the outsider’s claim is known as the Liabilities. It is
therefore clear that the performance and position of the business is entirely
isolated from those of the owner and is known as the entity concept.
A statement of present financial position would contain information as indicated
in the example below and may be displayed in a similar form.

Please see Statement of Financial Position skeleton

4.1.2 Past Financial Performance and Results

The accounting system must produce information that indicates how well the
business has performed during the previous period. This period can be
anything from a year to even weekly.
As the information is about the past it is only relevant as an indicator of what
performance may be expected in the future. As we cannot see into the future,
we can only use information and experiences from the past as an indicator to
what may happen in the future. This is therefore important information to
investors, as they are extremely interested in how well their investments will
perform in the future. Past performance is therefore valuable information to
users of accounting information.
One way of determining performance is to take the difference between the
owner’s worth at the beginning of a period and compare it with what they are
worth at the end of the period. This should however not include any additional
32
 capital invested by the owner or any withdrawals made by the owner. The
difference between the beginning and ending owner’s equity is therefore the
profit or loss incurred by the business during the period under consideration.
A statement of performance (Statement of Comprehensive Income) would
contain information as indicated in the example below and may be displayed in
a similar form:

Please see Statement of Comprehensive Income skeleton

Although the two output statements discussed are very short, they provide us
with some valuable information. For example:
 The business made a profit of R2 000.
 The owner had R14 000 invested in the business in the beginning of the
year.
 The business has assets of R20 000.
 The business owes outsiders R4 000.
By using the above information we can derive further information, such as:
The rate of return on investment for the owner’s R14 000 is 14.3%, which
equates to (2 000 ÷ 14 000) x 100. This can be compared with other
investment opportunities available, in order to asses its acceptability. Other
information can also be extracted through analysing the statements but that will
be covered later.

4.2 Input
Once we know what outputs is required, a process must be developed to
achieve the objectives. The process we use will depend on the inputs
available. We know that the objective of accounting is to provide information
about business’s present financial position and performance. To produce
information, we need data, which comes in the form of source documents. The
two statements discussed earlier could have been the result of thousands of
transactions, which took place between the business, other people and other
businesses. One of the fundamentals in accounting is that each transaction
must be recorded on a source document and serves as proof that a transaction
took place. Source documents therefore serves as input data into the
accounting process. Without a source document as proof that a transaction
took place, the accountant cannot make an entry in the books of the business.
Source documents are discussed in more detail later in the course.
33
4.3 Process
We have now established that the statements of position and
comprehensive income are the outputs and the source documents are the
inputs required to produce information. We know what we want and we know
what we have, the question is: How do we get from what we have to what we
want? This can only be done through a process, by which the mass of source
document data is processed into accounting information. To achieve this, a
logical procedure based on a simple mathematical equation is used.
The equation has the assets of the business enterprise as its starting point.
Because a business is not a person and therefore cannot really possess
wealth. The assets used by the business must therefore belong to the two
categories of owners or liabilities. From this we can conclude simply that:
Assets belong to Owner’s equity and Liabilities or differently stated:
ASSETS = OWNERS EQUITY + LIABILITIES

Assets can be anything from Buildings, Vehicles, Construction/Building

Equipment, Construction/Building Materials and Cash in the Bank. It is
therefore possible to define exactly which assets are under the control of the
business. We know that the business is not a person and therefore cannot
really own assets but merely controls it. The assets in fact belong to the people
who invested their resources in the business, that is, the owner(s) and
outsider(s). This relationship is expressed in the mathematical equation A = O
+ L and is the foundation and starting point for developing the recording
process.

4.4 Conclusion
The accounting system can now more clearly be illustrated by means of the
following diagram:

PROCESS
INPUT A=O+L OUTPUT

To conclude, we now know that the accounting system is designed to produce

two financial statements, where the one records the financial position at a
given point in time and the other records the financial performance over a
given period. The only way of producing these statements is by recording all
transactions on source documents and logically processing the data from the
source documents by means of the accounting equation, which relates to the
accounting process.

34
CHAPTER 5

Source documents and Basic Recording of Transaction

Goal:
At the end of this chapter, the student must understand and demonstrate the use of
source documents, as it will be applied in the industry and demonstrate the affect that
any basic transaction has on the accounting equation.

Study objectives:
After attending lectures and studying the notes, the student must be able to do the
following:
1. Recognise documents used in cash transactions.
2. Recognise documents used in credit transactions.
3. Use source documents for cash transactions.
4. Use source documents for credit transactions.
5. Demonstrate the affect that any basic transaction has on the accounting equation.
6. Draft a Statement of Financial Position at the end of a period during which
transactions took place.
7. Draft a Statement of Comprehensive Income for a period during which transactions
took place.

35
CHAPTER 5

Source documents and Basic Recording of Transaction

5.1 Source documents

5.1.1 Cash transactions

Where money is exchanged for goods and services rendered or received, we
talk of a cash transaction. Specific documents are used for recording cash
transactions. A brief explanation and illustrations of the documents used in
practice are as follows:

a) Cash received
Cash receipts, cash register rolls and cash slips are used when money is
received for:
 a service rendered;
 cash sales; or
 when a debtor (accounts receivable) settles his account.
The document used will depend on the nature and size of the enterprise. Some
enterprises will also issue a tax invoice, with the word “CASH” written on and
"PAID" stamped on the invoice. The word "PAID" on the invoice validates it as
a cash slip. This is a combination of the invoice and the cash slip.
The examples below represent source documents for cash received as issued
by the building contractor.

Example 5.1 - The receipt:

RECEIPT/KWITANSIEQ52
4__________________20_________
February 14
L R. Estland
RECEIVED from __________________________________________
ONTVANG van
Six Hundred and Fifty Rand
the sum of _________________________________________________
And
die somtwenty
van sents
_____________________________

ChequeS.T. Bouman
_____________________________
Met dank/With thanks
650-20
R
Building work completed
in payment of __________________________________________
ter betaling van

36
RECEIPT/KWITANSIEQ52
4__________________20_________
February 14
L R. Estland
RECEIVED from __________________________________________
ONTVANG van
Six Hundred and Fifty Rand
the sum of _________________________________________________
And
die somtwenty
van sents
_____________________________

CashS.T. Bouman
_____________________________
Met dank/With thanks
650-20
R
Building work completed
in payment of __________________________________________
ter betaling van

37
Example 5.2 - The personalised cash slip:

10 May 14

5m2 Lay Paving R70 350 00

3m2 Plaster wall R76 228 00
578 00
VAT @ 14% 80 92
Total R658 92

38
 10 May 14

5m3 Building Sand R70 350 00

3m3 Plaster Sand R76 228 00
578 00
VAT @ 14% 80 92
Total R658 92

39
Example 5.3 - The cash role slip:

b) Cash payments
Before we can look at cash payments, we should first look at the medium that
is used to make cash payments.
i) Paper money and coins.
The currency used in South Africa is the Rand (R) and cent (c). This
system is based on a metric system where there is a hundred cents in one
Rand. In order to pay somebody for goods or services rendered we can
pay by using physical Rands and cents.
ii) Cheques (Not used actively anymore)
To make payments by cheque, you first have to open a cheque account at
a commercial bank and make a deposit of physical money, which will be
kept at the bank. In order to use the money in the bank to pay for goods or
services, the account holder can write out a cheque, go to the bank and
withdraw the amount needed for the payment. S/he could also write out a
cheque in the name of the person to whom payment is due, give the
cheque to that person, who will go to the bank, present the cheque to the
bank teller and withdraw the money from the bank.
From the above we can deduce the following:
 A cheque is an instruction from the account holder (drawer) to the bank
where the account is held to release money from the account holder’s

40
 account to the person who presents the cheque at the bank or to the
person whose name appears on the cheque.
 To make a payment using a cheque, you must have more money in
the bank than the amount stipulated on the cheque. Writing out a
cheque without sufficient funds in the bank is a criminal offence and is
fraud.
To make sure that the person, whose name appears on the cheque,
actually receives the money, we secure or cross the cheque. This means
that the cheque is secured and that nobody but the person whose name
appears on the cheque can benefit from it. For security reasons banks
require that all cheques, except cash cheques, should be crossed.
Payments by cheque may include both operating expenses and capital
expenses.
To cross a cheque, two parallel lines are drawn on the cheque and by
writing “Not Transferable” or “Not Negotiable” between the lines. This can
also be stamped on the cheque.

Example 5.4 – Secured and Cash Cheques issued by the business:

7 July14 20 7 JulyNATIONAL
LAST 2014 BANK South Africa Ltd Date
Registered Commercial Bank Datum
African T
PAY / NEWTONPARK
Materials
FOR African Timbers
PAY AL Or bearer
of toonder
Balance b/f
the sum of dieThousand Three Hundred and Twenty
Seven
Deposit som van

Balance Rand and fifteen cents - only R7320 – 15

7320.15
This Cheque
FOR/VIR MMWC CONSTRUCTION CC
Classic Cheque/-tjek
L Manners
Balance c/f

0651 ||0651 |: 050717|: 080458978

Crossed Cheque

7 July14 20 7 JulyNATIONAL
LAST 2014 BANK South Africa Ltd Date
Registered Commercial Bank Datum
Cash
PAY / NEWTONPARK
Wages
FOR Cash
PAY AL Or bearer
of toonder
Balance b/f

Deposit
Seven Thousand Three Hundred and Twenty
the sum of
die som van

Balance
Rand and fifteen cents - only R7320 – 15
7320.15
This Cheque
FOR/VIR MMWC CONSTRUCTION CC
Classic Cheque/-tjek
L Manners
Balance c/f

0652 ||0652 |: 050717|: 080458978

Cash Cheque

41
Example 5.6 - Cheques Received by the Business:

LAST NASIONAL BANK South Africa Ltd Date 2 / 10 / 2014

Registered Commercial Bank Datum
/ NEWTONPARK
PAY AL Or bearer
MMWC Construction of toonder

Four Thousand Rand only

the sum of
die som van

4000-00
L. Poppitoplis
Classic Cheque/-tjek
L. Poppitoplis
||0252 |: 050717|: 090549971

Secured cheque

LAST NATIONAL BANKSouth Africa Ltd Date 2 / 10 / 2014

Registered Commercial Bank Datum
/ NEWTONPARK
PAY AL Or bearer
Cash of toonder

Four Thousand Rand only

the sum of
die som van

4000-00
L. Poppitoplis
Classic Cheque/-tjek
L. Poppitoplis
||0252 |: 050717|: 090549971

Cash cheque

42
 iii) Bank Deposits
In order to start a bank account and continue to operate the account we
need to deposit money in that account. For this purpose we use a bank
deposit slip. These forms are available from the bank where the account is
kept.

j) EFT (Electronic Fund Transfer)

EFT’s have become the chosen method of making payments as this
cuts out a lot of risks and work to make payments or receive money
from customers

43
Example 5.7 - The Bank Deposit Slip:

10 May 2014 X

MMWC Construction CC
08 0458978

5 x 5000
7 x14000
10 x50000
7 x70000
12 x240000

00

381500
L.R. Estland511-258 65020
Z. Masheko258-369 6 85030

R11 31550
L. Manners
041 367 2369

L. Manners

44
 iv) Petty Cash voucher
The petty cash voucher has a similar function as the cheque, however, in
this case the request for money is to the petty cashier.

Example 5.8 - The Petty Cash voucher:

8 April 2014

L. Samson – Coffee and

Sugar 25 17

L Samson
N 25 Refreshments
L Manners

v) Credit cards
Cash sales may also take place by means of credit cards. The bank pays
the supplier and the customer pays the bank. This transaction is regarded
as a cash transaction, as the bank pays the supplier in cash and the
customer owes the money to the Bank in either the form of an overdraft or
short-term loan.

45
Example 5.9 - The Credit Card voucher

vi) Garage or Petrol card

Another variation from this is the Garage or Petrol cards. This was
introduced to replace credit cards in the purchasing of fuel and payment for
all other vehicle expenses. The amount charged is electronically deducted
direct from the bank account.

Example 5.10 - The garage or petrol card slip:

46
 All cash transactions are recorded in the bank account or cashbook and petty
cash book. We will deal with this later.

vii) Internet Banking

Internet banking can also be used to pay or receive payment. Internet banking
can also be referred to as Electronic Funds Transfers (EFT). Internet banking
is cheaper and convenient than going to the actual bank.

5.1.2 Credit transactions

Accounts are opened in subsidiary ledgers (accounts receivable ledger and
accounts payable ledgers) for customers (accounts receivable) and suppliers
(accounts payable).

a) Credit sales
By supplying goods or services on account, an enterprise increases its
turnover. Credit sales, however, also involves the risk of not recovering the
amount owing. This method of trading accounts form the bulk of transactions
between manufacturers, distributors and retailers.
On concluding a transaction, a Credit Invoice is issued and serves as a
confirmation of the credit transaction that took place.
i) From the Builder’s perspective, at least three copies of an invoice are
processed that are distributed as follows
 The first goes to the client.
 The second is kept on file at head office for reference purposes.
 A third copy may be filed on site.
ii) From the Supplier / Building Merchant’s perspective, at least three
(there can be more) copies of an invoice are processed of which some
serves as Delivery Notes. The distribution of copies is as follows (different
systems are used depending on the size and the needs of an enterprise):
 The top copy is given to the customer.
 The second copy is used for recording sales in the Sales Journal; and
 The third copy is filed in number sequence for reference purposes and
used to update stock records. It may also serve as a delivery note,
which is signed and returned to the supplier.
 A fourth copy serves the same purpose as the third but the signed
copy is left with the customer.
These copies are often printed in different colours.
Accounting and stock recording are two independent functions and it is
sometimes necessary to separate the Credit Invoice and Delivery Note
from each other. In this case a separate Delivery Note in triplicate is used.
The following procedure is used in its distribution:

47
  All three copies accompany the load to be delivered. On delivery the
customer check the goods received and sign all three copies.
 The first copy is left with the customer.
 The second is returned to the supplier’s office as proof of delivery and
used to record the Credit Invoice.
 The last copy is filed in number sequence for reference purposes and
to update stock records.
In return, the customer will follow the procedures that are described in
paragraph b) below. The sale recorded on a Credit Sales Invoices is recorded
in the Sales Journal.

Example 5.11 - The credit invoice sent out by the builder:

MMWC Construction
TAX INVOICE
M. Sanders
MW268925/5/2014

250m2Beveled edge paving in

herring-bone pattern R60/m 15000 00
2

L. Manners15000 00

48
Example 5.12 - The Delivery note received by the builder:

Coastal Brick & Blocks

MMWC Construction
SS1589 20/5/2014

12500 Beveled edge paving bricks

K Mama
17 Dias Street, Walmer, PE
L Manners

b) Credit purchases
A credit purchases invoice is proof of a credit purchase transaction. The
objective of the enterprise (builder) should be to sell the goods and recover the
money in as short a time as possible and, where possible, even before the
supplier is paid.
Upon receipt of goods, the enterprise will issue a goods received voucher (or
notes) (GRV or GRN). It is an in-house document processed in response to the
supplier's delivery note. GRV do not affect the accounting process, but are
used to update the stock records in the stores.
The supplier will process three copies in their accounting/administration
division of which the top copy is given to the customer.
One of the procedures to be followed by the purchasing enterprise is as
follows:
 Enter the invoice number in a register. The purpose of this register is to
allocate the enterprise's own number to the supplier's invoice. Suppliers'
invoices are then entered in number sequence in the purchases/creditors
journal
 Match the invoice with the delivery note (and copy of the GRV or GRN);
and
49
  Record the transaction in the Purchases Journal.

Example 5.13 - The credit invoice received by builder

Coastal Brick & Blocks

TAX INVOICE
MMWC Construction

SS158925/5/2014

12500Beveled edge paving

bricks 60c/ea 7500 00

L. Manners7500 00

c) Statements for the payment of accounts

The payment of an account will take place after receiving a statement from a
supplier. This statement supplies details of credit transactions.
In an open item system all unpaid invoices will be listed on the statement. In a
brought forward system, the balance outstanding at the end of the previous
month is shown as the opening balance, followed by details of all transactions
(invoices and receipts), which took place during the current month.
The normal period for the settlement of an account is 30 days. If payments on
statements are outstanding for 60 days and more, interest will be charged at
the prime bank lending rate plus 3%.
The Purchases Journal is used to record credit purchases invoices.

50
Example 5.14 - The Statement

MMWC Construction
PO Box 1289
Walmer
Port Elizabeth
6070
5 30 September 2014

Credit sale
05/09/2014 TYJ258 3745.00 3745.00
12/09/2014 TYJ856 1765.00 5510.00
17/09/2014 TYK102 750.00 6260.00
Payment received
25/9/2014 Rec2681 3000.00 3260.00

51
 Exercise 5.1
Date: 25 September 20x1.
a) You are the owner of MMWC Construction and have just completed construction
work for Mrs L Poppitoples of 25 Sunset Crescent, Summerstrand in Port Elizabeth.
She will pay you with a cheque on completion of the following work:
 Repair roof to main house R1 200.
 Install 5m new gutters @ R40 per m.
 Repair garden wall 8m x 1.8m @ R350 per m².
 Lay 60m² new paving @ R90 per m².
 Remove a tree stump for R650.
Complete the following cash invoice as proof of the transaction.
b) If your client should pay you in hard cash, she would have no proof that payment
was made on the work done.
Fill out the receipt on the next page to hand to the client as proof of payment for the
work done.

52
 RECEIPT/KWITANSIE25
__________________20_________
RECEIVED from __________________________________________
ONTVANG van
the sum of _________________________________________________
die som van
_____________________________

_____________________________
Met dank/With thanks

in payment of __________________________________________
ter betaling van

Exercise 5.2

Date: 25 September 20x1.

Assume the same work as in Exercise 5.1 was done on credit for Ms L. Poppitoplis:

a) Complete the credit invoice as proof of the transaction.

b) At the end of the month (30 September 20x4), complete the attached statement, to

be sent to her as reminder of her debt.

c) On 2 October you received the following cheque from the client. At the end of
October 20x4, you send out another statement as a reminder of the remainder of the
debt on her account. Use the second statement for this purpose.

LAST NASIONAL BANK South Africa Ltd Date 2 / 10 / 20x1

Registered Commercial Bank Datum
/ NEWTONPARK
PAY AL Or bearer
MMWC Construction of toonder

the sum of
die som van Six Thousand Three Hundred Rand only
6300-00
L. Poppitoplis
Classic Cheque/-tjek
L. Poppitoplis 53
||0252 |: 050717|: 090549971
54
55
56
 Exercise 5.3
To complete the Job in Exercise 5.1 and 5.2 you had to pay wages, buy materials and
pay for other expenses. You have the following documentation at your disposal.
a) Purchase materials for cash and received the following document.

TAX INVOICE

57
b) Purchase materials on credit and received the following documents.
TAX INVOICE

TAX INVOICE

58
TAX INVOICE

TAX INVOICE

59
TAX INVOICE

60
61
62
c) The following wages were calculated during the project:

Pay period 1 (1/9/2001 – 15/9/2001)

M. Mentoor - Foreman = 8Hrs x 10 Day @ R18.75 per hr. (Paid by cheque).
T Mama - Mason = 8Hrs x 10 Days @ R11.25 per hr. (Paid cash).
V Kona – Carpenter = 8 Hrs x 9 Days @ R11.25 per hr. (Paid cash).
L. Vutha – Labourer = 8 Hrs x 10 days @ R7 per hr. (Paid cash).
S. Mamela – Labourer = 8 Hrs x 8 days @ R7 per hr. (Paid cash).
R Le Roux – Labourer = 8 Hrs x 10 days @ R7 per hr. (Paid cash).
M Darries – Labourer = 8 Hrs x 7 days @ R7 per hr. (Paid cash).

Pay period 2 (16/9/2001 – 30/9/2001)

M. Mentoor - Foreman = 8Hrs x 9 Day @ R18.75 per hr. (Paid by cheque).
T Mama - Mason = 8Hrs x 8 Days @ R11.25 per hr. (Paid cash).
V Kona – Carpenter = 8 Hrs x 9 Days @ R11.25 per hr. (Paid cash).
L. Vutha – Labourer = 8 Hrs x 10 days @ R7 per hr. (Paid cash).
S. Mamela – Labourer = 8 Hrs x 10 days @ R7 per hr. (Paid cash).
R Le Roux – Labourer = 8 Hrs x 10 days @ R7 per hr. (Paid cash).
M Darries – Labourer = 8 Hrs x 6 days @ R7 per hr. (Paid cash).

d) The following non contract related invoice was received:

Tax Invoice for MMWC Construction Telkom

The Manager
MMWC Construction
PO Box 1289
Walmer
6070

Amount due now R418.80

This invoice Amount before or on 7 Oct 2001 418.80
Previous invoice Paid I full, thank you 0.00

This invoice
Rent Your line(s) 48.75
Previous invoice Paid I full, thank you 121.62
Telephone Book Advertisement(s) 197.00
VAT R367.37 at 14% 51.43
Total R418.80

Previous invoice
Balance C/F Amount 333.88
Payments Received on 5 Sept 2001 (Rec. 3404) 121.62

63
 Total R0.00

e) Other expenses were as follows:

 There was no money in the Petty Cash box on 1 September 2001. You require an
average of R700.00 per month to operate the Petty Cash.
 Bought petrol for the bakkie and paid out of Petty Cash; 2 Sept 2001 –R138.00;
9 Sept 2001 – R145; 16 Sept 2001 – R112; 23 Sept 2001 – R131; 30 Sept 2001 -
R142.

Required:
 Replenish the amount required for petty cash with a cheque drawn on
1 September 2001.
 Write out the cheques for all cash expenses on the dates they occurred and on the
7th of October 2001 write out the remaining cheques for all the credit transactions as
cumulated at the end of the month. Use the cheque forms on the following page.
 The pay dates for wages were 17 September 2001 and 2 October 2001. Note that
M. Mentoor is paid with cheques and all the others workers are paid with cash.
 Make out all the petty cash vouchers on the dates as indicated above.
 Write out a cheque to replenish the Petty Cash account so that it is back to R700 on
the 30th of September 2001.

64
 20 LAST NASIONAL BANK South Africa Ltd Date
Registered Commercial Bank Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0651 ||0651 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd

Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0652 ||0652 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd Date

Registered Commercial Bank Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0653 ||0653 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd

Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0654 ||0654 |: 050717|: 080458978

65
 20 LAST NASIONAL BANK South Africa Ltd
Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0655 ||0655 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd

Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0656 ||0656 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd

Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0657 ||0657 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd Date

Registered Commercial Bank Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
20 LAST NASIONAL BANK South Africa Ltd Date FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek
Registered Commercial Bank Datum CONSTRUCTION CC
PAY / NEWTONPARK
0658 PAY|:AL
||0658 050717|: 080458978 Or bearer
FOR of toonder
66
Balance b/f
the sum of
Deposit die som van

Balance
 FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0659 ||0659 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd Date

Registered Commercial Bank Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0660 ||0660 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd

Registered Commercial Bank
Date
Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0661 ||0661 |: 050717|: 080458978

20 LAST NASIONAL BANK South Africa Ltd Date

Registered Commercial Bank Datum
PAY / NEWTONPARK
PAY AL Or bearer
FOR of toonder
Balance b/f
the sum of
Deposit die som van

Balance

This Cheque
FOR/VIR MMWC
Balance c/f
Classic Cheque/-tjek CONSTRUCTION CC

0662 ||0662 |: 050717|: 080458978

67
68
69
70
71
 Exercise 5.4

Date: 10 October 20x1

You are MMWC Construction and conduct business from 39 Selby Street Humewood
Port Elizabeth. You keep a cheque account at the Summerstrand Branch of Last
National Bank. Your account number is 20 001 2369. You have the following cheques
and cash that you received for contract work done during the week.

Cheques from:
Drawers name Amount Branch code
L. Poppitoplis R6 300 369-982
S. Mama R2 630 368-636
A. Emsly R12 369 125-124
L. Poppitoplis R4 200 369-982
X. Zintho R9 658 258-634
M. Jones R5 000 258-634

Cash on hand:
R10 x 25
R20 x 15
R50 x 15
R100 x 50
R200 x 42
R5 x 10
R2 x 15
R1 x 9
50c x 55
20c x 38
Use the Deposit slip on the next page and fill it out in order to deposit the cheques and
the cash in your possession.

72
73
ACCOUNTING EQUATION
5.2 The basic recording of transactions using the equation
The basic recording of transactions using the accounting equations is
illustrated in the following example:

Example 5.15 (USE LECTURERS FORMAT)

Mike Collins decided to start a construction enterprise called MMWC
Construction. He has the following at his disposal:
 A bakkie valued at R25 000; and
 R50 000 in his personal bank account.
He has the following transactions for which he has source documents as
indicated in brackets and which, happened in March 2000.
1. Opened a bank account in the name of MMWC Construction and deposit
R50 000. (Original Bank Deposit slip).
2. The bakkie is taken up in the businesses books at a value of R25 000.
(Duplicate Receipt)
3. Obtained a premises from were to operate and paid rent of R1 500 (EFT)
4. Purchased scaffolding, trestles and wheelbarrows for R3 000. (Original
receipt or Cash slip or EFT)
5. Purchased building materials on credit from Penny Pinchers for R32 000.
(Original Invoice)
6. Purchased fuel and oil on credit from La Roche Motors for R2 500.
(Original Invoice)
7. Received a cheque of R 17 500 for building a garden wall at a cost of
R12 000 (Duplicate cash Invoice and receipt)
8. Built a garage on credit for A Small to the value of R30 000 and at a cost of
R20 000. A Small will pay in April 2000 (Duplicate Invoice)
9. Paid R7 000 cash for construction wages for the month (Cash/Wage slip)
10. Paid the fuel and oil account in full R2 500. (Cash)
The above nine transactions is but a fraction of the types and number of
transaction that a business will enter into during the month. The accountant
now has the source documents or inputs and must produce the outputs, which
is the Statement of Financial Position at the end of March 20x1 and the
Statement of Comprehensive Income for March 20x1.
The process is to record the impact of each transaction on the accounting
equation.

74
Answer is as follows:
Transaction 1: Deposit capital (money)

The business entity now has R50 000 under its control. Should the business
close down at this stage then Mike would has a claim of R50 000 against the
business. Therefore the business owes Mike R50 000.
Transaction 2: Deposit capital (vehicle)

As with the money, the business entity now also has the bakkie valued at
R25 000 under its control. Should the business close down at this stage, then
Mike would have a claim of R75 000 against the business. Therefore the
business owes Mike R50 000 and the bakkie.
Transaction 3: Paid rent

An expense was incurred when payment was made for items that are not
assets. This means the business incurred a loss and because the owner is at
risk for all losses or profits of the business, the result is a reduction of the
owner’s equity. Should the business close down at this stage, Mike would have
suffered a loss and now has a claim of only R73 500 against the business.
Transaction 4: Purchase Building Equipment by cheque

The comment you might want to make at this stage is: “But there was no
change!” That is true and it could be somewhat difficult to understand. Well, if
you look carefully what happened you will see that an asset has been
purchased and all that in fact happened was that we exchanged one asset
(cash) for another (building equipment). Should the business close down at this
75
stage the business will still control R73 500 worth of assets and Mike will still
have a claim of R73 500 against the business.
Transaction 5: Purchase Building Materials on credit

The assets increase by R32 000 because; if the materials are to be resold it is

seen as an asset to the business until such time as it is sold and only when the
materials are resold it becomes an expense to the business. The business has
however incurred a debt and now owes R32 000 to Penny Pinchers, who is
referred to as a Creditor. The business now control R105 500 worth of assets
but Mike still only have a claim of R73 500 against the business, because an
outsider (Penny Pinchers) has a claim against the remaining R32 000.
Transaction 6: Purchase Fuel and oil on credit

The assets remains unchanged; that is if the materials purchased has no value
for resale but can be used in the business. The assets therefore are still worth
R105 500. However, the business has incurred an expense, which reduces the
owner’s equity and also a creditor to whom R2 500 is owed. The business still
controls R105 500 worth of assets but Mike now only have a claim of R71 000
against the business, because two outsiders’ (Penny Pinchers and La Roche
Motors) has claim against the remaining R34 500.

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Transaction 7: Receive cash from a client

You will see that the assets has increased by R17 500 but at the same time
decreased by R12 000. The same has happened to the owner’s equity. You
might want to ask what has happened, and the answer is simple. The assets
has increased because the business received money but had to use some
building material (assets) to build something (the garden wall) that could be
sold. The building materials were therefore consumed by building the wall, it
disappeared into the wall and if something disappears it is seen as a loss and
therefore resulted in an expense. Although the money received were R17 500
and the expense R12 000 it still left R5 500 profit, which belongs to Mike, who
now have a claim of R76 500 against the business, The two outsiders’ claim
against the business remains at R34 500.
Transaction 8: Building work on credit

This transaction is almost identical to the previous one with one difference and
that is the client has not yet paid the business for the work done. The money
owed by the client, although not in the businesses bank account, is still real
and therefore it is seen as an asset in the hands of the client. A client who
owes money to the business is called a Debtor. The increase and decrease in
assets and owners equity are for the same reasons as given in transaction

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seven above. The money owed by the debtor is R30 000 and the expense in
earning the money was R20 000. This still leaves Mike with R10 000 profit.
Mike now has a claim of R86 500 against the business while the two outsiders’
claim against the business remains at R34 500.
Transaction 9: Paid construction wages

The assets reduce as money is removed from the bank account in order to pay
for an expense, which reduces the owner’s equity. This means Mike now has a
claim of R79 500 against the business while the two outsiders’ claim against
the business remains at R34 500.

Transaction 10: Paid the fuel and oil account

The assets reduce as money is removed from the bank account in order to pay
a debt, which reduces the liabilities. This means Mike still has a claim of

78
 R79 500 against the business while only one outsider now has a claim of
R32 000 against the business.

5.3 The information generated by the process

Once the transactions have been processed using the logic of the accounting
equation, it is possible to organise the results into meaningful information. The
information should reveal the financial position at a given point in time and the
financial performance for the period under review.

5.3.1 Financial Position

The following Statement of Financial Position can now be drafted:

You will find that Mike started the business with R75 000 and ended up with
R79 500. This means his claim against the assets of the business has
increased by R4 500.

5.3.2 Statement of Comprehensive Income (Financial Performance)

In order to compile a summary of performance for the month needs a little
more analysis. To draft a Statement of Comprehensive Income we need to
deduct all the decreases (expenses) from all the increases (income) for the
period. The difference between them is either a profit (a positive figure) or a
loss (negative figure). In this case it is positive by R4 500.
Remember not to include additional capital deposited by the owner or
withdrawn from the business into the equation. As this does not form part of
the profit calculation it would be treated as an increase or reduction of capital
invested.
These calculations also do not take care of issues such as unused fuel and oil
and depreciation expenses on vehicles and equipment. However, these
adjustments will be dealt with later and at this stage will be left out, to keep the
transactions simple.

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 Exercise 5.5
Mr. B. Machesa starts a construction enterprise by the name of Finer Homes and starts
operating on 1 March 20x4.

The following transactions are recorded on the following dates:

March 20x4
1 Machesa Deposited R100 000 in the bank account of the business as capital.
2 Paid the Office rent by EFT, R500.
5 Purchased a 1-ton bakkie for R20 000 and pay by EFT.
6 Bought a plate compactor from Parker's Plant Hire and receives an invoice for
R3 500.
10 Paid back R1 500 of the account with Parker's Plant Hire.
15 Bought a computer and printer from Computer Concept on account for R8 500.
17 Received and invoice from NMM for the water and electricity R250.
25 Deposited a further R20 000 as capital.
27 Wrote out a cash cheque of R7 760 for site wages.
31 Mr Machesa drew cash of R3 000 as salary for himself.

Required:
Record all the transactions and demonstrate their influence on the accounting equation.
Prepare a Statement of Financial Position and a Statement of Comprehensive Income
on 31 March 20x4.

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 Exercise 5.6
Mr. B. Van der Wielen and Mr T.O. Small starts a construction firm by the name of Two-
Wheels Construction and starts operating on 1 July 20x4.

Details of transactions recorded are as follows:

July 20x4
1 Van der Wielen and Small each deposited R75 000 in the new bank account of the
business
1 Paid the office rent for the month by EFT, R750.
2 Paid Vodacom R275 cash for a cell phone recharge-card.
5 Purchased a 1-ton bakkie from City Motors for R40 000 and made an EFT
payment for R10 000 as a deposit.
6 Bought a concrete mixer for R6 500 and a plate compactor for R2 500 from
Parker’s Plant Hire and receive a credit invoice.
8 Purchased Building materials from Penny Pinchers on credit for R3 000.
10 Paid R3 500 per EFT on their account with Parker’s Plant Hire.
15 Bought a computer and printer from Computer Concept on account for R4 500.
18 Repaired a roof for Mr T Vutha at a cost of R2 500 and received an EFT payment
of R8 500.
21 Purchased Building materials from Penny Pinchers and paid cash for R4 400.
25 The owners each deposited a further R25 000 as capital.
27 Drew a cash cheque of R10 800 for site wages.
31 Van der Wielen took an amount of R2 500 cash as salary for himself.
31 Completed 150m² of paving on credit for S. Nake at a cost of R3 500 and issued
an invoice at R71 per m². Paving bricks left over on site was soled to S. Nake for
R500 and he paid for it by EFT.
31 Settled the account with Computer Concept by paying them the full amount of
R4 500 per EFT.
31 Sold the plate compactor to AC&M Construction and received an EFT for R2 700.
31 Small made an EFT payment of R500 to pay his personal telephone account.

Required:
Record all the transactions and demonstrate their influence on the accounting equation.
Prepare a Statement of Financial Position and a Statement of Comprehensive Income
on 31 July 20x4.

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 Exercises 5.7

The following transactions relate to March 2021. Mr F Strongs started his own business
called BKO Building. The business will use a mark-up of 40% on cost price.

1. The owner contributes R250 000 as his capital contribution to start the business.
4. BKO Buildings buys a second hand bakkie for R120 000 cash to use on all the
building sites for building projects starting this month.
7. BKO buildings bought a cement mixer and 4 wheelbarrows from TGH Suppliers
on credit, R18 000.
9. The business purchased building materials from EC Sand and Stone on account
for R12 000.
12. Paid the water and electricity account for the month, R2450.
15. Filled the bakkie with diesel and paid with a debit card, R800.
16. Build a garage for a customer, Mr S Bongani and send him an invoice for ?. The
cost of the material used was R18 000.
20. The business took out a loan from DFG Financial solutions for future expansion
to the value of R200 000.
23. The owner took material out of the store room for personal use in his garden.
The selling price of the material is R2 100.
24. Settled our account with TGH Suppliers.
26. A debtor, Mr D Fick, who owes the business R25 000 has become insolvent. His
estate confirmed that BKO Building receive 75 cents in every rand owed by Mr
Fick. The remaining balance must be written off as irrecoverable.
29. Build a garden wall for a customer, Ms F Diba. She paid for the work completed
in cash, R18 200. The cost price of the goods was R?.
31. Paid the weekly wages, R7 500.

Required
Use the attached addendum and complete the transactions in the accounting equation
for March 2021.

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 Exercise 5.8

The following transactions relate to March 2020. Mr T Yeye started his own business
called Yebo Building which will operate within the NMB area. The business uses a mark-
up of 25% on cost price.

1. Mr Yeye donated the following as part of his capital contribution:

 R250 000 in cash
 A vehicle worth R75 000
 A laptop worth R8 500

2. Mr Yeye purchased material from SDL suppliers that he will use in completing
building projects for different customers on credit for R35 000.
3. Bought equipment for cash from FDG Suppliers, R56 000.
4. Yebo Building took out a loan from ABSA bank. The loan was worth R200 00 and
interest on the loan would be 8% per annum
5. Build a boundary wall for Mrs Saunders and gave her an invoice for R24 000. The
cost of the material is R??.
6. Mr Yeye took some material to build a garden path at home. The goods would
have been sold for R3 000.
7. Cashed a cheque to pay the weekly wages of contract workers on site, R6 000.
8. Paid the water and electricity and telephone accounts of R300 and R950
respectively.
9. Paid half of the amount owing to FDG suppliers.
10. Build a bathroom for Mr Goolam at his holiday home and send him an invoice for
R???. The cost of the material used was R64 000.
11. You receive a letter from the lawyers of Mrs Saunders. She has gone into
liquidation and can only pay 60c in every rand owed to Yebo Building. The
remainder of her debt must be written off as irrecoverable. Payment was received
on the same day.
12. Received a payment from Mr Goolam of R30 000 as partial settlement of his
debt.
13. Donated R5 000 to a local charity in support of sheltered animals.

Required
Use the attached addendum and complete the transactions in the accounting equation
for March 2020.

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85
CHAPTER 6

The Fundamentals of the Recording Process

Goal:

At the end of this chapter the student must understand the most frequently used
terminology in the accounting process and the use of the ledger account.

Study objectives:
After attending lectures and studying the notes, the student must be able:

1. To know the following facts:

a) Transactions are recorded in Ledger accounts.
b) Adjusting entries are recorded in the Ledger accounts.
c) The left hand side of an account is called the debit side and the right hand side
is called the credit side.
d) Accounts are balanced by finding the difference between the debit and the credit
sides.

2. To do the following:
a) Enter transactions and adjusting entries correctly into the three primary accounts
used thus far, namely the Asset account, the Owner’s Equity account and the
Liabilities account.
b) Find the Balance of an account.

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CHAPTER 6

The Fundamentals of the Recording Process

In this chapter you will be introduced to the most frequently used terminology applicable
to the accounting process. You will be introduced to the General Ledger, which serves
as source for a summarised accounting information. This is the second conceptual step,
which must be taken before being able to record accounting data.

6.1 The Ledger Account

The focus of the previous chapter was on the positive or negative effect of
transactions on all three elements in the accounting equation. We have seen in
the previous chapter how transactions increase (+) or decrease (-) the amount
in the elements if affected by a transaction. You might have found that it
became quite difficult to keep track of records especially those that were not
sales or purchases. To overcome this problem the recording process was
modified and accounts were introduced. This however led to terminology not
used in everyday conversation. To explain the process we will use the Assets
element of MMWC Construction as given in the preceding chapter.
At the end of the month the Assets element of MMWC Construction appeared
as follows:

As mentioned previously this method of recording data is not very suitable for
displaying information. To give the recording of data in the Ledger a more
structured approach, we use accounts.

87
In accountancy we refer to the above format of a Ledger account as a T-
account. Notice the name of the account above the T-bar. This is to ensure
that the data entered is allocated to the correct account.
Let us again look at the Assets element of MMWC Construction but this time
record the data in a T-account. To deal with increases (+) and decreases (-)
the entries in the Assets can be allocated to the two sides of the Assets
account, the left-hand side for increases and the right-hand side decreases as
follows:

This is the simple form of a traditional Ledger account. A Ledger is a book in

which the pages have been divided down the middle and lineated in a special
way to facilitate complete and systematic recording of information such as the
date, details of the transaction, folio number and the amount. Such data are
very important and are entered into separate columns, each intended for that
specific piece of information. The following is an example of a Ledger book
page:

88
 The principle of using accounts can be applied to all three elements of the
accounting equation as follows:

The above is known as the Accounting Model (three accounts Ledger) and
from now on you will analyse all transactions based on the above model.
Assets, liabilities and Capital are balance sheet/real accounts while income
and expenses are nominal accounts.
One very important aspect of the Accounting Model is that assets increase on
the left-hand side and decrease on the right-hand side. While the remaining
two elements (Owner’s Equity and Liabilities) on the other side of the equal
sign, decrease on the left-hand and increase on the right-hand side.

6.2 Recording transactions using the three accounts Ledger

The following section will illustrate how the accounting model is used and the
accounting principle is applied. For this purpose we will use the same
transactions as discussed in the previous chapter.

Transaction 1: The owner open a bank account in the name of MMWC

Construction and deposit R50 000

The assets of the business entity have increased to R50 000 and the owner’s
claim against the business has increased to R50 000.
Note that an entry has been made on the left-hand side of the Assets account
and an entry has been made on the right-hand side of the Owner’s equity
account.

Transaction 2: Hand the bakkie over to be used in the business enterprise.

89
As with the money deposited in the bank account of the business entity, the
bakkie also increases the assets but in this case by R25 000. The owner’s
claim against the business has increased to R75 000.
Note that an entry has been made on the left-hand side of the Assets account
and an entry has been made on the right-hand side of the Owner’s equity
account.

Transaction 3: Paid rent for the month by cheque R1 500.

An expense has been paid, this means the assets has decreased and
therefore the owner has R1 500 less that he can claim against the business.
The business now only has R73 500 worth of assets available.
Note that an entry has been made on the right -hand side of the Assets
account and an entry has been made on the left-hand side of the Owner’s
equity account.

Transaction 4: Purchase Building Equipment and pay by cheque R3 000.

An asset has been purchased and therefore we exchanged one asset (cash),
which decreases, for another asset (building equipment), which increases.
Note that an entry has been made on the left-hand side and right-hand side of
the same account. It is important to realize that no expense or loss was
incurred and therefore the business did not become any poorer. One asset
was merely exchanged for another and the business still controls R73 500
worth of assets.

90
Transaction 5: Purchase Building Materials valued at R32 000 on credit from
Penny Pinchers.

The assets increase by R32 000 because; the materials are seen as an asset
to the business until such time as it is used up or resold and only then it
becomes an expense to the business. The business has however incurred a
debt and now owes R32 000 to Penny Pinchers, who is referred to as a
creditor. The business now control R105 500 worth of assets but Mike still has
a claim of R73 500 against the business, because an outsider (Penny
Pinchers) has a claim against the remaining R32 000.
Note that an entry has been made on the left-hand side of the assets account
and another entry has been made on the right-hand side of the Liabilities
account.

Transaction 6: Purchase Fuel and oil to the amount of R2 500 on credit from
La Roche Motors.

When materials are purchased and have no value for resale but can be used in
the business, it will be seen as an expense from the onset of the transaction.
The assets therefore remain unchanged and are still worth R105 500.
However, the business has incurred an expense and also a creditor whose
claim against the assets of the business has increased with R2 500. Mike’s
claim against the assets of the business now decreased to R71 000.
Note that an entry has been made on the left-hand side of the Owner’s Equity
account and another entry on the right-hand side of the liabilities account.

91
Transaction 7: Receive R17 500 cash from a client for work done at a cost of
R12 000.

This is the first time the business generated income. You will see that the
Assets account has increased by R17 500 but at the same time decreased by
R12 000 and the same has happened to the owner’s equity.. The reason is that
the business generated an income but had to use some assets (building
material) to build something (the garden wall) that was sold. The building
materials were therefore used up or consumed by building the wall. It is
therefore seen as a loss and therefore resulted in an expense. The money
received were R17 500 and the expense R12 000, which means that a profit of
R5 500 was made. The Assets account therefore increase to R111 000 and
Mike’s claim against the business increases to R76 500.
Note that a set of two entries has been made. First an entry was made on the
left-hand side of the Assets account and another on the right-hand side of the
Owner’s Equity account. Secondly, an entry was made on the right-hand side
of the Assets account and another on the left-hand side of the Owner’s Equity
account.

Transaction 8: Complete Building work at a cost of R20 000 and valued at

R30 000 on credit for a client.

This transaction is almost identical to the previous one but with one difference
and that is the client has not yet paid the business for the work done. The
money owed by the client, although not in the businesses bank account, is still
real and therefore it is seen as an asset still in the hands of the (held by) client.

92
Should the business close down the debtors would be required to pay their
outstanding debt to the business. The increase and decrease in the Assets
account and Owner’s equity account are therefore the same as that given in
transaction seven above. Therefore the Assets account increases to R121 000,
while Mike’s claim against the business now increases to R86 500.
Note that a set of two entries has been made. First an entry was made on the
left-hand side of the Assets account and another on the right-hand side of the
Owner’s Equity account. Secondly an entry was made on the right-hand side of
the Assets account and another on the left-hand side of the Owner’s Equity
account.

Transaction 9: Paid construction wages to the value of R7 000.

The Assets account decreases as money is removed from the bank account in
order to pay for an expense, which also decreases the Owner’s equity account.
This means that the Assets account decreased to R114 000, while Mike now
has a claim of R79 500 against the business.
Note that an entry has been made on the right-hand side of the Assets account
and another entry on the left-hand side of the Owner’s Equity account.

Transaction 10: Paid the fuel and oil account by cheque R2 500.

The Assets account decreases as money is removed from the bank account in
order to pay a debt; this in turn reduces the Liabilities account. This means that
the Assets account decreases to R111 500 and the Liabilities account
93
 decreases to R32 000, which leaves only one outsider with a claim against the
business.
Note that an entry has been made on the right-hand side of the Assets account
and another on the left-hand side of the Liabilities account.

Transaction 11: Receive a cheque from the Debtor in full payment of an

account R30 000.

The Assets account increases as money is received, while the Assets account
also decreases because the debtor who is an asset decreases his/her debt
owed to the business. This means the Assets account remains unchanged as
one asset (Debtor) was merely changed into another asset (money in the
bank).
Note that an entry has been made on the left-hand side of the Assets account
and another entry on the right-hand side of the Assets account.

6.3 Closing (balancing) the accounts and financial reporting

This brings us to the end of the transactions for this month and gives us an
opportunity to determine the financial position and performance of the
business. Before we can start to prepare these statements we have to
determine the balance remaining in the three accounts Ledger. This is done by
balancing the accounts and merely means to find the difference remaining
between the two sides of each account. This however is the simple form of
balancing accounts and a more detailed explanation will be given later in the
course. The simple form of balancing is done as follows:

94
 A final look at the three accounts ledger will reveal the most relevant
information related to the financial performance and financial position of the
business.

Let us answer the following questions related to financial reports:

 What is the financial POSITION of the business?
The business now controls assets at a cost value of R111 500. The
liabilities (outsiders) have a claim of R32 000 against the assets and the
owner(s) has a claim of R79 500 against the remaining assets.

 What has been the financial PERFORMANCE of the business?

The owner invested R75 000 in the business and this invested has now
increased to R79 500. This means the owner(s) has made a profit of
R4 500.

The two summary statements can now be drafted and will produce the same
results as shown in the preceding chapter.

6.4 Debits and Credits

Debit and credit might not be a totally foreign term to you as it is frequently
use. However now that the workings of the account have been covered the
term debit and credit can be introduced.
 Debit simply means the LEFT-HAND SIDE of an account; and
 Credit simply means the RIGHT-HAND SIDE of an account.
The following T-account explains the term:

95
 This is the point at which confusion can be caused. The critical point to note
is that the words Debit and Credit are merely names given to the sides of
an account and have nothing to do with the +’s and –‘s that are used when
analysing a transaction. The accounting model below might explain the
principle better:

You would have noticed from the transactions above that for each transaction,
there were an entry on the left-hand side of one account and another entry on
the right hand side of an account. This is as a result of the mathematical logic
underlying the accounting equation that when a transaction is analysed there
will always be an entry on the Debit side of one account and another entry for
an equal amount on the Credit side of another account. This is referred to as
the Double Entry Principle and implies that for each entry on the left-hand
(debit) side there must be an equal and opposite entry on the right-hand
(credit) side. This means that each transaction is entered at least twice in the
ledger and that the total of all the entries on the left-hand side must equal the
total of all the entries on the right-hand side. This is the result of applying a
basic mathematical formula and as such is a very important principle to
remember.
Based on the above and the fact that all transactions have an affect on the
accounting equation, a set of key principles (Golden rules) can be developed
for recording data in the Ledger accounts and applied as follows:
 Assets accounts increase(+) on the debit side and decrease(-) on the
credit side; (Asset A/C Dr Cr)
 The Owners' Equity accounts (capital & reserves) decrease(-) on the debit
side and increase(+) on credit side; (OE A/C Dr Cr)
 Liability accounts decrease(-) on the debit side and increase(+) on the
credit side; (Liability A/C Dr Cr)
The following could be added to make the analysis more clear:
 Income accounts, as a sub-category of owners' equity, decreases(-)
owners' equity on the debit side and increases(+) owners' equity on the
credit side; (Income A/C Dr Cr)
However:
 Although the expense accounts will always increase on the debit side, as a
sub-category of the owners' equity, the final effect on the owner’s equity
will always be that it decreases(-) owners' equity on the debit side and
increases(+) owners' equity on the credit side; (Expense A/C Dr Cr)

96
 Remember, there are no rules in the accounting process, only principles, which
are based on the mathematical equation (A = OE + L).

Exercise 6.1
Mr. B. Machesa starts a construction by the name of Finer Homes and starts operating
on 1 March 20x4.

The following transactions are recorded on the following dates:

March 20x4
1 Mashesa deposited R100 000 in the bank account of the new business.
2 Paid the Office rent by EFT R500.
5 Purchased a 1-ton bakkie for R20 000 and pay by EFT.
6 Bought a plate compactor on credit from Parker's Plant Hire and receives an
invoice for R3 500.
9 Paid R4 623 cash for building materials purchased from Penny Pinchers.
10 Machesa paid R1 500 on his account with Parker's Plant Hire.
13 Purchased building materials valued at R2 530 on credit from Penny Pinchers and
receive an invoice.
15 Bought a computer and printer from Computer Concept on account for R8 500.
17 Received an invoice from NMM for the water and electricity R250.
25 Mashesa deposited a further R20 000 as capital.
27 Drew R7 760 cash for site wages.
28 Received a EFT for R15 362 from L. Samson for building work done at his house
at a cost of R4 200.
31 Mr Machesa drew cash of R3 000 as salary for himself.
31 Completed building work and send an invoice for R7 000 to S. Manson, who
promise to pay within 30 days. This work was done at a cost of R2 500.

Required:
Record all the transactions in the three accounts Ledger. Prepare a Statement of
Financial Position and a Statement of Comprehensive Income on 31 March 20x4.

97
 Exercise 6.2
Mr. B. Van der Wielen and Mr T.O. Small starts a construction firm by the name of Two-
Wheels Construction and starts operating on 1 July 20x4.

Details of transactions recorded are as follows:

July 20x4
1 Van der Wielen and Small each deposited R75 000 in the new bank account of
their business
1 Pay the office rent for the month by EFT, R750.
2 Pay Vodacom R275 cash for a cell phone recharge-card.
5 Purchased a 1-ton bakkie from City Motors for R40 000 and make an EFT payment
for R10 000 as a deposit.
6 Bought a concrete mixer for R6 500 and a plate compactor for R2 500 from
Parker’s Plant Hire and receive a credit invoice.
8 Purchased Building materials from Penny Pinchers on credit for R3 000.
10 Two-Wheels paid R3 500 per EFT on their account with Parker’s Plant Hire.
15 Bought a computer and printer from Computer Concept on account for R4 500.
18 Repaired a roof for Mr T Vutha at a cost of R2 500 and received an EFT of R8 500,
as per invoice.
21 Purchased Building materials from Penny Pinchers and make and EFT payment
for R4 400 as per invoice.
25 The owners each deposited a further R25 000 as capital.
27 Drew cash of R10 800 for site wages.
31 Van der Wielen drew cash of R2 500 as salary for himself.
31 Completed 150m² of paving on credit for S. Nake at a cost of R3 500 and issued
an invoice for R71 per m². The paving bricks left over on site were sold to S. Nake
at cost for R500. S. Nake paid for the paving bricks in cash.
31 Settled the account with Computer Concept and paid them the full amount of
R4 500 per EFT.
31 Sold the plate compactor to AC&M Construction and received cash for R2 700.
31 Small took cash for R500 to pay his personal telephone account.

Required:
Record all the transactions in the three accounts Ledger. Prepare a Statement of
Financial Position and a Statement of Comprehensive Income on 31 July 20x4.

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CH
 APTER 7

Expanding the Set of Ledger Accounts

Goal:

At the end of this chapter the student must be able to develop a full set of ledger
accounts and understand the process of recording transaction data in the Ledger
account.

Study objectives:
After attending lectures and studying the notes, the student must be able:

1. To know the following:

a) How a full accounting system operates using numerous Ledger accounts all of
which emanates from three primary accounts.
b) The name of an account is chosen to reflect the information being gathered in
that particular category of account. (reflect account use)

2. To do the following:
a) Record any transactions by making a debit entry into one account and a credit
entry into another account.
b) Decide on suitable names for the accounts, which are necessary.
c) Balance the accounts at the end of the month.
d) Extract a Trial Balance.
e) Draft a rudimentary Statement of Comprehensive Income.
f) Draft a rudimentary Statement of Financial Position.
g) Analyse the two primary Financial Statements to answer relevant questions.

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CHAPTER 7

Expanding the Set of Ledger Accounts

We now know that the fundamental objective of processing accounting data is to provide
information that will be used to make business decisions. We know that there are two
types of information, which relates to:

 The present financial position of the business and is reflected in the STATEMENT
OF FINANCIAL POSITION.

 The profit or loss made by the business over a certain period and is reflected in a
statement of financial performance, which is known as the STATEMENT OF
COMPREHENSIVE INCOME.

The data processing system can thus be illustrated as follows.

PROCESS

INPUT OUTPUT
(Source Documents) (Financial Statements)

7.1 Modifying the Outputs

In accounting the major emphasis is on information. When looking at the
system developed thus far, you may ask whether it will provide you with the
quality and quantity of information required by the users. The two financial
statements, which form the outputs, were thus far produced as follows:

402
By studying the two statements we can now ask what information is provided
and maybe even more importantly, which information is not provided. Once we
have the answers to these two questions, we may attempt to modify the
process to satisfy the information requirements of the users. At this stage it will
be useful to refer to page 4 and compare the requirements for an effective
functioning accounting system with the current system.
a) What information does the current process provide?
 The net cost price of assets is R111 500.
 The owner’s claim against the business is R79 500.
 The outsiders or creditors (accounts payable) claim against the business
is R32 000.
 The profit for the period is R4 500.
b) What useful information does the current process not provide?
 It does not distinguish between the different types of assets. We do not
know what the assets consist of. Is it cash, equipment, debtors or any
other asset and what is the value allocated to each?
 We do not have a clear indication of what the liabilities consist of. Is it
the result of a loan, which only needs to be paid over a longer period or
is it short-term creditors, which need to be paid within two or three
months, and who are these creditors?
 The statements do show that a profit of R4 500 was made but it does
not show the nature of the income. The type of expenses incurred is not
show. This information could be very useful as there may be
unnecessary expenses, which would have been exposed if a breakdown
were given.
c) What kind of statement would be most useful?
When considering the questions asked in a) and b) above, it is obvious that
we need to modify the financials statements to supply more information to
its users. The following are suggested at this stage:

404
The process now has to be adapted to capture data in such a way as to
produce the two statements above and supply considerably more information.
This brings us to the third and final step in understanding the accounting model
and how data is processed in it.
Up to now we have been using the certain means to assist us in the correct
recording of transactions in the ledger. These were as follows:
 An accounting record can only be made from a source document as data.
 The Double Entry Principle implies that for each entry on the debit (left-
hand) side there must be an equal and opposite entry on the credit (right-
hand) side. This means:
o Record twice;
o Same total amount both sides; and
 Furthermore – the “golden rules”:
o Assets accounts increase (+) on the debit side and decrease(-) on the
credit side; (Asset A/C Dr Cr)
o The Owners' Equity accounts (capital & reserves) decrease(-) on the
debit side and increase(+) on credit side; (OE A/C Dr Cr)
o Liability accounts decrease(-) on the debit side and increase(+) on the
credit side; (Liability A/C Dr Cr)
 The following was added to make the analysis more clear:
o Income, as a sub-category of the owners' equity, increases owner’s
equity on Cr side – (Income Dr and Cr)
o Expenses, as a sub-category of the owners' equity, decrease owner’s
equity on Dr side – (Expense Dr and Cr)

While still continuing to use the above expedient we can now add further aids
to assist in recording data in the general ledger.

405
7.2 Modifying the Process
To produce the required information, we need to use a process of
CLASSIFICATION. Each of the three accounts used up to now will be
expanded into different account categories. To determine which account is
affected by a transaction, the following questions can be asked:
 If ASSETS are affected – WHICH Assets, WHY and HOW are they
affected? The following expanded questions can be asked:
o Which asset did we acquire? – This tells us which asset account to use
and why it is affected?
o Where did we get the funds to acquire the asset? – This tells us how
we paid, whether we paid and how this affects (increase or decrease)
the asset.
 If OWNER’S EQUITY is affected – WHICH Owner’s equity, WHY and HOW
are they affected?
o Which owner’s equity is affected? – This tells us which owner’s equity
account to use and why it is affected?
o How does this affect the owner’s equity? – Will the owner’s equity
increase or decrease?
 If LIABILITIES are affected – WHICH Liabilities, WHY and HOW are they
affected?
o Which liability is affected? – This tells us which liability account to use
and why it is affected?
o How does this affect the liability? – Will the liability increase or
decrease?
By asking these questions you can determine the affect on the accounting
model (equation)
The modified process may seem confusing at this stage and therefore we will
again use the same example transactions used in the previous chapters to
illustrate the workings of the process.

7.3 Recording transactions using the categories of accounts

During the following example only the accounts affected by each transaction
will be shown and a complete set of accounts will be shown at the end of this
section.

Transaction 1: The owner open a bank account in the name of

MMWC Construction and deposits R50 000

 Effect on the accounting model:

Assets has increased
Owner’s Equity has increased
 Question to ask:
Which Asset increases? – Bank
406
 Why does Owner’s Equity increase? – Capital was invested
 Entry in the expanded set of accounts:

Assets are increasing and therefore we need to record the money received in
an appropriate account categorised under Assets. The most appropriate will be
to open the Bank Account and because assets increase, an entry is made on
the debit side of the Bank Account.
On the other hand the owner’s equity has increased and therefore another
account, called Capital, is opened under Owner’s Equity. To answer the
question, why the Capital Account, as part of the Owner’s Equity, is increasing,
is to record the owner’s interest in the business.

Transaction 2: Hand the bakkie, valued at R25 000, over to be used in the

business enterprise.

 Effect on the accounting model:

Assets has increased
Owner’s Equity has increased
 Question to ask:
Which Asset increases? – Vehicles
Why does Owner’s Equity increase? – Vehicle was invested as Capital
 Entry in the expanded set of accounts:

Assets are increasing and therefore we need to record the value of the vehicle
received in another appropriate account categorised under Assets. The most
appropriate will be the Vehicles Account and because assets increase, an
entry is made on the debit side of the Vehicles Account. As with the money
deposited in the bank account increases the assets, the value of the bakkie
also increases the assets but in this case by R25 000.
On the other hand the Owner’s Equity has increased again and therefore the
Capital Account, as part of the Owner’s Equity, is affected. To answer the

407
question, why the Capital Account is increasing, is to record the increase of the
owner’s interest in the business.

Transaction 3: Paid rent for the month by cheque R1 500.

 Effect on the accounting model:

Assets has decreased
Owner’s Equity has decreased
 Question to ask:
Which Asset decreases? – Bank
Why does Owner’s Equity decrease? – Incurred rent expenses
 Entry in the expanded set of accounts:

Some of the money in the bank is used to pay for and expense and therefore
the Bank Account decreases. A credit entry is therefore made in the Bank
Account. The amount left over in the bank therefore reduces to R48 500.
Because the owner of the business is at risk, any expense (loss) will decrease
his/her interest in the business. Therefore the Rent paid Account, as an
expense and a category of Owner’s Equity, will reduce Owner’s Equity.

Transaction 4: Purchase Construction Equipment and pay by cheque R3 000.

 Effect on the accounting model:

Assets increase
Assets decrease
 Question to ask:
Which Asset increases? – Building Equipment
Which Asset decreases? – Bank
 Entry in the expanded set of accounts:

408
The equipment purchased represents an asset and therefore increase the
assets of the business. As an asset type, equipment differs from other asset
like Bank and Vehicles, and therefore a new account called Building
Equipment Account is created. As an asset the Building Equipment Account is
therefore debited by R3 000.
Because the equipment was paid for immediately it means that money from the
bank was used for this purpose. The Bank Account therefore reduces and is
credited with R3 000.
Although the Owner’s Equity was not effected we can see that the owner’s
interest has up to now reduced by R1 500 due to an expense and that his
interest in the business now consist of R45 500 in cash, R25 000 in vehicles
and R3 000 in equipment, totalling R73 500.

Transaction 5: Purchase Building Materials valued at R32 000 on credit from

Penny Pinchers.

 Effect on the accounting model:

Assets increase
Liabilities increase
 Question to ask:
Which Asset increases? – Building Materials
Which Liabilities increase? – Accounts Payable (Penny Pinchers)
 Entry in the expanded set of accounts:

The assets increase because the building materials received are seen as an
asset to the business until such time as it is used up or resold and only then it
becomes an expense (loss) to the business. A new asset account has
therefore to be opened, which is called Building Materials. The Building
Materials Account is therefore debited by R32 000.
The business has however incurred a debt because no payment was made
and now owes R32 000 to Penny Pinchers who is referred to as an accounts
payable. Penny Pinchers, as an outsider, has a claim against the assets of the
business and therefore is classified under Liabilities. A liability account
therefore has to be opened, which is called Accounts Payable (Penny
Pinchers) and credited by R32 000.

409
Transaction 6: Purchase Fuel and oil to the amount of R2 500 on credit from
La Roche Motors.

 Effect on the accounting model:

Owner’s Equity decreases
Liabilities increase
 Question to ask:
Why does Owner’s Equity decrease? – Incurred fuel and oil expenses
Which Liability increases? – Accounts Payable (La Roche Motors)
 Entry in the expanded set of accounts:

When materials are purchased and have no value for resale but can be used in
the business, it will be seen as an expense from the onset of the transaction.
Because the owner of the business is at risk, any expense will decrease
his/her interest in the business. Therefore the petrol & oil Account, as an
expense and a category of Owner’s Equity, will reduce Owner’s Equity. The
petrol & oil Account is therefore debited.
The business has however incurred a debt because no payment was made
and now owes R2 500 to La Roche Motors. La Roche Motors is also referred
to as a creditor and as an outsider has a claim against the assets of the
business and therefore is classified under Liabilities. A new liability account,
called La Roche Motors (accounts payable), is created and credited by R2 500.
The assets remain unchanged and are still worth R105 500. The business has
however incurred an expense and another creditor who also has a claim
against the assets of the business.

Transaction 7: Receive R17 500 cash from a client for work done at a material
cost of R12 000.
As there are two aspects to be covered in this transaction, we will deal with
each one separately. The first part covers the sale that took place and is
recorded as follows:

 Effect on the accounting model:

Assets increase
Owner’s Equity increases
 Question to ask:
Which Asset increases? – Bank

410
 Why did Owner’s Equity increase? – Doing building work generated an
income
 Entry in the expanded set of accounts:

This is the first time the business generated income or revenue and received
cash for a service rendered. The type of asset received was money and
therefore the asset, Bank Account, will increase and a debit entry made to
increase it by R17 500.
The business generated an income (revenue) and therefore the owner’s equity
also increases. Because the owner is at risk for all expenses and losses s/he
will also benefit from any income and profits, which is seen as his/her reward
for operating an enterprise. A new owner’s equity category account has
therefore to be opened to indicate the source of the income and is called
Contract Sales. The Contract Sales account is therefore credited with R17 500.
Note: You will notice that all transactions that affect the physical flow of money
are recorded in the Bank Account. Any suitable name may be assigned to an
account as long as it is appropriate to the type of business. In a retail
enterprise, for example, the name given to the owner’s equity account where
income is recorded may be Sales revenue, etc.

The second part of this transaction covers the material used in the process of
generating an income (revenue) and is recorded as follows:

 Effect on the accounting model:

Assets decrease
Owner’s Equity decreases
 Question to ask:
Which Asset decreases? – Building Materials
Why does Owner’s Equity decrease? – Materials from assets was used to
do building work
 Entry in the expanded set of accounts:

411
The business had to use some assets (building material) to build something
(the garden wall) that was sold. The building materials were therefore used up
or consumed by building the wall. Because assets were use it decreased and
therefore the existing assets category account, Building materials, is credited
by R12 000.
At the same time building materials used up or consumed by building a wall is
also seen as a loss and therefore resulted in an expense. A new owner’s
equity category account therefore has to be opened to indicate the source of
the expense and is called Cost of Sales: Materials. The Cost of Sales:
Materials account is therefore debited with R12 000.

Transaction 8: Complete Building work valued at R30 000 on credit for C.

Lient (client). The material cost to complete the work was R18 000.
As with the previous transaction there are two aspects to be covered in this
transaction and therefore we will deal with each one separately. The first part
covers sale that took place and is recorded as follows:

 Effect on the accounting model:

Assets increase
Owner’s Equity increases
 Question to ask:
Which Asset increases? – Accounts Receivable (C. Lient)
Why did Owner’s Equity increase? – Doing building work generated an
income
 Entry in the expanded set of accounts:

This is the second time the business generated income (revenue). This time
however, the business did not receive cash for the service rendered, but rather
chose to postpone the receipt of money to a later date. The money owed by
the client is an asset for the client while in his/her hands. Because of the
money owed by the client, the business as an outsider now has a real claim
against the assets of the client. This concept can be compared to the business
412