GRADE 12 STUDY NOTES

Contents
FIXED ASSETS .................................................................................................................................................. 2
VAT.................................................................................................................................................................... 6
INVENTORY CONTROL .................................................................................................................................. 9
INVENTORY SYSTEMS ................................................................................................................................ 9
PERPETUAL INVENTORY SYSTEM ......................................................................................................... 9
PERIODIC INVENTORY ........................................................................................................................ 10
STOCK VALUATION METHODS .............................................................................................................. 10
SPECIFIC IDENTIFICATION METHOD ................................................................................................ 11
FIFO (FIRST-IN-FIRST-OUT) METHOD ................................................................................................ 11
WEIGHTED AVERAGE METHOD ......................................................................................................... 11
SALARIES AND WAGES ADJUSTMENT ..................................................................................................... 11
INTEREST ON LOAN...................................................................................................................................... 13
INTEREST ON FIXED DEPOSIT...................................................................................................................... 13
YEAR-END ADJUSTMENTS .......................................................................................................................... 14
FINANCIAL STATEMENTS OF A COMPANY ............................................................................................ 16
CASH FLOW STATEMENTS........................................................................................................................... 19
FINANCIAL ANALYSIS - COMPANIES ..................................................................................................... 22
MANUFACTURING ....................................................................................................................................... 25
BUDGETS ........................................................................................................................................................ 27
CASH BUDGET .......................................................................................................................................... 27
PROJECTED INCOME STATEMENT ........................................................................................................ 28
CREDITORS’ RECONCILIATIONS ............................................................................................................... 29
RECONCILIATION BETWEEN CREDITORS/DEBTORS CONTROL ACCOUNT AND THE
CREDITORS/DEBTORS LIST/LEDGER (SUBSIDIARY LEDGER) ............................................................ 29
RECONCILIATION OF CREDITOR’S LEDGER AND THE STATEMENT OF ACCOUNT RECEIVED
(DEBTOR’S STATEMENT) .......................................................................................................................... 29
DEBTORS AGE ANALYSIS ........................................................................................................................... 30
AUDIT TRAIL ................................................................................................................................................... 31
AUDITORS ...................................................................................................................................................... 31
AUDITORS REPORTS ..................................................................................................................................... 31
PROFESSIONAL ACCOUNTING BODIES .................................................................................................. 32
SOUTH AFRICAN INSTITUTE OF PROFESSIONAL ACCOUNTANTS (SAIPA) ................................... 32
SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS (SAICA) ........................................ 32
CORPORATE GOVERNANCE - KING CODE III ...................................................................................... 33

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FIXED ASSETS
DEPRECIATION
 Expense
o First book of entry = general journal
o Will be closed off to profit and loss at financial year end
 IFRS principles
o Accrual basis (match expense with accounting period)
o Prudence concept (value assets at their realistic value)
 Methods of calculating
o Fixed instalment/cost/straight line = cost x %
o Diminishing balance/book-value/carrying value = cost – accumulated depreciation
x%
o Production unit method = (cost ÷ estimated number of units to be produced) x
number of units produced during the year
o NB: pro rata calculations if purchased or sold during year (÷ 12 x months)
 Only calculated
o At financial year end, or
 Months of depreciation: Beginning of year to year end date, or
 Purchase date (if during year) to year end date
o When asset is sold
 Months of depreciation: Beginning of year to date of sale
 Recording in General Ledger
o Debit Depreciation (only one account: concept of materiality)
o Credit Accumulated depreciation on vehicles/equipment (two different accounts:
concept of materiality)
 NB the cost accounts (land & buildings, vehicles, equipment) are not
affected by depreciation.

FIXED ASSET REGISTER

 Particulars of each fixed assets of the business are recorded individually.
 Internal control
o Check the physical assets against the assets recorded in the fixed asset registers to
ensure that they are all accounted for.
o Help track the value of the individual assets as it recorded the date it was
purchased, how much it was purchased for and tracks its depreciation and book
value.

ASSET DISPOSAL ACCOUNT

 Purpose is to record that an asset has been disposed of/sold.
 Calculates if a profit or loss was realised on the sale of the asset.
 Profit on sale of asset (+)/Loss on sale of asset (-) = Selling price – book value
Asset disposal B6 (or N)
2018 2018
Feb 28 Vehicles GJ8 Feb 28 Accumulated GJ8
depreciation on
vehicles/equipmen
t
Bank CRJ8
Creditors’ control / GJ8
Debtors’ control /
Donations /
Drawings / Loss due
to theft
Profit on sale of GJ8 X= OR Loss on sale of asset GJ8 X=
asset

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ACCUMULATED DEPRECIATION ACCOUNT

Purpose is to record all of depreciation of a particular asset group, i.e. vehicles or equipment.

Accumulated depreciation on vehicles B4

2021 2020
Feb 28 Asset disposal GJ8 July 1 Balance b/d
(as at begin year +
current depr)
Jun 30 Balance c/d 2021
Feb 28 Depreciation GJ8
(current depr of
vehicle sold during
year)
Jun 30 Depreciation GJ12
(vehicles
depreciated at
year end)

Jul 1 Balance b/d

Very important calculations:

Calculating depreciation of old remaining assets if they are depreciated using the diminishing
balance but an asset was sold during the year then:
1. Calculate the remaining cost: cost at beginning – cost of asset sold
2. Calculate the remaining acc depr: acc depr @ beginning – acc depr on of asset sold BUT
as at begin of year
3. Depreciation = [cost (1) – acc depr (2)] x %

DEPRECIATION ACCOUNT

Purpose is to record depreciation of a particular asset group, i.e. vehicles or equipment, for the
year.
Depreciation N16
2021 2021
Feb 28 Accumulated GJ8 Jun 30 Profit and loss GJ12 X=
depreciation on (closing transfer)
vehicles (sold during
year)
Jun 30 Accumulated GJ12
depreciation on
vehicles (vehicles
depreciated at year
end)
Accumulated GJ12
depreciation on
equipment
(equipment
depreciated at year
end)

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FIXED ASSET NOTE

 Part of the financial statements of a business.

 Notes to the Balance Sheet.
 Very detailed as these assets are of large monetary value.

Land & Vehicles Equipment Total

Buildings
Carrying value at beginning of year
Cost
Accumulated depreciation ( ) ( ) ( ) ( )
Movements
Additions at cost xxxx
Disposals at carrying value ( ) ( ) ( ) ( )
(cost – accumulated depreciation)
Depreciation xxxx ( ) ( ) ( ) ( )
Displayed
on face of
Carrying value at the end of the year
Balance
Sheet
Cost
Accumulated depreciation ( ) ( ) ( ) ( )

Important formulas:

1. Cost @ end = cost @ beginning + additions – cost of disposal

2. Accumulated depreciation @ end = acc depr @ beginning – acc depr of disposal +

depreciation

3. Carrying value @ end = carrying value @ beginning + additions – carrying value of disposal
– depreciation

4. Profit on sale of asset (+) or Loss on sale of asset (-) = selling price of asset – carrying value

5. Depreciation:

5.1 On cost/fixed installment/straight line = cost x %

5.2 Diminishing balance/carrying value/book value = (cost – accumulated depreciation) x %

NB: prorate calculations include the following to the formulas above ÷ 12 x months

5.3 Calculating depreciation on diminishing balance on the remaining assets:

Depreciation = (cost @ beginning – cost of disposal) – (accumulated depreciation @
beginning – accumulated depreciation of disposal @ beginning)

Control/management of fixed assets:

Fixed asset register updated annually – depreciation recorded correctly
Physical audit monthly – check the assets
Keep fixed assets in a secure/appropriate place
Service/maintain regularly
GPS monitoring (for vehicles)
rules of parking after working in the premises (for vehicles)
key logs – who has access to keys
Logbook – when vehicle was used, by whom and distance travelled

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Other important information:

 Fixed assets are recorded in the land & buildings, vehicles and equipment account at their
original cost (historic cost principle).
 Land and buildings may appreciate but this is not recorded at school.
 Fixed assets do not have to be sold when their book value reaches zero.
 When sold, fixed assets should be sold at the highest possible price that the business can get
for them.

OTHER TERMS

 Cost
o The original purchase price of the asset
o Accounts = land & buildings, vehicles and equipment
o Above are all Balance Sheet accounts
 Accumulated depreciation
o The total value by which the asset has devalued over time (sum of depreciation)
o Accounts = accumulated depreciation on vehicles and accumulated depreciation
on equipment
o Both are Balance Sheet accounts
o Negative asset
 Book value / carrying value
o Cost – accumulated depreciation
o May not be less than R1 per individual asset at school

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VAT
VAT rate in South Africa is 15%.

1. ZERO-RATED AND VAT EXEMPT ITEMS

Zero-rated items have a VAT rate of 0%. The purpose is to ensure that these items are cost effective
for those who may not be able to afford staple items otherwise. The Minister of Finance can adjust
the percentage at any time.

Examples of zero-rated items: brown bread, milk, milk powders, maize products, rice, lentils, dried
beans, legumes, fruit, vegetables, cooking oil, eggs, canned pilchards and paraffin.

VAT exempt items are not subject to VAT as they are subject to other forms of tax, e.g. PAYE, fuel
levy, etc.

Examples of VAT exempt items: rent income on residential property, interest, export services,
childcare services, educational services and services provided by associations not for gain.

2. REGISTERING FOR VAT

Not all businesses have to register as VAT vendors. Only business who have an excess of R1 000 000
turnover in any consecutive 12-month period have to be registered as a VAT vendor. Business who
do not reach this turnover may register as a VAT vendor if their annual turnover is more than R50 000
in the past 12 months. This is known as voluntary registration.

3. TAX PERIODS

Two-monthly period is the standard period, meaning returns to SARS must be submitted every two
months. These returns are split into category A and category B VAT vendors. The return must be
submitted to SARS by the 25th day after the VAT month, i.e. if the VAT month is January, the return
must be submitted by 25 February. VAT forms (VAT 201) can be delivered to SARS or more popular
is to complete the form using the e-filing system.

Tax Periods:
 Category A
Under this category a vendor is required to submit one return for every two calendar
months, ending on the last day of January, March, May, July, September and November.
 Category B
Under this category a vendor is required to submit one return for every two calendar
months, ending on the last day of February, April, June, August, October and December

4. METHODS OF CALCULATING HOW VAT PAID AND CLAIMED

Two methods of calculating how VAT is to be paid or claims: invoice basis and receipt basis.
Invoice basis is the normal method used in South Africa and applies to all businesses unless a
business applies in writing to SARS for permission to register on receipt basis.

Invoice basis: VAT is charged at the point when the goods are sold, whether for cash or on credit.
As VAT is paid to SARS every two months, this could mean that VAT is paid over before the debtor
settles their account. This could result in cash flow problems. There are also implications if accounts
are written off as bad debts or discounts are allowed on settlements of accounts.

Receipt basis: VAT is only levied once the debtor pays their account. This will assist with cash flow.

5. VAT: CALCULATIONS

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If the figure is VAT exclusive:

VAT = VAT exclusive x 15%

If the figure is VAT inclusive:

15
VAT = VAT inclusive x This is called the tax fraction!
115

OR

100
VAT exclusive = VAT inclusive x
115

VAT and the General Ledger

Entering daily transactions into the journals is the same as always, except, each journal now has a
VAT (input or output) column after the 'main/first' column. The 'main/first' column records the price
including VAT, the VAT column obviously records the VAT amount and all other columns indicate
the price excluding VAT. The same posting rules apply.

There are three general ledger accounts used to record VAT. They appear in the Balance Sheet
Section and are all liability accounts. They include:

 Input VAT (decreases the VAT liability)

o Used to record VAT on any purchases (or any transaction originally affected by
purchases) where VAT was applicable

 Output VAT (increases the VAT liability)

o Used to record VAT on any sales (or any transaction originally affected by a sale)
where VAT was applicable

 VAT Control
o Input and Output VAT accounts closed to this account at the end of every second
month
(i.e. Category A VAT vendors will close these at the end of Jan, March, May, etc.)

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 VAT and Basic Entries into the General Ledger

Using the VAT triangle to help!

INCLUSIVE OF VAT AMOUNT

Accounts affected:
Bank
Petty cash
Debtors’ control
Creditors’ control
Drawings

CREDIT
or
DEBIT

NB: If the account at

the top of the triangle
is credited then debit
the two at the bottom
DEBIT and visa versa. DEBIT
or or
CREDIT CREDIT

VAT AMOUNT EXCLUSIVE OF VAT AMOUNT

Accounts affected:
Input VAT Accounts affected:
Output VAT
Any other account not yet mentioned, e.g.
(or VAT control)
trading stock, equipment, discount allowed,
bad debts, telephone, sales, etc.

If the perpetual inventory system is used, then

also record the following for sale of goods:
Debit Cost of sales
Credit Trading stock
Use exclusive prices!

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INVENTORY CONTROL

INVENTORY SYSTEMS

PERPETUAL INVENTORY SYSTEM

The cost price of the goods sold will be calculated each time a sale occurs.

1.1.1 Recording a sales transaction using the perpetual inventory system

Journals: The cash receipts journal and debtors’ journal will have a cost of sales
column to record the cost price immediately.

General Ledger: Four accounts will be affected by a sales transaction.

Debit Bank/Debtors’ Control
With the selling price
Credit Sales
Debit Cost of Sales
With the cost price
Credit Trading Stock

1.1.2 Recording a return of goods sold using the perpetual inventory system

Journal: The debtors’ allowances journal will have a cost of sales column to record
the cost price of the goods returned immediately.

General Ledger: Four accounts will be affected by a sales transaction.

Debit Debtors’ Allowances
With the selling price
Credit Debtors Control
Debit Trading Stock
With the cost price
Credit Cost of Sales

1.1.3 The TRADING ACCOUNT in the final accounts section

TRADING ACCOUNT F1
Jan 31 Cost of Sales GJ Jan 31 Sales GJ
Profit & Loss
Account
(gross profit) GJ

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PERIODIC INVENTORY
A business that used the periodic inventory system will not record the cost of sales
each time a sale occurs.

Cost of sales is calculated using a formula at the end of the period which is:
Cost of sales = opening stock + net purchases + carriage on purchases + import
duties – closing stock

1.2.1 Recording a sales transaction using the periodic inventory system

Journals: The cash receipts journal and debtors’ journal do not have a cost
of sales column. Cost of sales is not recorded.

General Ledger: Only two accounts will be affected by a sales transaction.

Debit Bank/Debtors’ Control
With the selling price
Credit Sales

1.2.2 Recording a return of goods sold using the periodic inventory system

Journal: The debtors’ allowances journal will not have a cost of sales column
to record the cost price of the goods returned. Cost of sales is not recorded.

General Ledger: Only two accounts will be affected by a sales transaction.

Debit Debtors’ Allowances
With the selling price
Credit Debtors Control

1.2.3 The TRADING ACCOUNT in the final accounts section

TRADING ACCOUNT F1
Jan 31 Opening Stock GJ Jan 31 Sales GJ
Purchases GJ Closing Stock GJ
Carriage on
Purchases GJ
Import Duties
Profit & Loss
Account
(gross profit) GJ

Cost of sales = opening stock + purchases + carriage on purchases + import duties

– closing stock

STOCK VALUATION METHODS

Used to allocate a monetary value to the trading stock in a business.

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SPECIFIC IDENTIFICATION METHOD
 It is suited to a business that sell large items where the price remains unchanged,
but small volumes of stock are sold, e.g. motor vehicles.
 The cost price of a specific item is easily identified.
 When a stock item is purchased, the cost of each item is recorded in a stock sheet,
data base, register, or catalogue.
 Any expense incurred as a result of purchasing the stock is added to the cost of the
item.
 At the point of sale, the total cost price of the item is retrieved from the stock sheet
and this will be the cost of sales. The item sold is removed from the stock sheet.
 At the end of the accounting period, the stock sheet will indicate the value of the
stock on hand.

FIFO (FIRST-IN-FIRST-OUT) METHOD

 It is appropriate where there are many different batches of similar products.
 The method presumes that the next item to be sold will be the oldest of that type in
the warehouse.
 Good system for business which have products with a limited shelf life (perishable
goods) or goods where the cost price is easily identified (large electrical
appliances, e.g. fridge, computers or sports equipment).
 Stock values will be realistic as stock is recorded at the most recent prices.

WEIGHTED AVERAGE METHOD

 The average cost of the product is calculated.
 The total cost of items purchased through the period is divided by the number of
items purchased.
𝑹𝒂𝒏𝒅 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆
Average cost price = 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒖𝒏𝒊𝒕𝒔 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒇𝒐𝒓 𝒔𝒂𝒍𝒆
 This method is best suited to businesses that sell large volumes of small items of
stock, e.g. nails in a hardware store or hockey balls.
 Under this method, the value of the stock may not reflect the market value of the
stock, i.e. the cost may be higher or lower than what the stock can currently be
purchased for.

Important:
Always start with a goods available for sale table.
This includes opening stock followed by net purchases in date order!

Formulas:
Goods available for sale = opening stock + purchases – returns
Cost of sales:
FIFO: work from top of goods available for sale table (until number of units sold is
reached)
WA: Average cost price x number of units sold
Closing stock:
FIFO: work from bottom of goods available for sale table (until number of units unsold is
reached)
WA: Average cost price x number of units unsold
SALARIES AND WAGES ADJUSTMENT
Always best to use a table – columns highlight in yellow must always be included. Columns such as
pension fund may also be included.

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Formulas:
Net salary = gross salary - PAYE - UIF - medical aid - pension, etc.
Gross salary = PAYE + UIF + medical aid + pension etc. + net salary

Gross PAYE UIF Medical Net UIF Skills Medical aid

salary (max per aid salary (max per development
(or person = (or net person = fund
wage) R177.12) wage) R177.12)
Salaries/ SARS UIF Medical Creditors UIF Skills Levy Medical aid
wages (PAYE) = aid fund for Contribution = contribution
= = Liability = salaries = Expense =
Expense Liability Liability (or Expense Expense
Creditors Skills
for UIF development Medical aid
wages) = fund fund
= Liability = =
Liability Liability Liability

Posting to the General Ledger:

Expenses will appear on the debit side of the account.
Liabilities will appear on the credit side of the account.

Posting to the Financial Statements

Expenses will appear in the Income Statement.
Liabilities will appear in the Trade and other Payable Note to the Balance Sheet.

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INTEREST ON LOAN
Calculate the total interest on loan and update the interest on loan account by adding any
outstanding interest.

Interest on loan Loan / Accrued Expenses / Bank

Total (pre-adj) Adjustment figure
XXXX XXXX
Adjustment figure
XXXX
Total (post-adj)
XXXX
Always DEBIT this account! CREDIT:
Loan account if interest is CAPITALISED
Accrued expenses if interest is NOT
CAPITALISED
Bank if interest is PAID

LOAN STATEMENT

Use if interest is capitalised to calculate interest, capital repayments, etc.

Formula:
Loan @ end = Loan @ beginning + interest expense – repayments (including interest) + additions

Balance @ beginning 117 000

Interest expense 9 000
Repayments including interest (21 000) NB: This figure
= interest expense + capital
repayments
21 000 = 9 000 + capital repayments
Capital repayments = 12 000
Additional loans 10 000
Balance @ end 115 000

INTEREST ON FIXED DEPOSIT

Calculate the total interest on fixed deposit and update the interest on fixed deposit account by
adding any outstanding interest.

Interest on fixed deposit Fixed Deposit / Accrued Income / Bank

Total (pre-adj) Adjustment figure
XXXX XXXX
Adjustment figure
XXXX
Total (post-adj)
XXXX
Always CREDIT this account! DEBIT:
Fixed deposit account if interest is
CAPITALISED
Accrued income if interest is NOT
CAPITALISED
Bank if interest was RECEIVED

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YEAR-END ADJUSTMENTS

IFRS/GAAP PRINCIPLES:
1. Accrual basis / matching principle - incomes and expenses MUST match correct financial
year.
2. Historic cost concept – assets but must be recorded in the financial statements at their
original price.
3. Prudence concept - Accountants must report in the most conservative and pessimistic
manner
4. Concept of materiality - This concept states that all information that is important or material
must be shown separately in the financial statements in order to highlight them. Information
that is not important can be added together and put into a sundry income or sundry
expense account.
5. Business entity concept - accounting records of the business must be kept separate from
the personal accounting records of the owner/s.
6. Going concern assumption - financial statements must be drawn up as if the business is
going to continue to operate.

GENERAL LEDGER

FOUR ACCOUNTS CREATED DUE TO ACCRUAL BASIS AT THE FINANCIAL YEAR END
All need reversals on the first day of the new financial year

Prepaid Expenses Accrued Income

XXXX XXXX
Current asset Current asset
Trade and other receivables note Trade and other receivables note
Balance Sheet account Balance Sheet account

Accrued Expenses Deferred Income (IRA)

XXXX XXXX
Current liability Current liability
Trade and other payables note Trade and other payables note
Balance Sheet account Balance Sheet account

PROVISION FOR BAD DEBTS

No reversal needed.

Provision for Bad Debts Provision for Bad Debts Adjustment

2022 2021 2022 2022
Feb 28 PBD (inc) XX Mar 1 Bal b/d XXXX Feb 28 PBD (exp) XX Feb 28 PBD (inc) XX
2022
Feb 28 PBDA (exp)XX

Mar 1 Bal b/d XXXX

Calculated as a
percentage of trade
debtors

Negative asset Expense or Income

Trade and other receivables note Income Statement
Balance Sheet account Nominal Account

TRADING STOCK DEFICIT / SURPLUS

No reversal needed.

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 Trading Stock Trading Stock Deficit / Surplus
2022 2021 2022 2022
Feb 28 TS surplus (inc) Mar 1 Bal b/d XXXX Feb 28 TS (exp) XXXX Feb 28 TS (inc) XXXX
XXXX 2022
Feb 28 TS deficit (exp)
XXXX

Mar 1 Bal b/d XXXX

As per physical stock
count

Current asset Expense or Income

Inventories note Income Statement
Balance Sheet account Nominal Account

CONSUMABLE STORES ON HAND

Reversal needed

Consumable Stores on Hand Stationery / Cons Stores / Packing Materials

2022 2022 2022
Feb 28 Stationery XX Feb 28 Total b/d XX Feb 28 Con stores on
Hand XX
Mar 1 Bal b/d XXXX
As per physical
stock count

Current asset Expense

Inventories note Income Statement
Balance Sheet account Nominal Account

Handling Adjustment Figures in the Financial Statements

Once the adjustment figure has been identified/calculated then it needs to be added or
subtracted.

Assets / Drawings / Expenses Liabilities / -ve Assets / Capital / Incomes

Bal / Tot Bal / Tot
+ - - +
adjustment figure adjustment figure adjustment figure adjustment figure

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FINANCIAL STATEMENTS OF A COMPANY
INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 2021
Note 2021
Sales xxx
Cost of sales (xxx)
Gross profit xxx
Income from services rendered (can be combined with other operating income) xxx
Fee income xxx
Commission income (or under operating income) xxx
Other operating income xxx
Rent income xxx
Profit on sale of fixed assets xxx
Provision for bad debts adjustment (if an income) xxx
Bad debts recovered xxx
(Any other incomes except to interest income) xxx
Gross operating income xxx
Operating expenses (xxx)
Salaries & wages xxx
UIF contributions xxx
Medical aid contributions xxx
Skills development levy xxx
Maintenance xxx
Stationery & printing xxx
Water & electricity xxx
Depreciation xxx
Trading stock lost due to theft xxx
Trading stock deficit xxx
Loss on sale of asset xxx
Provision for bad debts adjustment (if an expense) xxx
(Any other expenses except for interest expense & ordinary share dividends) xxx
Ordinary share dividends is not displayed in the income statement but in the retained income note!!
Operating profit xxx
Interest income 1 xxx
Profit before interest expense xxx
Interest expense / Financing cost 2 (xxx)
100
Net profit before tax (NPBT) (NPAT + income tax) or (NPAT x xxx
100−𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 %
Income tax (NPBT x %) (xxx)
Net profit for the year (NPAT) (NPBT – income tax) 8 XXX
Additional formula to solve for NPBT or NPAT:
Retained income @ begin + NPAT – ordinary share dividends – above average share price = retained income @ end

BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY 2021

ASSETS Note 2021
Non-current assets xxx
Tangible / Fixed assets 3 xxx
Financial assets – Fixed deposit: XYZ Bank xxx
Current assets xxx
Inventories 4 xxx
Trade and other receivables 5 xxx
Cash and cash equivalents 6 xxx
Total assets XXX

EQUITY AND LIABILITIES

Shareholders’ equity xxx
Ordinary share capital 7 xxx
Retained income / accumulated profits 8 xxx
Non-current liabilities xxx
Mortgage loan: ABC Bank xxx
Current liabilities xxx
Trade and other payables 9 xxx
Bank overdraft (if applicable) (can be include in the trade and other payables note) xxx
Total equity and liabilities XXX

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2021
2021
1. INTEREST INCOME
From investments xxx
From overdue debtors xxx
From current account xxx
XXX
2. INTEREST EXPENSE
On mortgage loan xxx
On bank overdraft xxx
XXX

3. FIXED ASSETS Land &

Vehicles Equipment 2021
buildings
Carrying value at beginning xxx xxx xxx xxx
Cost xxx xxx xxx xxx
Accumulated depreciation (xxx) (xxx) (xxx) (xxx)
Movements xxx xxx xxx xxx
Additions at cost xxx xxx xxx xxx
Disposals at carrying value (xxx) (xxx) (xxx) (xxx)
Depreciation (xxx) (xxx) (xxx) (xxx)
Carrying value at end XXX XXX XXX XXX
Cost xxx xxx xxx xxx
Accumulated depreciation (xxx) (xxx) (xxx) (xxx)

4. INVENTORIES 2021
Trading stock (pre-adj figure +/- adjustments +/- 𝑥) if 𝑥 = + then TRADING STOCK SURPLUS xxx Physical stock
if 𝑥 = - then TRADING STOCK DEFITCIT take figures
Consumable stores on hand xxx
XXX
5. TRADE AND OTHER RECEIVABLES
Net trade debtors xxx
Trade debtors (this is the debtors’ control value) xxx
Provision for bad debts (xxx)
Accrued income / income receivable xxx
Expenses prepaid xxx
SARS (Income tax) Don’t forget this (if this is a DEBIT/ASSET)
(Asset (+) or Liability (-) = SARS IT pre-adjustment trial balance figure – income tax)
XXX
6. CASH AND CASH EQUIVALENTS
Fixed deposit maturing (maturing within 12 months) xxx
Savings account xxx
Bank xxx
Cash float xxx
Petty cash xxx
XXX

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 7. ORDINARY SHARE CAPITAL
AUTHORISED
Number of authorised ordinary shares: 200 000 shares No figure here

ISSUED
120 000 ordinary shares in issue at beginning of financial year 890 000
10 000 ordinary shares repurchases at an average share price of R3 per share (30 000)
40 000 shares of R10.00 each issued during the year 400 000
150 000 ordinary shares in issue at end of financial year 1 260 000

Average share price:

Average per share = 𝑁𝑢𝑚𝑏𝑒𝑟
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 (𝑎𝑡 𝑡𝑖𝑚𝑒 𝑜𝑓 𝑟𝑒𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒)
𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒 (𝑎𝑡 𝑡𝑖𝑚𝑒 𝑜𝑓 𝑟𝑒𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒)

Total average share price = average per share x number of shares repurchased

Above average share price:

Above average per share = Repurchase price per share – average share price per share
Total above average share price = above average share price per share x number of shares repurchased

8. RETAINED INCOME
Retained income at beginning of year 220 800
Net profit after tax for the year 252 700
Repurchase of shares at R2.50 above the average share price (25 000)
Dividends on ordinary shares (this is the expense value) (66 000)
Paid / Interim X=36 000
Recommended / Final (use the shareholders for dividends figure here) 30 000
Retained income at end of year 382 500

9. TRADE AND OTHER PAYABLES 2021

Trade creditors (this is the creditors’ control value) xxx
Accrued expenses / expenses payable xxx
Deferred income / income received in advance xxx
Creditors for salaries xxx
Creditors for wages xxx
SARS (PAYE) xxx
Pension fund xxx
Medical aid fund xxx
UIF xxx
Skills development fund xxx
Shareholders for dividends 30 000
(this is the final dividend value; same value in retained income note “final”)
SARS (Income tax) Don’t forget this (if this is a CREDIT/LIABILITY
xxx
(Asset (+) or Liability (-) = SARS IT pre-adjustment trial balance figure – income tax)
Current portion of loan/Short-term loan xxx
(can be displayed on the face of the Balance Sheet under Current Liabilities)
XXX

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CASH FLOW STATEMENTS

Purpose of Cash Flow Statements

• Gives details of cash generated and used by a business within an accounting period.
• To show the reason why the cash balance has changed.
• The assessment of liquidity and control of working capital are possible allowing for analysis
of the performance of the business.
• The ability of the business to generate profit and favourable cash flow in the future are
identified.
• The shareholders are able to see whether future earnings and dividends due to them will in
fact be possible.

Cash Flow Statement Format

JINGLE STORES LTD

CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2017

Notes
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 1
Interest paid ( )
Dividends paid 3 ( )
Tax paid 4 ( )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of tangible assets ( )
Investment in financial assets ( )
Investment in shares ( )
Proceeds from disposal of tangible assets
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from issue of share capital
Repurchase of shares ( )
Repayments of loans ( )
Proceeds from long-term borrowing
NET CHANGE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents: beginning year 2
Cash and cash equivalents: end of year 2

19 | P a g e
NOTES TO THE CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2017

1. RECONCILIATION BETWEEN PROFIT BEFORE TAXATION

AND CASH GENERATED FROM OPERATIONS

Profit before taxation

Adjustments for:
Depreciation (as per income statement)
Interest expense (as per income statement)
Operating profit before changes in working capital
Changes in working capital
Increase / decrease in inventories
Increase = decrease in cash
Decrease = increase in cash
Increase / decrease in trade and other receivables
exclude SARS (IT)
Increase = decrease in cash
Decrease = increase in cash
Increase / decrease in trade and other payables
exclude SARS (IT) and shareholders for dividends and accrued interest
Increase = increase in cash
Decrease = decrease in cash
Cash generated from operations

2. CASH AND CASH EQUIVALENTS Net change 2017 2016

Bank
Cash float

3. DIVIDENDS PAID
Amount owing at the end of the previous year
Total dividends for the year – interim and final
Amount owing at the end of the current year
Amount paid

4. TAXATION PAID
Amount owing at the end of the previous year
Income tax for the year
Amount owing at the end of the current year

Amount paid

20 | P a g e
Steps to completing Cash Flow Statement

A) Operating Activities

Step 1 Note: Reconciliation of profit before tax and cash generated from operations
Net profit before tax as per income statement (add depreciation and
interest expense back to this figure)
Record changes in working capital (stock, debtors & creditors)

Step 2 Subtract dividends paid, interest paid and tax paid on cash flow statement

B) Financing Activities

Step 3 Add amounts from issuing new shares

Step 4 Subtract amounts paid to repurchase shares

Step 5 Add amounts received from raising loans

Step 6 Subtract amounts repaid on loans

C) Investing Activities

Step 7 Subtract cost of tangible assets purchased

Step 8 Add book-value of tangible assets sold

Step 9 Add or subtract effect on financial assets (fixed deposit & shares in another
company)

D) Effect of cash and cash equivalents

Step 10 Show net change in cash and cash equivalents (A +/- B +/- C)

Step 11 Show cash and cash equivalents figure at beginning of year

Step 12 Show cash and cash equivalents figure at end of year

21 | P a g e
FINANCIAL ANALYSIS - COMPANIES
1. PROFITABILITY RATIOS All answers must be expressed as a %

1.1 Gross profit on sales

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
x 100
𝑆𝑎𝑙𝑒𝑠

1.2 Gross profit on cost of sales

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
x 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

This measures the actual mark-up.

 .

1.3 Operating profit on sales

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
x 100
𝑆𝑎𝑙𝑒𝑠

1.4 Operating profit on cost of sales

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
x 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

1.5 Operating expenses on sales

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
x 100
𝑆𝑎𝑙𝑒𝑠

1.6 Net profit on sales

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
x 100
𝑆𝑎𝑙𝑒𝑠

2. LIQUIDITY

2.1 Liquidity Ratios

These ratios measure the ability of the business to meet its short-term obligations.

2.1.1 Current Ratio

Current Assets : Current Liabilities Answer must be expressed as x : 1

It is generally accepted that this ratio should not be lower than 2:1, but the ratio may vary
between industries. Do not mention generally accepted ratio in comment.

2.1.2 Acid Test Ratio (Quick Ratio)

Current Assets - Stock : Current Liabilities Answer must be expressed as x : 1

The generally accepted ratio is 1:1, but the ratio may vary between industries. Do not
mention generally accepted ratio in comment.

22 | P a g e
2.2 Stock Turnover Rate Answer must be expressed as x number of times.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘
The stock turnover rate indicates how many times a business's inventory is sold (replaced)
over a period of time.

2.3 Stock Holding Period (period for which enough stock was on hand)
If x 365 the answer will be in days If x 12 the answer will be in months

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘

x 365 (or 12)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

The stock holding period is the average number of days it takes to sell trading stock.

If a business wants to calculate how many days they still have stock for then they will use the
following formula:

𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘

x 365 (or 12)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

2.4 Average Debtors Collection Period

If x 365 the answer will be in days If x 12 the answer will be in months

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑑𝑒𝑏𝑡𝑜𝑟𝑠

x 365 (or 12)
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠

2.5 Average Creditors Payment Period

If x 365 the answer will be in days If x 12 the answer will be in months

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

x 365 (or 12)
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

NB: Credit purchases can be calculated by using cost of sales x credit purchases
percentage.

3. RETURN

3.1 Return on Investment (ROI) Answer must be expressed as a %

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

x 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑒𝑞𝑢𝑖𝑡𝑦

Average shareholders’ equity Shareholders’ equity = ordinary share capital + retained income
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑡 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑦𝑒𝑎𝑟+𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑡 𝑒𝑛𝑑 𝑜𝑓 𝑦𝑒𝑎𝑟
=
2

3.2 Earnings per Share (EPS)

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

x 100 (cents)
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒

 This indicates the amount of net profit after tax each share earned.

3.3 Dividends per Share (DPS)

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑛 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

x 100 (cents)
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒

 This indicates the dividend amount paid/declared per share.

 EPS – DPS = The retained income per share.
4. SHARE VALUE

23 | P a g e
 Net Asset Value (NAV)

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑒𝑞𝑢𝑖𝑡𝑦

x 100 (cents)
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒

5. SOLVENCY RATIO Answer must be expressed as x : 1

Total Assets : Total Liabilities

The solvency ratio measures the ability of the business to settle all of its debts.

6. DEBT-TO-EQUITY RATIO Answer must be expressed as x : 1

Non-Current Liabilities : Shareholders’ Equity

The debt-to-equity ratio is used to measure the financial leverage of a business, i.e. the
degree to which the business uses borrowed capital to finance itself. Measures RISK.

6. RETURN ON CAPITAL EMPLOYED (ROCE) Answer must be expressed as a %

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 +𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

x 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Capital employed = non-current liabilities + shareholders’ equity

ROCE should be higher than the interest rate on loans, this would indicate that the business
is in positive gear.

7. GEARING

 When referring to gearing one should look at the debt-to-equity ratio and the return on
capital employed (ROCE).
o Gearing: The ratio/relationship between own and borrowed capital determines the
financial risk
o Risk: The greater the amount of borrowed capital to own capital the greater the
financial risk.
 A business is positively geared if they borrowed at a cheaper rate (interest rate) than the
rate earned by borrowing the money (return on capital employed).
 A business is negatively geared if they borrowed at a more expensive rate (interest rate)
than the rate earned by borrowing the money (return on capital employed).

GUIDELINES TO COMMENTING

The following guidelines should be used when commenting on the various financial indicators. It is
important to make in-depth comments and not just superficial ones. However, in a test or exam
you must also consider the mark allocation.

1. State the value for the current financial period and compare this to the previous year.
2. Indicate whether the indicator indicates positive or negative performance.
3. Highlight what possible causes are for the positive or negative performance.
4. Suggest possible solutions for negative performance or suggest ways to ensure that positive
trends continue.

24 | P a g e
MANUFACTURING
GENERAL LEDGER
Three stock accounts:

Balance Sheet Accounts

Raw Material Stock

(use this information to draw up the Direct Raw Materials Note)
Balance b/d Raw Materials Issued
Bank Creditors CAJ
Creditors CJ Balance c/d (per physical stock count)
include carriage on purchases

Work-In-Progress Stock
(use this information to draw up the Production Cost Statement)
Balance b/d Finished Goods (X) (bottom line of production cost statement)
Direct Raw Material Cost Balance c/d (per physical stock count)
Direct Labour Cost
Factory Overhead Cost

Finished Goods Stock

(use this information to draw up the Finished Goods Note)
Balance b/d Cost of Sales (X) (bottom line of finished goods note/cost of sales note)
Work In Progress (same value as in work-in-progress) Balance c/d (per physical stock count)

Important formulas:

1. Raw materials issued/raw material cost = opening stock + purchases (including carriage on
purchases) – returns – drawings - donations – closing stock

2. Production of finished goods = opening work-in-progress + raw materials issued (raw

material cost) + direct labour costs + factory overhead cost – closing work-in-progress

3. Cost of sales = opening finished goods + production of finished goods – closing finished
goods

4. Indirect materials = Indirect materials on hand at beginning + purchases – returns – indirect

materials on hand at the end

5. Break-even point formula:

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

The number of units that must be produced and sold in order for the business to make
neither a profit or loss. Answer must be in units.

25 | P a g e
PRODUCTION COST STATEMENT, INCOME STATEMENT & NOTES

PRODUCTION COST STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 2021

Note
Direct / Prime costs
Direct material costs 1
Direct labour costs 2
Factory overhead costs 3
Total production costs for the year
Work-in-process at beginning of the year
Total production costs
Work-in-process at end of the year ( )
Cost of production of finished goods

INCOME STATEMENT FOR THE PERIOD ENDED 28 FEBRUARY 2021

Note
Sales
Cost of finished goods sold / Cost of sales 6 ( )
Gross profit
Other costs
Selling & distribution costs 4
Administration costs 5
Net profit

NOTES TO THE FINANCIAL STATEMENTS

1. Direct material costs
Opening stock
Net purchases
Carriage on purchases
Goods available for production
Closing stock ( )
Direct material cost

2. Direct labour costs

Factory wages
UIF contributions
Pension fund contributions
Direct labour cost

3. Factory overhead costs

Consumable stores
Indirect labour
Salary: Foreman
Depreciation
Maintenance
Insurance
Rent
Factory overhead costs

4. Selling and distribution costs

Salaries
Depreciation
Bad debts
Commission on sales
Consumable stores
Selling and distribution costs

5. Administration costs
Salaries
Depreciation
Insurance: Administration offices
Sundry administration expenses
Rent
Consumable stores
Administration costs

6. Cost of finished goods sold / Finished Goods

Opening stock of finished goods
Cost of finished goods produced during the year
Cost of goods available for sale
Closing stock of finished goods ( )
Cost of finished goods sold

26 | P a g e
BUDGETS

Budgets are important tools that allow a business to plan, then control and correct
its finances.

DIFFERENCE BETWEEN A CASH BUDGET AND A PROJECTED INCOME STATEMENT

The cash budget shows the expected cash receipts, cash payments and cash
balance of the business. All non-cash items are excluded.
The projected income statement shows the expected net profit or net loss of the
business. All incomes and expenses are included according to the matching
principle.

CASH BUDGET
Any planned transaction involving cash in or cash out will be recorded in the cash
budget, these transactions could involve, incomes, expenses, assets, liabilities,
capital and/or drawings.
The “receipts” section mimics the cash receipts journal.
The “payments” section mimics the cash payments journal.
The “surplus/deficit”, “opening bank balance” and “closing bank balance” mimic
the bank account.

MASHVILLE TRADERS
CASH BUDGET FOR THE PERIOD JANUARY – MARCH 2020
RECEIPTS January February March Total
Cash sales 216 000 226 800 238 140 680 940
Commission income - - - -
Old equipment sold 6 450 6 450
Rent income 800 800
Total receipts [A] 216 000 227 600 244 590 688 190

PAYMENTS
Cash purchases of trading stock 148 000 155 200 162 760 465 960

Salaries 34 720 34 720 34 720 104 160

Deposit on vehicle 15 000 15 000
Instalment on vehicle 5 000 5 000
Cash drawings 5 000 5 000 5 000 15 000
Sundry other expenses 5 768 5 941 6 119 17 828
Total payments [B] 193 488 215 861 213 599 622 948

Cash surplus (shortfall) [A – B] 22 512 11 739 30 991 65 242

Bank: opening balance 13 020 35 532 47 271 13 020
Bank: closing balance 35 532 47 271 78 262 78 262

27 | P a g e
PROJECTED INCOME STATEMENT

Plans for whether a net profit or net loss is expected for the month. Any planned
transaction involving incomes and/or expenses will be recorded in this budget.
Only incomes and expenses will appear in this budget, and these figures must be
determined according the matching principle.

ACITOP TRADERS
PROJECTED INCOME STATEMENT FOR THE PERIOD 1 FEBRUARY – 31 MARCH 2020
January February March Total
Sales 400 000 320 000 324 000 1 044 000
Cost of sales (200 000) (160 000) (180 000) (540 000)
Gross profit 200 000 160 000 144 000 504 000
Other operating income 2 500 2 875 2 875 8 250
Rent income 2 500 2 875 2 875 8 250
Gross operating income 202 500 162 875 146 875 512 250
Operating expenses (123 900) (124 620) (124 718) (373 238)
Salaries 102 000 103 680 103 680 309 360
Depreciation 3 000 3 000 3 050 9 050
Stationery & consumables 900 900 900 2 700
Advertisements 7 200 7 200 7 200 21 600
Bad debts 4 800 3 840 3 888 12 528
Insurance 1 200 1 200 1 200 3 600
Sundry expenses 4 800 4 800 4 800 14 400
Operating profit 78 600 38 255 22 157 139 012
Interest income 100 100 100 300
Profit before interest expense 78 700 38 355 22 257 139 312
Interest expense 0 0 0 0
Net profit for the month 78 700 38 355 22 257 139 312

28 | P a g e
CREDITORS’ RECONCILIATIONS

RECONCILIATION BETWEEN CREDITORS/DEBTORS CONTROL ACCOUNT AND THE

CREDITORS/DEBTORS LIST/LEDGER (SUBSIDIARY LEDGER)

The Debtors Control account in the General Ledger must be equal to the Debtors List which is a
summary of all of the debtor’s ledger balances.
The Creditors Control account in the General Ledger must be equal to the Creditors List which is a
summary of all of the creditor’s ledger balances.

Some reasons for discrepancies:

 Posting errors
 Incorrect amount when posting
 Transactions not posted

HANDLING ERRORS AND OMISSIONS

Error/Omission Where correction must

take place
Journals total is incorrect Control account
Transaction omitted from journal (or incorrectly entered in the Control account
journal) Subsidiary ledger/list
Transaction entered in journal but not posted to creditors/debtors Subsidiary ledger/list
account
Transaction in journal is posted incorrectly to creditors/debtors Subsidiary ledger/list
account
Transaction is posted to incorrect creditors/debtors account Control account
Subsidiary ledger/list
Amount posted to incorrect side of control account and/or list Control account and/or
Subsidiary ledger/list
(double the figure)

RECONCILIATION OF CREDITOR’S LEDGER AND THE STATEMENT OF ACCOUNT

RECEIVED (DEBTOR’S STATEMENT)

Compare Creditor’s Ledger balance and the Debtor’s Statement balance.

The creditor’s reconciliation statement is used to track errors/omissions on the debtor’s statement
for comparison the following month.

STEPS TO DOING A CREDITOR’S RECONCILIATION:

 Enter final balance of Creditor’s Ledger into Creditor’s Ledger/creditor’s ledger calculation.
 Enter final balance of Debtor’s Statement into Creditor’s Reconciliation Statement/calculation.
 Cross off entries that appear correctly in both the Creditor’s Ledger and Debtor’s Statement.
 Then handle the errors and/or omissions as per the table below:

HANDLING ERRORS AND OMISSIONS

Error/Omission Where correction must take place
If figure appears (and is correct) in Creditor’s Enter into Creditors Reconciliation Statement
Ledger and not in Debtor’s Statement
If figure appears (and is correct) in debtors Enter into Creditor’s Ledger by making a
statement and does not appear in the general journal entry
creditors ledger

Creditor's Ledger Debtor's Statement / Creditor's Reconciliation Statement

Debit Credit Debit Credit
- + + -

29 | P a g e
DEBTORS AGE ANALYSIS
It forms part of the internal control process of the business.
Enables the accountant to see whether debtors are paying their accounts according to their credit
terms.
Aging analyses each outstanding amount by each debtor and calculates for how long it has been
unpaid.

HOW TO DO AN AGE ANALYSIS:

1. Allocate column headings, e.g. current = August, 30 days = July, 60 days = June, 90+ days =
May, April, etc.
2. Allocate the balance brought forward (first balance) on the ‘oldest’ statement to the
‘oldest’ column, e.g. 90 days+. Now ignore all the other balances.
3. Allocate invoices to the applicable month (see column headings allocated in step 1).
4. Match credit notes to specific invoices.
5. Record payments and discount received starting at the ‘oldest’ column.
6. If there are any dishonoured EFTs, cancel payment it was in lieu of.

Calculation to prepare the debtor’s age analysis

90+ days 60 days 30 days Current Total
MAY, APR, MAR JUNE JULY AUGUST
2 400 6 000 - 600 8 300 1 150 14 455
(1 200) (660) 8 300 3 400
1 200 4 740 4 550
(60) (90)
1 140 (2 000)
(1 140) (100)
0 2 550
(900)
(45)
1 605

The payment of R1 800 was split over two columns: R1 140 was allocated to 90+ days which
brought this column to zero, so the rest, R660

COMPLETED DEBTOR’S AGE ANALYSIS

90+ days 60 days 30 days Current Total
0 1 605 8 300 4 550 14 455

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AUDIT TRAIL

An audit trail consists of records that document every step in a business transaction. A
clear audit trail consists of source documents. Original source documents include
invoices, bank statements, debit/credit notes or any written record of an accounting
transaction that proves the legitimacy of a transaction.

It is important to maintain an organised and easy-to-use filing system to keep source

documents so that they can be found quickly and easily.

A good audit trail provides an excellent platform for fraud prevention and/or detection.

AUDITORS

INTERNAL AUDITOR:
Is a trained professional tasked with providing an independent and objective evaluation
of the business’s financial and operational business activities.
They are an employee of the business.
They ensure that business follows proper procedures and function efficiently.

EXTERNAL AUDITOR:
Inspect a business’s accounting records and express an opinion as to whether financial
statements are presented fairly in accordance with the applicable accounting standards
of the entity, such as Generally Accepted Accounting Principles (GAAP) or International
Financial Reporting Standards (IFRS).
They must assert whether financial statements are free of material misstatement, whether
due to error or fraud.
An external auditor is a chartered accountant with a CA (SA) qualification (in South
Africa).

AUDITORS REPORTS

An auditor's report is a formal opinion issued by either an internal auditor or an external

auditor.

TYPES OF AUDIT OPINIONS:

Unqualified Opinion
Issued when the auditor concludes that the financial statements give a true and fair view
in accordance with the financial reporting framework (IFRS/GAAP) used for the
preparation and presentation of the financial statements.

Qualified Opinion
Issued when the auditor encountered one of two types of situations which do not comply
with IFRS/GAAP, however the rest of the financial statements are fairly presented.

Adverse Opinion
Issued when the auditor determines that the financial statements of an auditee are
materially misstated and, when considered as a whole, do not conform with IFRS/GAAP.

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PROFESSIONAL ACCOUNTING BODIES

The role of professional bodies:

 They regulate accounting practices.
 Accountants and auditors must register with and comply with the codes of
ethics stipulated by these bodies.
 A lack of compliance will result in the professional body taking disciplinary
action against the member.
 Punishments for those found guilty could be a fine or deregistration.

SOUTH AFRICAN INSTITUTE OF PROFESSIONAL ACCOUNTANTS (SAIPA)

SAIPA is one of South Africa's foremost accountancy institutes for professional
accountants.
Membership of SAIPA provides accountancy professionals with local and
international recognition.
Membership at SAIPA assists its members with ongoing training to facilitate the
necessary knowledge, competencies and functional skills members need to
effectively execute their responsibilities in a manner that complies with local and
international regulatory frameworks and standards.

SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS (SAICA)

SAICA serves the interests of the Chartered Accountancy profession by upholding
professional standards and integrity, and the pre-eminence of South African
chartered accountants nationally and internationally.
They do so by:
 Delivering competent entry level members.
 Providing services to assist members to maintain and enhance their
professional competence thereby enabling them to create value for their
clients and employers.
 Enhancing the quality of information used in the private and public sectors
for measuring and enhancing organisational performance.
 Running and facilitating programmes to transform the profession and to
facilitate community upliftment.
 Fulfilling a leadership role regarding relevant business related issues and
providing reliable and respected public commentary.

CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS (CIMA)

SOUTHERN AFRICAN INSTITUTE FOR BUSINESS ACCOUNTANTS (SAIBA)

THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (ACCA)

INDEPENDENT REGULATORY BOARD FOR AUDITORS (IRBA)

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CORPORATE GOVERNANCE - KING CODE III

The revised Code of and Report on Governance Principles for South Africa (King III)
were released on 1 September 2009, with an effective date of 1 March 2010. King
Code III revised King Code II.

SAICA supports the principles embodied in the Code and has been an active
participant on the King Committee.

While the King Code has no legal backing, except as adopted by the JSE Listings
Requirements, SAICA encourages ALL entities to apply the principles insofar as is
practicable.

Characteristics of good corporate governance:

 Audit and disclose risk exposure annually.
 Report on the triple bottom line, i.e. social, environmental and economic
aspects.
 Report on non-financial issues such as human rights, ethics and AIDS as these
are also becoming a part of the responsibilities of organisations.
 Report on sustainability.
 Discipline - a commitment to behaviour that is universally recognised and
accepted as correct and proper.
 Transparency - the ease with which an outsider is able to analyse a
company's actions.
 Independence - the mechanisms to avoid or manage conflict.
 Accountability - the existence of mechanisms to ensure accountability.
 Responsibility - processes that allow for corrective action and acting
responsibly towards all stakeholders.
 Fairness - balancing competing interests.
 Social Responsibility - being aware of and responding to social issues.

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