Accounting Grade 12 revision and final exam preparation

CASH BUDGETS / FORECAST INCOME STATEMENTS

INTRODUCTION
Cash Budgets and Forecast Income Statements is an important part of planning and making
strategic financial decisions. In Grade 12 you will need to be able to do calculations but also
analyse the Cash Budget and/or Forecast Income Statement.

HOW TO ANSWER ANALYSIS QUESTIONS?

• Analysis answers – must include % increases, decreases or change, reason why the
change and possible solutions to prevent problem getting worse.
• Possible areas to analyse :
o debtors collections
o creditors payments,
o bank balances e.g. is there a way to avoid going into overdraft
o Loan repayments vs purchase of assets effect on gearing and risk.
o How business is financed and manages its cash or future profits
o Always relate to what is happening in the current economic climate – e.g
huge electricity hikes, salaries and wages and threats of strikes, effect on
productivity
o Mark-up calculation – is mark-up suitable and achievable
o May be asked to compare to actual results

RECEIPTS VS INCOMES / PAYMENTS VS EXPENSES

Probably the trickiest part of cash budgeting and doing a forecast income statement is
knowing whether the item will appear in the Cash Budget or the Forecast Income
Statement or both. Below is some common ones that you need to remember.
Account Cash Budget Forecast Income
Statement
Rent Income/Expense * *
Depreciation (this is a non cash item) *
Discount Allowed *
Loan Repayment *
Interest on loan * *
Sales *
Debtors Collections *
Bad Debts *
Fixed deposit matures *

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Accounting Grade 12 revision and final exam preparation

FORECAST INCOME STATEMENT

A forecast income statement is completed to determine possible profits in the future. It
allows the business to see if there are areas where costs can be cut and to improve
profitability.
The forecast income statement uses the same format as a Comprehensive Income
Statement.
It is important to remember that the Forecast income you need to take into account
adjustments such as accrued income, accrued expenses, prepaid expenses and income
received in advance.

FORECAST INCOME STATEMENT

December January Calculate %

Sales 250 000 200 000 increase/decrease in sales
Less Cost of Sales (125 000) (100 000)
Gross Profit 125 000 100 000 Mark-up calculations /
Other Incomes 5 200 5 800 analysis of mark-up
Rent Income 5 000 5 500
Discount received 200 300
Other operating expenses (35 000) (34 100)
Wages 36 000 35 000
Bad Debts 1 000 1 200 Depreciation, bad debts,
Discount Allowed 500 400 discounts = non-cash items
Depreciation 7 500 7 500
Operating Profit 95 200 71 700
Interest Income 800 0
Net profit before interest 96 000 71 700
Interest expense (2 000) (1 500)
Net Profit before tax 94 000 70 200
Income Tax
Net profit for the year

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Accounting Grade 12 revision and final exam preparation

CASH BUDGET
Cash Budget for Kerdachi Traders
July 2021 August 2021
Cash Receipts
Cash sales (a % of total sales for the month)
Debtors collection (debtors collection schedule completed if monies
are staggered over various months. Alternatively a % of total sales
received in a later month – usually 30-60days
Rent income, interest received, sale of asset, shares sold, capital These items will appear on the
invested, Loan Received
TOTAL RECEIPTS
forecast income statement!
Cash Payments
Cash Purchases of Stock (a % of Cost of Sales for the month) Can use the interest on loan to
Creditors Payment Period (may need a creditors collection of the calculate the amount of loan
collection period is not obvious – beware of discounts that may be received or paid
given)
Loan repayments, purchase of tangible assets, drawings, payments
to SARS, Dividends etc… (these are included in a budget but not a
forecase income statement)
Always use Cost of Sales here (be
Interest on loan, advertising, salaries and wages etc… (these can be
included in the budget and the forecast income statement just check careful – if the owner takes stock
payment times) or stock is donated it needs to be
TOTAL PAYMENTS included in the calculation
Surplus or Deficit
Balance at the beginning
Balance at the end

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Accounting Grade 12 revision and final exam preparation

DEBTORS COLLECTION SCHEDULE

A debtor’s collection schedule is draw up to calculate when the money is going to be
received from Debtors. This information is based on historical data on how debtors make
payments.
E.G.
Debtors pay as follows:
• 60% take 30 days, and pay in the month following the transaction and receive a 5%
discount
• 30% take 60 days;
• 8% take 90 days
• 2% are written off as bad.
Credit Sales January February March
November 200 000 60 000 16 000
December 300 000 171 000 90 000 24 000
January 210 000 119 700 63 000
February 190 000 108 300
March 180 000
231 000 225 700 195 300

CREDITORS PAYMENT SCHEDULE

Creditors Payment is calculated in the same way that Debtors Collection is calculated. It is
important to remember that cost of sales is used to calculate the purchases.
• Calculate the Cost of Sales
• Add stock that was donated or withdrawn by the owner
• This will give the total amount of stock that needs to be purchased. The business uses
a fixed base stock method, which means that whatever is sold needs to be replaced
so that the same level of stock is on the shelf at the start of each month.
• The payments to creditors will be calculated on the credit purchases

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Accounting Grade 12 revision and final exam preparation

RECONCILIATIONS
INTRODUCTION TO RECONCILIATIONS

WHAT DOES “TO RECONCILE” MEAN IN ACCOUNTING?

To reconcile in accounting means that we want both parties to agree. This means that some
sort of comparison needs to be done either between internal records or external records
An example of Internal Reconciliations (records within the business)
• Creditors Control account balance in the General ledger needs to agree to the total of
the Creditors List
An example of External Reconciliations (records within the business needs to agree to an
external document)
• The Bank Statement prepared by the bank needs to agree to the Bank Account in the
General Ledger.

WHY DO BUSINESSES NEED TO RECONCILE RECORDS?

• A business always needs to prepare accurate and have up to date records for
decision-making purposes.
• A business needs to account for any differences that have been because of errors,
omissions, or timing differences.
• This process is part of auditing the records of the business to see whether the
internal controls are affective.
• Investigate any discrepancies to identify problem areas.

HOW DO WE RECONCILE?
• The records that need to be reconciled are compared
• The items that are the same means that no entry needs to be made
• Differences need to be identified and dealt with
• Adjust the records of the internal documents and calculate the new balance
• Differences made by the external source needs to be accounted for on a
Reconciliation statement.
• Check that the balance between both items reconcile

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Accounting Grade 12 revision and final exam preparation

BANK RECONCILIATIONS
In Grade 12 you are required to analyse the Bank Reconciliation Statement and answer
questions relating to the Bank Reconciliation:

TYPES OF QUESTIONS:
1. Why is it important to reconcile the bank account to the bank statement?
2. You could be given an incorrect bank reconciliation statement and ask to correct the
errors.
3. You could be ask to identify errors and explain how you would rectify the problem
4. A question commonly asked is what to do with a post-dated cheque issued if it is the
end of the financial year.
5. Questions on internal control procedures will be asked

PURPOSE OF BANK RECONCILIATIONS

The purpose of doing Bank Reconciliations is to protect and control the cash of a business.
It is important that businesses have separation of duties as part of their control over their
cash. This means that different people have responsibilities e.g. the person recording cash
entries is not the same person who is banking the cash for the business.
Bank Reconciliations are to update the cash entries by comparing the cashbooks with the
Bank Statement to account for any differences. This enables the business to know exactly
how much cash/overdraft they have.

THE BANK ACCOUNT IN THE GENERAL LEDGER

The bank account in the General Ledger can either be regarded as an asset or a liability this
is because the bank is either a debtor (they owe us our money) or a creditor (we owe the
bank money as we are in overdraft). This means the Bank Account can have either a debit
(asset) or a credit balance (liability).

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THE BANK STATEMENT

The bank records transactions the opposite to the way the business records cash
transactions.
• If the bank statement reflects a credit balance – this means the business has a
favourable balance (the business is a creditor to the bank – they owe us money),
• If the bank statement reflects a debit balance, then the business has an unfavourable
balance (the business is a debtor to the bank – we owe them money)
Debit entries on the Bank Statement
• Should match to the Cash Payments Journal entries
Credit entries on the Bank Statement
• Should match to the Cash Receipts Journal entries

CASH PAYMENTS JOURNAL ENTRIES

• Record entries that are on the debit side of the Bank Statement only
o Bank charges
o Dishonoured cheques
o Interest on overdraft
o Debit/Stop orders
• If a cheque has been cancelled and needs to be reissued the new cheque issued
would be recorded in the CPJ
• Errors made by the business
o If the cheque has been understated the difference needs to be recorded in the
CPJ
o If a receipt has been overstated the difference needs to be recorded in the CPJ
• Do not record a cheque that appears was outstanding on last month’s bank
reconciliation.

CASH RECEIPTS JOURNAL ENTRIES

• Record entries that are on the credit side of the Bank Statement only
o Direct deposits
o Interest on favourable bank balance
• Cancel cheques that have either been lost or stale
• Errors made by the business
o If a receipt has been understated the difference needs to be recorded in the
CRJ
o If a cheque has been overstated the difference needs to be recorded in the CRJ
• Do not record deposits that appear on last month’s bank reconciliation statement
again.
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Accounting Grade 12 revision and final exam preparation

BANK RECONCILIATION ENTRIES

FORMAT OF THE BANK RECONCILIATION STATEMENT

Debit Credit
Dr/Cr Balance as per Bank Statement
Cr Outstanding Deposits
Dr Cheques not yet presented for payment
No. 345
No. 451
Dr/Cr Correction of error
Dr/Cr Balance as per Bank Account

Entries that appear only in the Cash Receipts Journal (outstanding deposits)
• These deposits have not been recorded on the Bank Statement due to a timing
difference between the bank statement being sent and the reconciliation statement
being drawn up.
• Cash should be deposited regularly if the money is not being deposited then an
investigation needs to be conducted. The business needs to deposit money received
in the bank for safekeeping. Money should be locked in a safe until it is deposited. If
there is a difference between the bank statement and the cash receipts journal in
terms of money that has not been deposited then an investigation needs to be
conducted as to where the money has disappeared.
Entries that appear only in the Cash Payments Journal (cheques not presented for payment)
• These are cheques that have not been presented for payment
• Post-dated cheques that have been issued will not appear on the bank statement
until they are cashed
Correction of errors
• If the bank has made an error, then a correction needs to be made on the Bank
Reconciliation Statement
• The Bank needs to be notified of the error
Balance according to bank statement
• If the balance is favourable the bank statement balance is credited
• If the balance is unfavourable the bank statement balance is debited
Balance according to the Bank Account
• If the bank account in the ledger is favourable, then the balance is debited
• If the bank account in the ledger is unfavourable, then the balance is credited
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POST-DATED CHEQUES
Post-dated cheques issued are recorded in the Cash Payments Journal and will be recorded
as an outstanding cheque on the Bank Reconciliation.
If it is the end of financial year post-dated cheques issued need to be added back to Bank
(the money is still in the bank account at the end of the year) and added to Creditors (the
money is still owed at the end of the year).
Post-dated cheques received are kept in a safe until the date on the cheque is realised and
then can be recorded as a receipt in the Cash Receipts Journal.

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Accounting Grade 12 revision and final exam preparation

CREDITORS RECONCILIATIONS

PURPOSE OF CREDITORS RECONCILIATIONS

The purpose of reconciling is twofold:
1. Firstly, for internal control purposes to check the Creditors Control account in the
General ledger to the individual creditor’s accounts in the Creditors Ledger
2. Secondly to check whether the amount owed to the Creditor is correct by checking
that the Creditors Ledger account reconciles to the Statement issued by a Creditor

CREDITORS CONTROL ACCOUNT AND THE CREDITORS LEDGER

Creditors transactions are recorded in the journals and then posted to the Creditors Control
account and posted to the individual creditors account.
To recap Grade 10 work
• Creditors Journal (CJ) records credit purchases (invoice).
• Creditors Allowances Journal (CAJ) for purchase returns (debit note issued, credit
note received).
• Cash Payments Journal (CPJ) for cheques issued as payment to creditors and discount
received.
• Cash Receipts Journal (CRJ) for returned (RD) cheques issued by the business.
• General Journal (GJ). Credit interest charged on overdue accounts as well as other
increases in creditors.
• General Journal (GJ). Debit transactions that reduce the amount owed to creditors,
including errors and omissions.
To check whether the accounting process has been accurately implemented the Creditors
Control account should equal the total of the individual Creditors accounts in the Creditors
List.

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Accounting Grade 12 revision and final exam preparation

CREDITORS LEDGER ACCOUNT AND THE CREDITORS STATEMENT

REASONS FOR DIFFERENCES BETWEEN THE CREDITORS’ LEDGER ACCOUNTS AND
STATEMENTS:

• Transactions may have been left out or not completed (omissions)

o E.g. interest not recorded or discounts omitted
• There may be timing differences.
o E.g. The creditor has not yet recorded a payment made by the business.
• Errors made by either the business in the creditor’s individual account or errors on
the statement received from the creditor
o E.g. a credit purchase recorded in the wrong creditors account, amounts
recorded incorrectly
STEPS FOR RECONCILING THE CREDITOR’S INDIVIDUAL ACCOUNT AND THE STATEMENT
RECEIVED

STEP 1

Compare the creditor’s individual account with the statement received.

The debit side of the statement compared to the credit side of the account.
The credit side of the statement compared to the debit side of the account.
STEP 2

Correct errors or omissions in the creditor’s individual account in the Creditors Ledger by
journalising and posting entries.
STEP 3

Open the creditors reconciliation with the balance at the end of the month.
STEP 4

Correct errors or omissions in the statement received and correcting errors.

STEP 5

You should end with the same balance as in the creditor’s account.
STEP 6

Prepare a remittance advice to send out with the cheque when you pay creditors. We use a
remittance advice to inform creditors of errors and omissions on the statement.

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Accounting Grade 12 revision and final exam preparation

DEBTORS RECONCILIATION AND DEBTORS AGE ANALYSIS

Debtors reconciliations is an internal reconciliation to check whether the Debtors Control
account in the General Ledger is equal to the total of the Debtors List. This is to check
whether the transactions have been recorded and posted accurately in the books of the
business.
RECAP OF DEBTOR TRANSACTIONS

• Debtors Journal (DJ) for credit sales. (Invoice)

• Debtors Allowances Journal (DAJ) for sales returns. (Credit Note)
• Cash Receipts Journal (CRJ) for money received as payment from debtors and
discount allowed. (Receipts)
• Cash Payments Journal (CPJ) for returned cheques received from debtors (RD
cheques).
• General Journal (GJ). Debit column shows interest charged on overdue accounts as
well as other increases in debtors.
• General Journal (GJ). Credit column shows transactions that reduce the amount owed
by debtors, including errors and omissions.

The balance of the Debtors control account in the General Ledger should equal the Debtors
List total (balances of the debtors’ individual accounts in the Debtors Ledger).

WHY DEBTORS’ ACCOUNTS AND STATEMENTS DIFFER

• Omissions e.g. a transaction has not been recorded such as a discount or an invoice
or interest
• Timing differences from when the statement was sent to when the reconciliation was
performed.
• Errors made in recording or posting.

WHY WE DO DEBTORS RECONCILIATION

• For accurate and up to date records
• Keep a track of our debtors so we can effectively manage our debtors

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PROCEDURE FOR RECONCILING DEBTORS CONTROL ACCOUNT AND DEBTORS LIST

PROCEDURE FOR RECONCILING DEBTOR’S INDIVIDUAL ACCOUNT AND THE

STATEMENT ISSUED

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DEBTORS AGE ANALYSIS

The Debtors age analysis analyses the amounts that are owed by debtors into the number
of days the debt is outstanding. The management of debtors is important for a business
especially for managing the cash flow position.
Businesses should conduct this important internal control procedure on a regular basis.
It allows the business to:
• Check up on their follow up procedures such as sending out statements, reminding
debtors to pay, encouraging payment by offering discounts
• Helps to determine who needs to be charged interest
• Determine whose account needs to be written off
• Identifies problem areas with respect to managing debtors
o Credit limits
o Freezing accounts
RULES TO REMEMBER WHEN PREPARING A DEBTORS AGE ANALYSIS

• Receipts and discounts are subtracted from the oldest debt

• Returns are subtracted from the most recent invoice

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